Understanding Why the SEC Might Go After Coinbase

Coinbase is the largest cryptocurrency exchange in North America - and one of the biggest in the world. The company has become a giant in the crypto industry, thanks in no small part to its cooperation with regulators.

Understanding Why the SEC Might Go After Coinbase

However, even the mighty Coinbase isn’t immune to attacks from these same regulators. Last week, the Securities and Exchange Commission (SEC) showed that it could indeed come after the exchange.

Coinbase Lend: A Security or Not?

Coinbase’s chief executive Brian Armstrong unleashed a lengthy tirade against the SEC, explaining that the agency had been engaging in some “really sketchy behavior” as they look to maintain order in the crypto market. In a 21-post thread, Armstrong detailed some of the SEC’s dealings with Coinbase, adding that the agency had started to engage without good faith.

As Armstrong explained, Coinbase had approached the SEC to brief them over its Coinbase Lend program. Under the program, Coinbase had intended to offer up to 4 percent in annual yield returns to users who deposit its USDC stablecoin. Armstrong added that the SEC had told Coinbase that Coinbase Lend would be a security, even though the agency didn’t show any reasons why it was categorizing it as such.

Armstrong added that there are already several other companies in the crypto market that offer lending services to their customers. Still, their services don’t get classified as securities. The CEO added that the government will need to offer more clarity on this issue, especially now that it seemed like it was getting in the company’s way.

Armstrong also pointed out that the current SEC position could signify danger for companies like Celsius and BlockFi, which already offer lending products with yields.

Minimal Engagement from the SEC

A blog post from Coinbase shared pretty much the same thing. The company pointed out that it had asked the SEC for proof that its upcoming Coinbase Lend program would indeed be a security, but the agency didn’t respond. Instead, the SEC simply said that it was making its categorization “through the prism” of Supreme Court cases that have stood for decades.

“Customers won’t be ‘investing’ in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship. And although Lend customers will earn interest from their participation in the program, we have an obligation to pay this interest regardless of Coinbase’s broader business activities,” the blog post added.

These cases, known by many as Reves and Howey, have become the tests through which regulators like the SEC and the Commodity Futures Trading Commission (CFTC) test assets and offerings to see if they are indeed securities. Over the past few years, the SEC had cited the Howey test as the reason for which it categorizes several cryptocurrencies as securities.

Coinbase added that it was looking to get the SEC’s grounds for categorizing Coinbase Lend as a security. But, the agency wouldn’t provide it.

The Nuances of Regulation

If anything, the current situation shows once more that there is a large disparity between how crypto insiders see the industry and how regulators see it. Many on both sides have called for agencies like the SEC to step up its regulation of cryptocurrencies. There was hope that this would happen under the Biden administration, and it definitely looks like that.

But, it doesn’t mean much progress if the regulations from the SEC aren’t what the crypto industry would prefer. If anything, this just shows the need for closer and more productive dialogue on both sides.

In the meantime, there is the question of what Coinbase plans to do with this quandary. Does the company continue with Coinbaase Lend, or does it put plans on hold due to this SEC squabble?

In reply to Armstrong, billionaire and crypto enthusiast Mark Cuban called for Coinbase to go “on the offensive.” Cuban explained that the SEC is trying to regulate through litigation and that the agency doesn’t want to make mistakes as it looks to maintain clarity in the crypto space.

"The worst case is that the SEC gets a judgment that cripples Crypto/DeFi and moves it even further offshore, killing possibly trillions of $$$ in economic benefit for the USA. We need exemptions like the internet got in the 90s. Call your congressperson," Cuban said.

Cuban also added that it would be a good look if Coinbase goes up against the SEC, urging that the best way to solve this case might be in the courts.

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