Bitcoin and the entire crypto space are experiencing a terrible week. El Salvador’s turned bitcoin into an official currency on Tuesday, with fans celebrating the move. Despite that, the bitcoin price experienced a massive flash crash. Bitcoin lost $10,000 within minutes, as over-leveraged traders who were long on bitcoin found themselves liquidated. All other coins followed, with the bloodbath wiping well over 20% of a digital token’s value. More bad news followed on Wednesday morning. Coinbase announced an unexpected development for an unreleased product called Lend. The SEC threatened the world’s most popular exchange with a lawsuit if it were to move forward with plans to launch a crypto feature other companies already offer.
The Coinbase Lend program
Coinbase planned to launch a new Coinbase Lend program where cryptocurrency owners would be able to earn interest on select digital assets. It’s all support to start with USD Coin (USDC). USDC is known as a stable coin because 1 USDC is always worth exactly $1.
Earning interest on crypto holdings is a feature that other companies offer their customers. It’s not something Coinbase invented. And it’s not a product that’s available in any form on the platform. Interested users have to pre-enroll before earning interest by lending out cryptos.
Coinbase engaged the SEC in the months leading to Lend’s launch to ensure it wasn’t breaking any laws with the new program it wanted to offer customers. The company explained in a blog post on Wednesday that a week ago, the SEC gave Coinbase a Wells notice over Lend.
SEC threatens to sue Coinbase over Lend launch
“A Wells notice is the official way a regulator tells a company that it intends to sue the company in court,” Coinbase explains in the blog post.
The company then disclosed that it has been engaging with the SEC for nearly six months seeking clarity:
We could have simply launched the product but we chose not to. This is far from the norm in our industry. Other crypto companies have had lending products on the market for years, and new lending products continue to launch as recently as last month. But Coinbase believes in the value of open and substantive dialogue with our regulators. So we took Lend to the SEC first.
Coinbase says it answered all of the SEC’s Lend questions in writing and in person. The SEC then said they’d consider Lend to involve a security. “But [it] wouldn’t say why or how they’d reached that conclusion.”
The exchange continued talking with the SEC. Separately, Coinbase announced Lend in June without listing a public launch date. That’s when the SEC opened an official investigation. This involved documents, written responses, and sworn testimony from a corporate witness.
Coinbase did not provide the SEC personal details about customers interested in Lend:
They also asked for the name and contact information of every single person on our Lend waitlist. We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information. We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us.
Why is SEC going after another crypto company?
The SEC shocked crypto enthusiasts in December 2020 when it sued Ripple, the company behind the XRP token. The SEC alleges that XRP is a security. Going after Coinbase would fall under the same umbrella.
The exchange explains that SEC refused to explain why they’d consider Lend a security. Instead, the SEC said they’re assessing Lend through the Howey (1946) and Reves (1990) Supreme Court cases:
Formal guidance from the SEC about how they intend to apply Howey and Reves tests to products like Lend would be a big help to regulating our industry in a responsible way. Instead, last week’s Wells notice tells us that the SEC would rather skip those basic regulatory steps and go right to litigation. They’ve offered us the chance to submit a written defense of Lend, but that would be futile when we don’t know the reasons behind the SEC’s concerns.
As a result, Coinbase said it would not launch Lend until at least October. It urged the SEC to provide more clarity. “Coinbase continues to welcome additional regulatory clarity; mystery and ambiguity only serve to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver,” the company wrote.
Why is Coinbase making the SEC talks public?
The reason Coinbase is fighting back against the SEC in public is quite evident to anyone familiar with the crypto universe.
The SEC’s case against Ripple is going poorly, as the regulator has suffered a few defeats in the pre-trial phase. The SEC isn’t just fighting a company that has put up a formidable defense so far. The so-called XRP Army of vocal investors and influencers has followed the legal conflict closely, mounting a massive anti-SEC movement on social media.
Separately, crypto enthusiasts have fought Congress earlier this summer over new crypto provisions inside the new infrastructure bill. Many organized online to urging others to contact their representatives over the crypto rules. Despite the backlash, the regulations remained in the bill.
In addition to the blog post, co-founder and CEO of Coinbase Brian Armstrong posted a timeline of SEC events about Lend on Twitter:
1/ Some really sketchy behavior coming out of the SEC recently.
— Brian Armstrong (@brian_armstrong) September 8, 2021
Bitcoin is has been trading under $47,000 on Wednesday at the time of this writing.