SEC Warns Coinbase About Lend Product, Threatens Lawsuit

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SEC Warns Coinbase About Lend Product, Threatens Lawsuit
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Coinbase made public a warning from the SEC in regards to its new Lend product, which could potentially involve a lawsuit. 

One the world’s largest exchanges may face trouble with the ominous U.S. regulator. Coinbase Global Inc., the corporation behind the Coinbase exchange, received a SEC warning against its latest financial product. 

The Coinbase Lend project would allow its clients the ability for interesting earning on their crypto holdings. In the lead up to the launch of this project, the exchange said it remained proactive with regulation engagement. 

In a Tweet from Coinbase CEO and co-found, Brain Armstrong, he said the new Coinbase venture is nothing new in the financial world. “Millions of crypto holders have been earning yield on their assets over the last few years. It makes sense, if you want to lend out your funds, you can earn a return. Everyone seems happy.”

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However, the CEO said the Securities and Exchange Commission did not welcome this development. According to Armstrong, Coinbase reached out to the SEC about the product as a heads up. Though in return the company received a probe. 

“They responded by telling us this lend feature is a security. Ok – seems strange, how can lending be a security? So we ask the SEC to help us understand and share their view,” Armstrong tweeted. “We always make an effort to work proactively with regulators, and keep an open mind.”

Nonetheless the U.S. regulator said it would bring legal action down on the company if it goes forward with the Lend service. Chief Legal Officer of Coinbase,  Paul Grewal confirmed this in a blog post. “The SEC has told us it wants to sue us over Lend. We have no idea why.”

Maneuvering the SEC

Coinbase now seeks an answer to this mysterious threat from the SEC. According to Grewal the company submitted a request for a more clear understanding of the regulator’s reasoning.  “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,” Grewal continued.

In addition, the SEC asked for company records along with names and contact information of everyone on the Lend waitlist. Although the company complied with the records, the waitlist names are still private. 

“We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information,” Grewal said. “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.”

This comes as the SEC is ramping up regulations and surveillance over the crypto domain. SEC Chair Gary Gensler supports officials such as Elizabeth Warren who called for “Crypto Cops” earlier this summer. Last week the SEC opened another probe into the crypto company Uniswap. 

As the crypto industry awaits potentially harmful regulations from the SEC these new crackdowns do not appear crypto-forward. In light of these updates, Coinbase intends for a delay in the launch of Lend at least until October. 

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