Coinbase Battles Back After SEC Threatens To Sue

Mandatory Credit: Photo by Avishek Das/SOPA Images/Shutterstock (11863354e)In this Photo illustration of a Coinbase logo seen displayed on a Smartphone.
Avishek Das/SOPA Images/Shutterstock / Avishek Das/SOPA Images/Shutterstock

Coinbase launched a counteroffensive Wednesday after it was threatened with legal action by the Securities and Exchange Commission over the cryptocurrency trading platform’s proposed lending product.

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Last week Coinbase received a Wells notice from the SEC indicating that it intends to sue the company over Coinbase Lend, CNBC reported. The news sent Coinbase’s stock price down 3% in premarket trading Wednesday. A Wells notice is the official way regulators tell a company that they intend to sue.

Coinbase disclosed the news in a blog post on its website written by Chief Legal Officer Paul Grewal, who also used the post as an opportunity to fight back against the SEC.

“As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it,” Grewal wrote. “Coinbase has been proactively engaging with the SEC about Lend for nearly six months. We’ve been eager to hear their perspective as we explore innovative ways for our customers to gain more financial empowerment on Coinbase.”

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Coinbase Lend is designed to let eligible customers earn interest on select assets, starting with a 4% annual percentage rate on USD Coin (USDC). At issue is how the product should be classified. The SEC told Grewal that it considers Lend a security, but Coinbase disagrees with that designation.

“Coinbase’s Lend program doesn’t qualify as a security — or to use more specific legal terms, it’s not an investment contract or a note,” Grewal wrote in the post. “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. What’s more, participating customers’ principal is secure and we’re obligated to repay their USDC on request.”

He went on to say that Coinbase “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.”

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Meanwhile, Forbes reported that the SEC also requested records and testimony from employees and that Coinbase CEO Brian Armstrong accused the agency of “sketchy behavior” and of making a “land grab” compared to other regulators.

This much is known: Coinbase said it will not launch Lend until at least October. The company also plans to keep its customers “informed at every step as things progress.”

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte MagazineStreet & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, will be published in 2021 by Atmosphere Press.

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