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Coinbase CEO says SEC has threatened to sue over crypto lending program

Federal securities regulators have threatened to sue Coinbase if it moves forward with its planned lending program, according to the top executive of the cryptocurrency exchange. (Michael Nagle/Bloomberg)
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The Securities and Exchange Commission has threatened the largest cryptocurrency exchange in the United States with a lawsuit if it moves forward with a program that would allow investors in digital assets to earn interest on their holdings, the company’s chief executive said.

Coinbase CEO Brian Armstrong, in a 21-part Twitter thread posted late Tuesday, said the federal markets regulator told the company that the product it is planning to offer is a type of security that should be registered with the government.

Armstrong disputed that view, calling the SEC’s move “sketchy,” but the company is delaying the launch of the program until at least October, Coinbase chief legal officer Paul Grewal said in a separate blog post.

The SEC did not immediately respond to a request for comment.

Armstrong, in his tweets, said the cryptocurrency exchange had reached out to the SEC to brief officials on the lending feature. In turn, he said, the agency subpoenaed records, took testimony from employees and threatened to sue the company if it proceeded with the plan.

The confrontation between the company and the agency comes at a time of heightened scrutiny of cryptocurrency in Washington, as lawmakers and watchdogs look to regulate an industry that has operated for years in a legal gray area. Wild price gyrations, high-profile ransomware attacks and influencer-driven speculative trading have also drawn skepticism to the world of crypto.

But entrepreneurs and industry groups have also flexed their lobbying muscles in recent months, mounting a vigorous campaign that power brokers widely viewed as a grand announcement of the young industry’s influence.

Coinbase has pitched its proposed product to customers as a way for them to get paid for investments in a stablecoin called USD Coin, a digital asset pegged to the value of the dollar. Participants could earn a 4 percent annual yield by lending the asset to other crypto traders.

The company contends the SEC has failed to justify why the program would require the federal oversight reserved for investment products. “How can lending be a security?” Armstrong tweeted.

Some securities law experts countered that the law is clear on that point.

“Coinbase isn’t lending here, it’s borrowing. And the idea that borrowing can’t involve the issuance of a security is demonstrably false,” said Dan Awrey, a professor at Cornell Law School.

Whether Coinbase’s proposal deserves an exemption from regulation is another matter, Awrey said, but the back-and-forth between the company and the SEC to reach that determination evidently broke down.

Armstrong wrote that the agency needs to spell out a standard and apply it consistently. “If you don’t want this activity, then simply publish your position, in writing, and enforce it evenly across the industry,” he tweeted, arguing that other companies offer similar crypto lending features but have not been pursued by regulators. “Our door remains open,” he wrote.

The news sent shares of Coinbase tumbling more than 3.2 percent, to just over $258, in Wednesday’s trading.

The industry already is facing stricter oversight from Biden administration-appointed regulators.

Treasury Secretary Janet L. Yellen has expressed reservations about some of the claims advanced by the crypto faithful and is seen by advocates as a tough sell.

SEC Chair Gary Gensler told Congress earlier this year in one of his first remarks on cryptocurrency regulation that “ … the exchanges trading in these crypto assets do not have a regulatory framework, either at the SEC or our sister agency, the Commodity Futures Trading Commission. … Right now there’s not a market regulator around these crypto exchanges. And thus there’s really not protection against fraud or manipulation.”

Gensler has called on Congress to give regulators greater authority to police crypto activity. And some industry analysts cast the agency’s move against Coinbase’s lending program as part of a broader campaign.

“Coinbase just happens to be the entity in the spotlight right now,” Jaret Seiberg, a Cowen Washington Research Group analyst, wrote in a note to clients Wednesday. “We expect the SEC is targeting other crypto exchanges that are offering loan products.”

“Cryptocurrency is 95 percent fraud, hype, noise and confusion,” said Neel Kashkari, president of the Minneapolis Federal Reserve, at a public event last month.