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SEC threatened to sue Coinbase, reveals CEO

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  • The SEC gave them a Wells notice about our proposed Coinbase Lend program, allowing them to engage meaningfully
  • For nearly six months, Coinbase has been proactively engaging with the SEC concerning Lend
  • As a result of all of this, they won’t be able to launch Lend until at least October

The SEC handed Coinbase a Wells notice about their planned Coinbase Lend service last Wednesday, after months of effort by Coinbase to engage effectively. A Wells notice is the formal notification that a regulator intends to sue a corporation in court. As astonished as they were when the SEC threatened to sue them without ever explaining why they wanted to be open with them about the circumstances that led up to it.

About the background of Coinbase

For about six months, Coinbase has been in contact with the SEC concerning Lend. They’ve been keen to hear their thoughts as they look for new methods to give their clients more financial power on Coinbase. Lend is looking to allow qualifying clients to earn interest on specific assets on Coinbase, starting with a 4% annual percentage yield on USD Coin (USDC).

They had the option of just launching the product, but they elected not to do so. This is not typical in our industry. Other cryptocurrency companies have had lending products on the market for years, and new loan products have only launched this month. Coinbase, on the other hand, believes in the importance of having open and substantive communication with their regulators. As a result, they sent Lend to the SEC first.

What they’ve handed up to the SEC

Coinbase’s Lend program isn’t security — or, to put it another way, it’s not an investment contract or a note in legal terms. Customers will not be investing in the program; rather, they will be lending the USDC they have on Coinbase’s platform as part of their existing relationship. Customers who participate in the Lend program will receive interest, but they will be responsible for paying it regardless of Coinbase’s overall business operations. Furthermore, the principal of participating clients is protected, and they are required to reimburse their USDC upon request.

Instead, an official investigation was launched. The requested papers and written responses, which we gladly delivered. They also requested that we supply a corporate witness to testify about the program under oath. As a result, one of their employees spent an entire day in August testifying about Lend in an open and honest manner. They also demanded the names and contact details of everyone on their Lend waiting list.

They have not agreed to disclose that because we take requests for personal information from clients extremely seriously. They also don’t think it has anything to do with any specific concerns the SEC might have about Lend concerning security, especially when the SEC refuses to provide any of such questions with them.

What is the current state of affairs and what are the future steps?

Despite Coinbase’s decision to remove the Lend from the market and provide thorough information, the SEC has yet to explain why they believe there is a problem. Instead, they’ve told them that if they launch Lend, they’ll sue. They inquired again if the SEC would disclose their explanation with them, and they were denied. They’ve just been told that they’re evaluating our Lend product through the lens of two decades-old Supreme Court cases known as Howey and Reves.

The SEC will not reveal the assessment itself, only that it was completed. These two cases date back to 1946 and 1990, respectively. Formal guidance from the SEC on how they intend to apply the Howey and Reves standards to products like Lend would go a long way toward responsibly regulating our business. Instead, the SEC’s Wells notice from last week suggests that it would like to skip over those basic regulatory hurdles and proceed straight to litigation. They’ve offered us the chance to defend Lend in writing, but that would be meaningless because they don’t know why the SEC is concerned.

The SEC has consistently requested that our industry meet with us and come in. That’s what they did here. However, all we know right now is that we can either keep Lend off the market indefinitely without understanding why, or we can sue them. A good regulatory partnership should never put the industry in such a bind without warning. The essence of good regulation is dialogue.

As a result of all of this, they won’t be able to launch Lend until at least October. Coinbase continues to welcome more regulatory clarity; ambiguity and mystery only serve to suffocate new products that customers demand and that Coinbase and others can securely offer. They will keep their consumers updated at all times as the project progresses.

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