Coinbase CEO Laments SEC's 'Sketchy' Behavior As Regulator Threatens To Sue Over Crypto Lending Product

Coinbase Global Inc COIN CEO Brian Armstrong came down heavily on the U.S. Securities and Exchange Commission late night Tuesday on social media.

What Happened: In a series of tweets, Armstrong told the story of what transpired between the cryptocurrency trading platform and the SEC, describing the market regulator’s behavior as “sketchy.”

Referring to Coinbase’s yet-to-be-launched “Lend” product, Armstrong, said the company was “planning to go live” in a few weeks and gave the SEC a “friendly heads up and briefing.”

“They responded by telling us this lend feature is a security,” Armstrong wrote. “How can lending be a security? So we ask the SEC to help us understand and share their view.”

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“They refuse to tell us why they think it's a security, and instead subpoena a bunch of records from us (we comply), demand testimony from our employees (we comply), and then tell us they will be suing us if we proceed to launch, with zero explanation as to why.”

Armstrong said that Coinbase was “committed to following the law” but urged the SEC to publish guidance and “actually enforce it evenly across the industry equally.”

However, as per Armstrong, the SEC is refusing to “offer any opinion in writing.” Instead, they are “​​engaging in intimidation tactics behind closed doors. Whatever their theory is here, it feels like a reach/land grab vs other regulators.”

The Coinbase CEO said that the SEC refused to meet with him when he traveled to Washington D.C. in May this year. He said the regulator told him, “we’re not meeting with any crypto companies.”

Why It Matters: The Lend product offers a 4% APY on USD Coin USDC/USD coin to begin with — the platform is open pre-enrollment.

In a blog post, Coinbase Chief Legal Officer Paul Grewal claimed Lend did not qualify as a security as it is neither a contract nor a note.

“We shared this view and the details of Lend with the SEC. After our initial meeting, we answered all of the SEC’s questions in writing and then again in person. But we didn’t get much of a response,” wrote Grewal.

As per Grewal, SEC is assessing the product through Supreme Court cases called Howey and Reves. The regulator has not shared the assessment but only told Coinbase that it used that particular methodology.  The two cases date back to 1946 and 1990, respectively.

Grewal said as a result of the developments, Coinbase will not launch Lend until at least October.

Last month, the SEC filed its first-ever lawsuit against an organization over its activities related to decentralized finance or DeFi, alleging the sale of unregistered securities.

The SEC Chair Gary Gensler suggested last month that some DeFi projects have features that make them appear as the type of entities that the SEC is tasked with overseeing, reported the Wall Street Journal.

In December, the SEC sued Ripple, the company associated with the XRP XRP/USD token, alleging it conducted a $1.3 billion unregistered securities offering. 

Price Action: On Tuesday, Coinbase shares closed 4.18% lower at $266.81 in the regular session and rose almost 0.2% in the after-hours trading. The cryptocurrency exchange desk enables trading of cryptocurrencies like Bitcoin BTC/USD, Ethereum ETH/USD and Dogecoin DOGE/USD.

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Photo: Courtesy of Marco Verch Professional on Flickr