Coinbase faces SEC lawsuit over lending product, CEO says SEC is creating an unfair market

Following the previous reports of investigating Uniswap, the U.S. Securities and Exchange Commission (SEC) has turned its attention to the lending product "Coinbase Lend," claiming that the product falls under the category of securities. However, according to Coinbase's Chief Legal Officer and CEO, the SEC has not provided a clear reason and has warned that if the product undergoes further updates, Coinbase will be sued.

Coinbase Lend

Coinbase Lend, announced to launch on 6/29, is a new product reportedly based on the stablecoin USDC, offering an annualized return of 4%. It is marketed as "50 times higher than traditional savings account rates," with the average annualized rate for traditional savings in the U.S. being 0.07%.

Compliance Efforts in Vain

In a blog post, Coinbase's Chief Legal Officer, Paul Grewal, stated that Coinbase could have launched the product directly but chose to engage in dialogue with regulators because they believed in its value.

However, after describing the product to the SEC, answering all questions in writing and in person, the SEC, with minimal response, claimed two months later that Lend involved securities and issued a Wells Notice, indicating their intent to sue directly.

Grewal pointed out that the SEC only cited the Howey Test and Reves guidelines in evaluating Lend but refused to disclose the evaluation process, stating:

The SEC keeps urging industry players to engage in regulatory dialogue. Coinbase did just that, but the product was rejected for unclear reasons. Now, even in the best-case scenario, Lend won't be launched until October. The opaque regulatory environment will only stifle the new products customers desire. As things unfold, we will disclose all conditions to users.

It should be noted that the Wells Process refers to the notification provided to the subject of an investigation when law enforcement authorities gather sufficient evidence to recommend enforcement action to the commission, hence also known as a Wells notice.

While the Wells notice provides the subject of the investigation an opportunity to defend themselves, Grewal claimed that it is difficult to defend without knowing the SEC's concerns.

SEC Creating an "Unequal Market" Themselves

Coinbase CEO Brian Armstrong characterized the SEC's regulatory actions on Lend as "rough behavior" in a series of tweets. He stated:

The SEC claims Lend is a security but doesn't disclose how they determined it as such. They demanded a bunch of written materials, asked employees to testify, we did all that, and now they say we'll be sued once we launch, without giving any reasons.

Armstrong noted that many crypto platforms offer lending services, yet Coinbase was left out. He urged SEC Chairman Gary Gensler saying:

If you don't want lending products in the market, just inform us in writing. Enforce policies fairly across the industry. The SEC's surface duty is to protect investors and create a fair market, so who are they really protecting? Where is the harm they seek to isolate? Many are happily earning on other platforms with various products.

He emphasized that the SEC is preventing Coinbase from launching products that other platforms already have, thus creating an unfair market.

SEC the Only Uncooperative Agency

Reports indicate that Armstrong has met with the Federal Reserve earlier this year, explaining the development of the crypto industry to the government, and possibly even met with Chairman Jerome Powell as early as May.

In today's tweets, Armstrong further revealed that after becoming the first publicly traded crypto company in the U.S., the SEC was the only regulatory agency that refused to meet with him during his visit to Washington, stating, "We will not meet with any crypto companies."

Armstrong concluded in his tweets, hoping the SEC would make efforts to create transparency in regulating the crypto industry, rather than harming consumers and crypto companies during the regulatory process.