Coinbase CEO Brian Armstrong is really upset. In a lengthy 21-message Twitter thread, he recounted that the U.S. Securities and Exchange Commission, SEC, has threatened to sue the exchange over a new loan product. Specifically with a yield product, Coinbase Lend program,
which was supposed to launch in a few weeks. The product intends to pay 4% interest to stablecoin owners on their savings (nearly four times the yield of a savings account in that country).
Coinbase’ s intention with the product was for users to earn interest on selected digital assets. For now, the offering would only include the USD Coin
But let’s look at some of what Armstrong says
1/ Some really sketchy behavior coming out of the SEC recently.
He starts by saying that they face “really inaccurate behavior came out of the SEC recently.” Imprecise, he repeats, because “millions of cryptocurrency holders have earned returns on their assets over the past few years. It makes sense, if you want to lend your funds, you can get a return.” He adds that many companies do this and Coinbase
recently came out to announce that it would do so as well.
“We were planning to go public in a few weeks, so we reached out to the SEC to give them a friendly notice and briefing. They responded by telling us that this loan feature is a security (guarantee, value). Ok, that seems strange, how can a loan be a security? That’s why we asked the SEC to help us understand and share their point of view. We always strive to work proactively with the regulators and keep an open mind.
SEC refuses to explain
However, the SEC’s response was unclear, according to Armstrong: “They refuse to tell us why they think it’s a guarantee and instead cite us a bunch of regi
We comply, they demand testimony from our employees (we comply) and then tell us they will sue us if we proceed to launch, with no explanation as to why.
Armstrong clarifies that they are committed to following the law but “sometimes, the law is not clear. So, if the SEC wants to issue guidance, we’re happy to follow that too (it’s good if it really does apply it uniformly across the industry equally).”
But, he insists, the problem is that the SEC refuses to elaborate on its view. He continues:
Meanwhile, many other crypto companies continue to offer a lending feature, but Coinbase somehow isn’t allowed to do so.
And again he insists: “If you don’t want this activity, simply publish your position, in writing, and apply it uniformly across the industry.” He adds:
Apparently, the SEC’s goal is to protect investors and create fair markets. So who are they protecting here and where is the harm? People seem quite happy to make a return with these various products, at many other crypto companies.
He stresses that shutting down these services would hurt consumers more than protect them “and by preventing Coinbase from launching the same thing that other companies already have live, they are creating an unfair market.”
No meeting with the SEC
Armstrong commented in his tweet thread, that although he met with every regulator in the country this year, the SEC is the only one that has refused to do so.
The SEC was the only regulator that refused to meet with me, saying “we won’t meet with any crypto companies”. This was right after we became the first crypto company to go public in the US.
He insists on his interest in compliance, “We’ve always tried to be good players in the space, relying on sensible regulation even when it’s difficult or costly. We try to think about what products we would want for ourselves and what risks we would want our families to know about before we launch products.” He adds:
‘However, in this case, we are being threatened with legal action before a single piece of real guidance has been given to the industry about these products.
If we end up in court, we can finally get the regulatory clarity that the SEC refuses to provide. But regulation by litigation should be the last resort for the SEC, not the first.
He concludes, “Our doors remain open. Hopefully the SEC will step forward to create the clarity this industry deserves, without harming consumers and businesses in the process. America could really use all of us working together to resolve this right now.”
In a blog post today, Paul Grewal, Coinbase’ s chief legal officer, says that the company has already received a Wells notice, a letter sent by the SEC notifying recipients of the substance of its charges.
Grewal adds that filing a written defense would be “futile” since the company doesn’t know exactly why it might face a lawsuit:
“The SEC has repeatedly asked our industry to ‘talk to us, come on in.’ We did that here. But today all we know is that we can keep Lend off the market indefinitely without knowing why or we may be sued.
Ripple responds to Coinbase: “Welcome to the party.”
As mentioned above, Ripple is already several months into litigation with the SEC, a body that considers its crypto XRP as a security. Since similar arguments now seem to have been thrown around, Ripple CEO Brad Garlinghouse sent this tweet to Armstrong:
– Brad Garlinghouse (@bgarlinghouse) September 8, 2021
Also, some legal opinions came via Twitter that support the SEC’s position and not Armstrong’s. Attorney Preston Byrne tweeted, “”Performance” products are securities. They do not differ in any material respect from an unsecured bond. They just don’t use the name. Other countries, like England, have debt crowdfunding rules. The U.S. should check it out and we should emulate those rules here.”
“Yield products are securities. They differ in no material respect from an unsecured bond. They just don’t use the name.
Other countries, like England, have debt crowdfunding rules. US cos should check that out and we should emulate those rules here. https://t.co/8BRbu6s4nv
– Preston Byrne (@prestonjbyrne) September 8, 2021
Image from Unsplash