After Ripple, now Coinbase. At what point does cryptocurrency trading become securities trading? And when will the SEC intervene?
After the SEC (United States Securities and Exchange Commission) first took aim at Ripple, it is now Coinbase ‘s turn. Again, it revolves around the old question: at what point is the offering of cryptocurrencies a securities business? And to what extent does the SEC have jurisdiction over it, or when is a ban or adjustment order warranted?
The content of the dispute that has just flared up is the still-planned Lending Program(Lend). The idea is that customers do not invest in the program itself, but in the stablecoin USDC via the Coinbase platform. Coinbase then lends the USDC to verified borrowers, allowing customers to earn up to four percent effective return. According to the crypto trading platform, this interest is completely independent of Coinbase’s other business. They stress that they want to and will follow through on the commitment to repay any USDC upon request and that they will keep the capital entrusted to them safe. Currently, you can only pre-register to Lend.
Despite the fact that the SEC and Coinbase have been in communication about this product for six months now, it has yet to come to market or disappear from the Coinbase website. According to the freshly published blog entry by Chief Legal Officer Paul Grewal, this is mainly due to the SEC’s unwillingness to communicate. In his post, he clearly criticizes that while the SEC had shown a nice gesture with “talk to us, come in” (“talk to us, come in”), there was currently no sign of that. Instead, despite complying with the SEC’s requests, the company would have been left with no justification for the classification.
The SEC has repeatedly asked our industry to ‘talk to us, come in.’ That’s what we did here. But today, all we know is that we can either keep Lend off the market indefinitely without knowing why, or we can get sued.
Paul Grewal, The Coinbase Blog, September 8, 2021
Coinbase perspective on what happened
- Coinbase would have tried to get into the conversation with the SEC before Lend was officially announced.
- The SEC would have flunked Lend based on the 1946 and 1990 Supreme Court cases Howey and Reves. Thus, Lend was classified as a security.
- Upon further inquiry by Coinbase staffeitenden what specifically it would have failed had there been no response from the legal authority.
- Coinbase is withholding Lend and reportedly continuing to provide all information to the SEC.
- In June 2021, Lend is announced but not released for sale.
- The SEC subsequently initiates a formal investigation, which involves the SEC (a) being sent a number of documents and (b) interviewing Coinbase employees:inside.
- Coinbase is cooperative and releases both filings. However, the company then claims to have stopped cooperating when the SEC asked for the release of the names and contact information on the list of interests in Lend.
- Now, a Wells notice would be on the table since September 1, which means the SEC plans to bring an enforcement action.
Please SEC, clear rules, but for everyone
CEO Brian Armstrong commented on this conflict on his Twitter account with 21 points. Among others, points 3, 7, 9, 11 and 13 deserve special attention, in which he formally asks for clear and unambiguous legislation to maintain fairness and transparency. At the same time, he stressed that if guidelines and regulations are determined, they must also apply equally to all market participants. It seems that he is referring to direct competitors BlockFi and Celcius, which have not yet found themselves under investigation by the SECs.
The SEC has yet to comment on this storyline.