With its "Lend" savings offer, Coinbase attracts the wrath of the US financial regulator

The services of lending bitcoin and other cryptocurrencies, are trending upwards, but that’s without the obstacles put up by regulatory bodies. Today, here is a new illustration with the Securities and Exchange Commission (SEC) which has just warned Coinbase about its lending services called Lend.

SEC threatens Coinbase

On September 1, 2021, the SEC issued what is known as a Wells Notice to Coinbase regarding its lending services. A Wells Notice is a form of formal notice from a regulatory agency to a company it is considering suing. Paul Grewal, Chief Legal Officer(CLO) said that Coinbase has not been informed of the basis for this potential legal action:

“As surprised as we were by the SEC’s threat to file a lawsuit, without ever telling us why, we want to be transparent with you about the course of events leading up to it.”

Paul Grewal, CLO of Coinbase – Coinbase Blog

The Lend service that Coinbase wants to offer is a high yield product that would offer a 4% interest rate on deposits. It is this interest rate that would be problematic, being much higher than those offered by banks for savings products. Consequently, the SEC seems to be applying its famousHowey test , which allows it to characterize an investment contract by the meeting of three elements:

  • An investment of a sum of money
  • Made in a joint venture
  • With an expectation of profits derived from the management of the enterprise.

Paul Grewal took exception to the SEC’s refusal to share the details of the valuation made of Coinbase’s Lend product, in light of this 1946 Howey case law from the US Supreme Court.

“The SEC does not want to share the valuation itself, only the fact that it made it. […] Formal guidance from the SEC on how they intend to apply the Howey and Reves tests to products like Lend would be a great help in regulating our industry in a responsible manner. “

Paul Grewal, CLO of Coinbase – Coinbase Blog

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Coinbase must prepare its defense

Although Coinbase

is the exchange that has made the most effort to be in full compliance with regulations, it seems that this is not enough for the SEC. This state of affairs leaves Brian Armstrong, CEO of Coinbase, stunned:

“They [the SEC] refuse to tell us why they think it’s a financial security, and instead they subpoena a bunch of documents (we acquiesce), require employee testimony (we comply), and then tell us they’ll sue us if we go ahead with the launch, without telling us why


Brian Amstrong, CEO of Coinbase With its "Lend" savings offer, Coinbase attracts the wrath of the US financial regulatorWith its "Lend" savings offer, Coinbase attracts the wrath of the US financial regulatorTweet from Brian Amstrong, CEO of Coinbase – Source: Twitter

Furthermore, the CEO of Coinbase asks the SEC to explain the reasons for this threat of prosecution. He reaffirms their willingness to proactively work with regulators. Yet, the SEC has already refused to meet with Brian Armstrong, right after Coinbase’s IPO, stating that they never meet with crypto companies. From then on, there is little chance that the CEO’s wish for collaboration will be granted.

All in all, Coinbase has two options: either stop the launch of the Lend

service, or go ahead with it and face legal action. For now, Coinbase has announced that the feature will not be launched until October.

Once again, digital asset lending services are being scrutinized by regulators. Indeed, this event is reminiscent of the BlockFi

episode, which was sued by various US states for offering similar products to its users.

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