The SEC has threatened to force the cryptocurrency company Coinbase into court for its new Lend service that will allow its customers to earn interest from their cryptocurrencies by lending them to other people. As part of this program, the company will offer crypto based loans, but the SEC has said this feature is a security.
Coinbase revealed these details in a blog post. After the announcement, the CEO of Coinbase, Brian Armstrong, gave more information on Twitter where he explained how the SEC gave no guidance and has behaved “sketchy.”
Armstrong said that Coinbase messaged the SEC to understand this move as Cryptocurrency does not fit into the security framework given they don’t represent ownership of debt and no promise was given for any appreciation of the cryptos.
“They responded by informing us this lend program is a security. This seems strange, how can a lending program be a security? So we asked the SEC for their help in understanding.,” said Armstrong. “They refused to tell us why they believe it is a security, and instead subpoenaed a lot of records from us (we complied), demanded testimony from employees (we complied), and then told us they will sue us if we launch, with no explanation as to why.”
John Hempton, a famous investor and current CIO of Bronte Capital Management, replied to Armstrong’s tweet with a photo of the first page of the 1933 Securities Act.
5/ They responded by telling us this lend feature is a security. Ok – seems strange, how can lending be a security? So we ask the SEC to help us understand and share their view. We always make an effort to work proactively with regulators, and keep an open mind.
— Brian Armstrong (@brian_armstrong) September 8, 2021
This led to some confusion as people started to debate about how there was nothing connected to “digital assets” in the law. Hempton simply replied by stating, “The question was about a loan for interest. Seems covered.”
While cryptocurrency itself might not be a security, Coinbase’s Lend service plans to give loans for interest, which could come under the security rule. Should Coinbase take this to court and these loans be ruled to be securities, several more companies such as Celsius, BlockFi, Ledn and more could face similar issues.
Author: Steven Sinclaire