The cryptocurrency exchange Coinbase is facing a legal challenge from U.S. state regulators who claim that it is offering unregistered securities to its customers. The regulators allege that Coinbase’s Lend program, which allows users to earn interest on certain digital assets, violates securities laws and poses risks to investors.
Coinbase announced the launch of Lend in June, promising to pay 4% annual percentage yield (APY) on deposits of the stablecoin USD Coin (USDC). The company said that Lend would not involve lending or borrowing, but rather a contractual agreement between Coinbase and its customers. Coinbase argued that Lend is not a security and does not require registration with the Securities and Exchange Commission (SEC) or any state regulator.
Coinbase Lend is a proposed service that would allow Coinbase customers to earn interest on their crypto assets by lending them to other users. According to Coinbase, the service would offer a 4% annual percentage yield (APY) on USD Coin (USDC), a stablecoin pegged to the U.S. dollar. Coinbase claims that the service would be secure, transparent, and easy to use, and that it would not involve any lockups or hidden fees.
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However, the SEC disagreed and threatened to sue Coinbase if it proceeded with Lend. The SEC said that Lend involves an investment contract, which is a type of security, and that Coinbase failed to provide adequate disclosures and protections to investors. Coinbase responded by accusing the SEC of intimidation and lack of clarity and said that it would delay the launch of Lend until October.
On October 1, the Texas State Securities Board also issued a cease-and-desist order to Coinbase, alleging that Lend is a fraudulent scheme that violates Texas securities laws. The order said that Coinbase is misleading investors by claiming that Lend is not a security and by promising unrealistic returns. The order also said that Coinbase is exposing investors to potential losses due to hacking, theft, market volatility, and regulatory actions.
Coinbase has not yet responded to the state regulators’ orders, but it has previously stated that it will cooperate with any inquiries and defend its position in court if necessary. Coinbase has also said that it believes that Lend is in the best interest of its customers and that it will continue to innovate in the crypto space.
The SEC has not publicly explained its reasoning, but it has reportedly sent Coinbase a Wells notice, which is a formal notification that the agency intends to sue the company unless it changes its plans or convinces the SEC otherwise. The SEC likely views Coinbase Lend as a security because it involves an investment of money in a common enterprise with an expectation of profit from the efforts of others. This is the definition of an investment contract, which is one of the types of securities regulated by the SEC under the Securities Act of 1933.
The Securities and Exchange Commission’s action against one of the country’s biggest crypto exchanges has been seen as existential for the future of crypto in the United States, with the sector accusing the agency of regulating by enforcement in the absence of new laws from the U.S. Congress. Now, three new amicus briefs, which allow parties who are interested but not directly affected by the case to aid the court’s reasoning, argue crypto is neither significant nor special, and that the SEC can take on digital assets under existing law.
Meanwhile, several state regulators have also taken action against Coinbase’s Lend program. On September 28, the New Jersey Bureau of Securities issued a cease-and-desist order to Coinbase, ordering it to stop offering Lend to New Jersey residents. The order said that Lend is an unregistered security and that Coinbase has not provided sufficient information about the risks and benefits of the program.
For Coinbase, it could face fines, injunctions, and reputational damage, as well as potential delays or cancellations of its future products and services. For the crypto industry, it could signal a more aggressive regulatory stance from the SEC, which could affect other crypto lending platforms, decentralized finance (DeFi) protocols, and stablecoins.
It could also create more uncertainty and confusion for crypto investors and developers, who may face more legal risks and compliance costs. Coinbase has publicly denied any wrongdoing and accused the SEC of being unfair and hostile to innovation. The company has also published a blog post and a tweet thread detailing its interactions with the SEC and explaining why it believes Coinbase Lend is not a security.