The agency is a menace for shady crypto projects, often sending chills down the spine for those who might have misled U.S. investors.
From EtherDelta, Kik, Telegram, Tether Limited, the list goes on and on. Currently, a tussle between the agency and Ripple Labs—the minters of XRP—a coin the regulator maintains is a security, dominates headlines.
While Jay Clayton initiated the suit, Ripple lawyers are rightly claiming few morale-boosting wins. A win for David. Yet, Goliath still has its crosshairs on the crypto scene and, this time, Coinbase.
No Doubt – Coinbase is Legit and Compliant
There are a few firsts about Coinbase. The exchange was one of the pioneers, setting base in California, and is known for its compliance with the law.
Based in the United States, there is no exception or negotiable regulatory framework, as we have come to know. San Francisco is one of the most stringent places to set up shop, yet Coinbase remains operational later.
Coinbase Global is incorporated in Delaware, still in the United States, with other countries’ backing.
For example, the German Federal Financial Supervisory Authority (BaFin) approves of the exchange’s operations—custody and trading—within its borders.
At the same time, N.Y. traders can trade, meaning the exchange is also approved by the NYFDS and complies with the Bitlicense dictates. While the FDIC doesn’t insure Coinbase, the exchange claims all of its monies are insured.
By all means, this shows Coinbase is legit.
SEC has a Problem with Coinbase Lend
All the same, the SEC finds Coinbase’s new product Lend illegitimate and therefore plans on suing the exchange.
They have since issued the exchange with what’s called a Wells notice—an official declaration of “war” and a short way of saying, let’s meet in court.
Coinbase says they don’t know exactly why the SEC plans on suing them, yet they have been engaging them productively for the past six months.
The crux of the matter lies with Coinbase Lend.
So, what is this product?
The Lend Program by Coinbase essentially competes with banks by allowing crypto holders to lend out their assets and receive a higher yield. Think Compound or MakerDAO in crypto circles.
This utility means that holders of certain assets listed by the exchange can earn a yield. Starting with USDC, users can receive a 4 percent APY—a rate that’s “50x the national average of a traditional savings account.” (Incensing for banks and the financial system, right?)
What’s more, Coinbase plans to back this program “giving you peace of mind while you earn “interest,” which they add is “risk-free” but without the SPIC or FDIC insurance as a traditional bank would arrange.
Is Coinbase Lend an Investment Contract?
The SEC is having none of it and rightly thinks the product is an investment contract, that is, a security under the Howey Test prism.
In their view, if Coinbase wants to proceed and roll out this program, the exchange should register it, allowing Lend to comply with securities laws.
And the SEC isn’t yielding since its New Jersey’s bureau had issued BlockFi with a “cease and desist” order in July, stopping them from issuing interest-earning products, which had raised $14.7 billion from several investors.
Even with the fast-evolving cryptocurrency market, the SEC explicitly clarifies that no one gets a free pass, not even Coinbase with their Lend program. To issue this product to the masses, compliance with applicable securities law is mandatory.
The Coinbase Lend program was supposed to launch in June, but it has been pushed to October due to the SEC obstacle.
Will Coinbase Defy? Gary Gensler Fires Shots
Whether they will defy the SEC in the days ahead is something that’s closely watched.
Gary Gensler, the new head of the SEC, is not helping either. In the recent Senate Banking Committee, he called for overall adherence to regulation by crypto players for investor protection. He remains crypto neutral but comments from Coinbase’s CEO—calling out the SEC for “sketchy behaviors” forced him to comment.
Gary not only thinks Lend is an investment contract, a note, but also some of Coinbase’s listed tokens are securities despite the exchange not registering with the agency—thus exempted from disclosure regimes that other exchanges must submit to SEC.
For instance, he took a shot at stablecoins—the heartbeat of the crypto world—citing them as possible securities, a recalcitrant asset that should be under his watch.
Worse for crypto, Gary is confident. He cites the “35 different things” described by the 1933 Securities Act, which defines a security— far more than those definitions from the “Howey Test.”
As this plays out, the crypto community is closely watching out the turn of events.