Coinbase vs. US SEC: Could the Regulatory Discussions Escalate Further?

Questions arose in regulatory terms after the US SEC threatened the crypto exchange over its forthcoming Lend program.

The US-listed cryptocurrency exchange Coinbase made the headlines this week after the US Securities and Exchange Commission (SEC) announced it would sue them over concerns of breaching security laws if the firm launches its Lend program. The news not only took the crypto community by surprise but Coinbase itself.

“As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it,” Paul Grewal, Coinbase’s Chief Legal Officer, commented on a blog post right after the announcement hit the wires. There are more questions than answers after the watchdog announced the plans, and most of them are concerning the crypto sphere.

Biden Administration and Cryptos

The US President Joe Biden’s administration is willing to regulate the industry further, which has been on some sort of a grey area from a regulatory perspective. For example, the Internal Revenue Service (IRS) classifies virtual currency as property. On the other hand, the Commodity Futures Trading Commission (CFTC) considers them as commodities. The SEC has said that they ‘may be securities, depending on the facts and circumstances’.

The Lend program seeks to allow users to earn interest in their crypto holdings. Although it has not been launched to the public, the product is set to offer a 4% yield once their holders lend their stablecoin USD Coin (USDC) to Coinbase. Due to the SEC’s turmoil, its launch has been delayed until October.

But, the now-set Coinbase vs. SEC battle could escalate further, and it is something that its CEO, Brian Armstrong, has hinted in some tweets. In fact, he revealed that the SEC did not want to meet with him when he travelled to Washington DC in May this year. Of course, that happened within the context of Coinbase becoming the first publicly traded crypto exchange.

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Is It All about Clarifying Legal Concepts?

However, is Coinbase willing to go to court with the SEC? Armstrong said the following in that regard: “If we end up in court, we may finally get the regulatory clarity the SEC refuses to provide. But, regulation by litigation should be the last resort for the SEC, not the first.”

Legal experts have reacted to the news, such as Charles Whitehead, Professor at Cornell Law School, who told the Financial Times that there are still questions that SEC needs to answer first regarding loan accounts: “At its core, this is a question of SEC jurisdiction. The question is whether these loan accounts are securities. And if they aren’t securities, what are they, and who regulates them?”

In fact, he highlighted the question of whether an instrument like a lend could be a note or a security when it comes to the broad offering of crypto instruments that are appearing on the scene.

On the other hand, Tyler Gellasch, a former SEC official who now leads the Healthy Markets Association, commented to The New York Times that the watchdog has now recognized the importance of handling a new product when it makes its inception into a market, even if it is the crypto market: “This is a very large player in the cryptocurrency place, and they are extremely cautious in bringing down a hammer.”

As of press time, there are no additional updates on whether the Lend program will be postponed again by Coinbase or not.

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