SEC Issues Notice For Crypto Industry With Coinbase Move

Coinbase has recently revealed that the Securities and Exchange Commission issued a sue warning if it launches a new digital asset lending product called Lend, which would enable users to earn interest on certain digital assets that they hold. 

Gary Gensler, Chair of the Securities and Exchange Commission said last week that cryptocurrency trading platforms could not last long outside of the US regulatory system and it became clear this week that SEC meant what they said. 

Back in April, Coinbase became the first US cryptocurrency exchange to list itself publicly. The exchange said, in a blog post, that SEC had warned that it will sue the company if it launches a new digital asset lending product called Lend. SEC also issued the trading platform with subpoenas for more information. 

Lend would enable its users to earn interest on certain digital assets. Coinbase’s Chief Legal Officer, Paul Grewal, said that the SEC had told Coinbase earlier in the year that it considered Lend to be a security. The SEC would not disclose how or why they had reached that decision. 

This latest move from SEC unlines the debate that is currently happening at the heart of cryptocurrency regulatory platforms as US supervisors battle to keep up with the industry’s booming growth. 

Charles Whitehead, Professor at Cornell Law School said that this is a question of “SEC jurisdiction” followed by, “This question is whether these loan accounts are securities. And if they aren’t securities, what are they and who regulates them?”

SEC’s main role revolves around whether products, like Lend, are ‘investment contracts’ making them security under federal law. The supreme court has ruled that an investment contract exists when “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

There is also a question around whether Lend is deemed a ‘note’ and in turn a ‘security’. Head of Arnold & Porter’s financial service practice, David Freeman, said that while he expected SEC to use tests, the regulator should also issue rules or guidance via a ‘formalised process’ on how to interpret new crypto instruments. 

Following a more formalised process would help to make the regulation of crypto tools more just and this way “A considered decision can be reached rather than a fight between SEC and one company,” said Freeman, adding “rulemaking through enforcement action is not great and it is not subject to judicial review or public input.”

In recent months, Coinbase had made efforts to make friends in Washington. The company has also increased its spending on lobbying and has joined up with three other companies including the investment manager, Fidelity, the cryptocurrency investment firm Paradigm and the payments company Square. Together, the companies have set up a new lobbying group called the Crypto Council for Innovation (CCI). The SEC has not yet responded to this move.