On The Coinbase Blog, Chief Legal Officer Paul Grewal stated that the SEC issued a notice to Coinbase indicating the agency's intention to bring an enforcement action against Coinbase if it were to launch its proposed Coinbase Lend ("Lend") program. The program would allow customers to lend USD Coin to Coinbase and earn interest. (USD Coin is a dollar-based stablecoin created by Coinbase.)
Mr. Grewal asserted that Coinbase's Lend program is neither an investment contract nor a note, so customers would not be "investing" in the program, but rather "lending" the USD Coin the customer already holds on the platform. He said that the SEC appears to consider Coinbase Lend a program that involves a security, under the Howey and Reves tests.
Mr. Grewal provided further background on Coinbase's interaction with the SEC, saying that Coinbase could have "simply launched the product but  chose not to," deciding to notify the SEC first. He said that after Coinbase provided significant information to the SEC, the SEC simply stated that the Coinbase Lend program involved a security and did not provide further explanation as to its reasoning.
Separately, Reuters reported on Coinbase's delayed launch, noting that the SEC's actions came after SEC Chair Gary Gensler announced the agency is seeking more authority to oversee crypto trading and lending.
Coinbase CEO Brian Armstrong said on Twitter: "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."
Setting to the side the SEC's alleged failure to explain itself, the relevant legal precedent at issue here is not Howey; it is Reves (holding that demand notes sold to retail investors are securities). The security at issue in this case is not the USD Coin (which is probably not a security at all); it is the loan of the asset to Coinbase. In short, the SEC would almost certainly assert that Coinbase is offering unsecured interest-bearing "notes" to retail investors; the fact that the retail investors are purchasing those notes with USD Coin rather than with dollars is likely not viewed by the SEC as a differentiating factor. If one were to take the view that the Coinbase Lend program did not involve a security, it would be the simplest thing in the world to issue debt without becoming subject to the securities laws: simply issue a dollar-based stablecoin, then borrow back the stablecoin at an agreed interest rate, and then convert the stablecoin back into dollars.
Put differently, while followers of developments in digital assets may think that this matter casts a very negative shadow on the distribution of digital assets, actually the relevant legal analysis has nothing to do with digital assets (they are what Hitchcock might have called a "MacGuffin": they merely make the story interesting). In fact, the legal analysis is just as to whether Coinbase can borrow money unsecured from retail investors without being subject to the securities laws. Stated bluntly, a court is most likely to find that the answer is "no." The Coinbase Blog states that a number of other businesses already have similar lending programs. Those other businesses will now need to consider whether they are at risk.
Notwithstanding the likely outcome of resulting litigation, the SEC owed Coinbase some explanation of its reasoning for threatening the firm with enforcement action (that is, assuming that Coinbase, at least by its own report, made significant efforts to reach out to the SEC). The SEC should view itself as primarily a regulatory agency, not a criminal enforcement agency, and in that role it owes market participants some explanation of its understanding of the law.
- The Coinbase Blog: The SEC has told us it wants to sue us over Lend. We don't know why.
- Reuters: U.S. markets regulator takes aim at Coinbase lending product
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