The SEC threatens to sue Coinbase over their Lend program

In a blogpost titled “The SEC has told us it wants to sue us over Lend. We don’t know why”, Coinbase revealed that the  Securities Exchange Commission intends to sue the company in court.

According to the blog post written by  Coinbase’s Chief Legal Officer Paul Grewal, Coinbase received a ‘Wells notice’ about their planned Coinbase Lend program, which is an official way that a regulator informs a company that it intends to sue them in court. It seems however, that Coinbase was not informed about the reason why the SEC is taking them to court.

“Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem. Rather they have now told us that if we launch Lend they intend to sue. Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused”

Coinbase’s Lend program allows owners of cryptocurrencies to lend these in return for interest, and according to them the program does not qualify as an investment contract or a note. Nonetheless, the SEC has informed Coinbase that they are assessing their Lend product using old Supreme Court cases called Howey and Reves.

These court cases are often used to interpret whether a specific digital asset is a security, a utility, currency, commodity or some other digital asset. For example, the Howey Test defines an investment contract as follows:

“… an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby 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…. Such a definition…permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of the many types of instruments that in our commercial world fall within the ordinary concept of a security…. It embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

Despite Coinbase having requested formal guidance on how they intend to apply these tests to their Lend product, they noted that the issuance of the Wells notice indicates that “the SEC would rather skip those basic regulatory steps and go right to litigation”. 

Regulators in the US have been increasingly concerned over cryptocurrencies that they believe offer security. Coinbase, Ripple, and BlockFi have all faced legal orders or notifications from the SEC regarding their respective offerings.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.