US Regulator Threatens Coinbase With Lawsuit in 'Surprising' Move

Coinbase said it tried to negotiate with the US Securities and Exchange Commission (SEC) for months on Lend, a programme that allows users to earn interest by lending crypto assets.

According to Coinbase Global Inc, the SEC has sent a Wells notice to the country’s biggest cryptocurrency exchange, surprising it with a "threat to sue without ever telling us why".

The SEC warned Coinbase that should it decide to go ahead with plans to launch its Lend product, it will face the regulator in court.

After months of trying to engage with the @SECGov on our planned Coinbase Lend product, we recently received notice that it intends to pursue legal action against us. We believe dialogue is at the heart of good regulation, even if the SEC may not. https://t.co/OumvyTPQdj

— Coinbase (@coinbase) September 8, 2021

Coibase's Chief Legal Officer Paul Grewal said on Wednesday that Lend doesn't qualify as a security and it's not an investment contract or a note.

"Customers won’t be 'investing' in the programme, but rather lending the USDC they hold on Coinbase's platform in connection with their existing relationship. And although Lend customers will earn interest from their participation in the programme, we have an obligation to pay this interest regardless of Coinbase's broader business activities. What's more, participating customers' principal is secure and we're obligated to repay their USDC on request", Grewal said.

Various US state agencies have issued warnings in recent months, with one about similar yield-earning accounts from BlockFi Lending LLC – a non-bank lender that offers cryptoasset-backed USD loans to cryptoasset owners.

"…all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued", Grewal wrote in a blog note, in response to the situation.

SEC Chair Gary Gensler, who assumed office in April, has been advocating for increased transparency in the fields of climate risks and human capital.

"Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs", Gensler said in July, calling for mandatory and standardised disclosures amid the rising popularity of environmental, social, and governance (ESG) funds.