Regulatory concerns and privacy issues lie behind the SEC’s threat to Coinbase

Cryptocurrency lending instruments are under scrutiny by regulators in some US jurisdictions. While these enforcement actions came from state agencies, there are indications that the US Securities and Exchange Commission (SEC) has also decided to go on the offensive.

So perhaps it’s not surprising to see the SEC ask Coinbase to stop its cryptocurrency loan program project, titled “Lend.” Coinbase CEO Brian Armstrong went to Twitter to express dissatisfaction with the behavior of the SEC, stating that the Commission was unwilling to offer useful guidance despite public claims to the contrary.

Critics of the SEC’s oversight actions aimed at the US crypto space warn that the country runs the risk of falling behind in this emerging digital economy if adequate regulatory protections are not put in place. However, the SEC held that the size and growth potential of the cryptocurrency industry makes it necessary for companies in the sector to operate within the scope of existing laws and guidelines.

Loans are bonds

As previously reported by Cointelegraph, the SEC recently threatened Coinbase with legal action if the giant exchange went ahead with the launch of its cryptocurrency loan product. According to Armstrong, Wells’ notice – a letter the regulator sends to companies it intends to sue – came as a surprise to the company, given Coinbase’s efforts to resolve any regulatory issues with the SEC prior to the announcement of the product launch.

In fact, the exchange’s CEO confirmed that Coinbase intended to introduce the “Lend” to customers “in a few weeks.” However, the latest SEC moves could cause the company to delay the launch. At least for a while.

As part of the Twitter thread, Armstrong rebutted the SEC’s argument that loans are bonds. However, US securities law classifies loans as bonds, with some notable exceptions. For example, in the case of banks.

According to the CEO of Coinbase, the SEC says “Lend” is a title because it behaves like an “investment contract.” That is, it is an investment of money (in this case, deposits in customer cryptocurrencies) in an enterprise with the expectation of obtaining a reasonable profit (income) that is derived from the efforts of others. As such, Coinbase cannot launch its cryptocurrency loan product without proper SEC approval.

However, Coinbase countered this position stating that the “Lend” does not constitute an investment contract. Instead, exchange clients are borrowing the stablecoin USDC they have in their accounts as a result of a prior relationship with Coinbase. The company also stated that it is the company’s obligation to pay interest to its “Lend” customers, regardless of the success of the underlying operations and financial activities.

Part of the confusion surrounding the SEC’s interpretation of evaluating a cryptocurrency lending program on the basis of decades-old securities laws probably stems from the Commission’s apparent lack of transparency. The SEC has not explained how it plans to analyze such products within the framework of the Howey and Reves Test, which is used to determine what constitutes an investment contract. Armstrong also alluded to this inaccuracy in his complaint about the Commission’s behavior towards Coinbase.

In a conversation with the Cointelegraph, former SEC official Marc Powers highlighted that there are many nuances involved in interpreting US regulatory provisions for centralized and decentralized exchanges, especially in markets such as cryptocurrency lending and trading. staking.

According to Powers, since industry entities like Coinbase are not registered as exchanges with the SEC, the Commission will need to decide whether a cryptocurrency loan product qualifies as a security or not, even if the cryptocurrency listing catalog the company does not include any title tokens.

Detailing the many points to consider, Powers noted: “A ‘bond’, by definition, does not only include ‘investment contracts’, as interpreted by the Supreme Court in the Howey case, but also ‘participation in any profit-sharing agreement.’ , adding:

“It depends, will the proposed currencies that will be available on the Coinbase platform be grouped together in order to split the profits from the lending activity among all those who lent their cryptocurrencies? If so, there may be a need to register the proposed program as an offer of ‘securities’ and also of the exchange, as this will be offering the purchase and sale of ‘securities’. As an ‘exchange’, it is a ‘facilitator bringing together buyers and sellers of securities. ‘”

Possible tax surveillance?

While it is perhaps correct to say that Coinbase’s argument that the loans are not a security is incorrect with respect to US securities law, alarms have also been raised about the SEC’s conduct on this matter. In addition to the threat of legal action, a move apparently outside the Commission’s usual approach to matters of this nature, the SEC has also asked Coinbase to provide details of clients who are on the loan program’s waiting list.

Some SEC critics said the request it was scandalous in many ways. In addition to being a violation of privacy, it also demonstrates the seemingly dominant anti-crypto stance among several top figures in Washington. In fact, a common argument among some anti-crypto policymakers in the US is that looser industry regulations will result in the creation of a dark and vibrant financial sector based on digital assets, open to unforeseen and nefarious uses.

These claims about crypto-crime are in line with investigative and forensic analyzes of cryptocurrency transactions, which show that only a tiny proportion of the total volume handled is linked to illicit activities. Furthermore, cryptocurrencies are much less used with criminal intent when compared to traditional financial instruments.

The request for names and contact information from Coinbase customers interested in a cryptocurrency product is a development that continues to generate criticism from the cryptocurrency industry. Since the illegality of cryptocurrency loans has not yet been established by any competent court, some figures in the crypto world have expressed their displeasure with the request.

Part of the alarms being raised is that the request likely points to a concerted tax enforcement effort on cryptocurrency users, especially in the United States. The move also echoes the negative sentiments that arose when the Treasury Department tried to track non-custodial cryptocurrency portfolios in late 2020.

SEC President Gary Gensler has already spoken loudly about the Commission’s intention to enact strong laws to curb the US crypto industry. In early August, the head of the SEC pointed out that the regulatory encirclement will also include the decentralized finance (DeFi) space, as well as that of stablecoins and cryptocurrency loans.

In early September, reports surfaced that the SEC was investigating Uniswap, the largest decentralized exchange (DEX) in the crypto market. Gensler also previously argued that some DeFi protocols were highly centralized.

Offensive against cryptocurrency loans

A significant part of Armstrong’s Twitter complaints mentioned above was the SEC’s apparent reluctance to discuss the loan program with the company. The Commission may have a reason not to issue opinions related to cryptocurrency loan products and that stance may be related to law enforcement in actions currently underway against BlockFi’s interests.

During the US summer, cryptocurrency company BlockFi received some orders from state securities regulators, including New Jersey and Alabama. At the time, the Cointelegraph reported that such regulatory pressure on BlockFi from state agencies could be indicative of possible federal actions not only against BlockFi, but also against other institutions offering the cryptocurrency lending service..

If the SEC is preparing to pursue BlockFi and other cryptocurrency lending entities, perhaps the response to Coinbase’s request for guidance may have constituted a premature disclosure of the commission’s conduct. According to Powers, however, the possibility of future SEC action against BlockFi may not be the reason for the Commission’s inaccuracy, according to Coinbase.

“While it may be helpful for the SEC to provide consulting advice to companies, it has no obligation to do so,” the Florida International University School of Law adjunct professor told the Cointelegraph. Commenting on the SEC’s reluctance to provide broader guidance on cryptocurrency lending, Powers said:

“Part of the SEC’s hesitation to provide a broader opinion on cryptocurrency loans can be explained by the variety of platforms that do so, if the ‘securities’ are occurring in an intensive investigation of facts and circumstances.”

Cryptocurrency loans are popular for a variety of reasons beyond the attractive interest rates offered by companies like BlockFi. On the one hand, these companies allow people to borrow up to 50% of the value of their possessions in cryptocurrencies without having to pay them off. Therefore, instead of incurring taxes on the sale of cryptocurrencies, customers and even institutions can access the money using the cryptocurrencies themselves as collateral.

The SEC’s threat to file legal action against Coinbase provides perhaps the first real indication that federal authorities are preparing to go after the cryptocurrency loans. Such action may also include policies to suppress stablecoins.

Crypto industry players continue to warn that stringent regulatory provisions will only serve to drive industry-driven technological innovation out of the United States.



Thomas Miles

Cryptocurrency is the most recently discovered currency which will be likely at the help of modernization across the next few decades. With a limited control from the government, the crypto market is independent of many features of a sound market as we know it. Thomas brings these stories to us by weaving them into articles of general importance to all those looking at the fluctuations in the market, or new entries. Thomas is also the founder of Bulletin Bits and is an excellent leader. His leadership is the kind that makes him the most knowledgeable and experienced on the team. His wonderful work ethic and attitude are worthy of imitation!

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