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Coinbase says SEC threatened lawsuit over Lend feature

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The company says the regulator won’t explain its issues with the feature

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Illustration by Alex Castro / The Verge

Cryptocurrency exchange Coinbase seems to have some issues with the Securities and Exchange Commission (SEC) over a planned feature that lets people lend cryptocurrency through its platform. In a Medium post on Tuesday, Coinbase’s chief legal officer wrote that the regulatory agency threatened to sue the company if it launched the feature. Coinbase’s CEO posted a Twitter thread on Tuesday evening saying that the SEC wasn’t clear about what it wanted.

According to Coinbase’s CEO, Brian Armstrong, the company told the SEC about its new Lend feature as a courtesy but didn’t anticipate pushback, based on his impression that similar features exist on other platforms. However, according to Armstrong, the SEC informed the company that the lend feature would be considered a security, meaning it would be regulated as an investment. Coinbase disputes that classification, but they weren’t able to make their case in the same informal channels. Instead, according to Armstrong and the company, the SEC opened an investigation into Coinbase, asking for employee testimony and the names and contact information of people who had signed up for the Lend waitlist.

Armstrong says that Coinbase is looking for clearer information from the SEC and a written explanation of how it's judging Lend to be a security. According to the Medium post, the SEC told Coinbase that it had assessed Lend against two benchmark securities cases tried in the Supreme Court: SEC v. W. J. Howey Co. and Reves v. Ernst & Young. The former set the standard that investments would be considered securities if there’s “a reasonable expectation of profits to be derived from the efforts of others,” according to Investopedia.

Coinbase’s upcoming Lend feature, according to its website and a Medium post, is meant to let people lend out their cryptocurrency and earn interest doing so. Coinbase says that the loans would go to “verified borrowers” and that the company would guarantee the initial value (so if you lent $100 through the program, Coinbase promises you’d get $100 back). It also says you can expect a return of 4 percent APY. The company says that, in light of its SEC troubles, it won’t launch Lend “until at least October.”

A spokesperson for the SEC told Reuters that the agency “does not comment on the existence or nonexistence of a possible investigation.” Many have seen a recent tweet from the SEC’s Investor Education Twitter account as trolling Coinbase, though: it contains a video explaining the concept of bonds, financial instruments that allow you to give a loan to a company or government, in return for interest payments. The tweet was posted Wednesday morning, after Armstrong’s Tuesday-night thread. However, the account regularly posts similar videos and tips, so it’s possible the timing is coincidental.

The SEC’s tiff with Coinbase may be indicative of its move toward regulating crypto more heavily. The current chairman has said that Stablecoins, or cryptocurrencies whose value is pegged to something else like the US dollar, may fall under the SEC’s jurisdiction. That could be relevant to Coinbase’s woes — the Lend feature that started all this was set to launch using USDC, a Stablecoin.