SEC doubles down on crypto exchanges. Is Coinbase next?

SEC Coinbase ripple lawsuit lending program
“sec-seal-blue-background” by Securities and Exchange Commission is licensed under CC BY-NC-SA 2.0

Key Takeaways:

  • The SEC is prepared to sue Coinbase in court, if they launch their Lending Program.
  • The agency gave no explanation of why they consider the program “securities”.
  • SEC’s intentions to regulate the crypto market went too far, some experts believe.

YEREVAN (CoinChapter.com) – The US Securities and Exchange Commission (SEC) has threatened to sue Coinbase, one of the largest crypto exchanges, over a Lending program, as the company reported on September 8. Coinbase claims that the law enforcement agency has already sent them a Wells Notice, an official document informing about a possible lawsuit, without specifying the reason behind it.

SEC vs Coinbase?

In a recent blog post, Coinbase asserted its intention to be “transparent” about the events that led to the mentioned Wells Notice. The exchange claims, that it has been actively discussing the upcoming Lending program with the SEC for the past six months.

In hindsight, the program will allow eligible customers to earn interest on select assets on Coinbase, starting with 4% APY (annual percentage yield) on USD Coin (USDC).

Moreover, the exchange said they could have just launched the program, without going through all the trouble with the law enforcement agency. But they chose not to take that route and be “transparent” with their actions.

“Other crypto companies have had lending products on the market for years, and new lending products continue to launch as recently as last month. But Coinbase believes in the value of open and substantive dialogue with our regulators. So we took Lend to the SEC first”.

commented Paul Grewal, Chief Legal Officer at Coinbase

Also read: Chuck Schumer f***ed us all, Cardano founder on crypto tax bill

Coinbase still ready to cooperate?

The bottom line is that Coinbase believes their program does not qualify as “securities”, thus should not be singled out. The agency disagrees, without giving out any details on their stance.

The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion.

added Mr. Grewal.

Brian Armstrong, the founder and CEO of Coinbase, called the agency’s behavior “sketchy”. He also asserted that they complied with all the requests from the agency. Yet the latter still threatened to sue if the Lending Program launches.

Mr. Armstrong asserted he was ready to continue attempts to build a constructive dialogue, but “it takes two” to reach a solution.

Also read: El Salvador creates a $150 million Bitcoin trust while citizens protest

While Coinbase potentially faces a lawsuit, it is not the only crypto exchange under scrutiny. The law enforcement agency adopted a general strategy of doubling down on the crypto market and seeing that strategy through.

What does the SEC want?

Many lawyers, financial experts, and politicians have been vocal about the necessity of regulations in the crypto-sphere, to avoid criminal activity. For example, Hester Pierce, a Commissioner with the SEC, called for regulations since she joined the agency in 2018. She also pointed out that she thinks the definition of “securities”, is quite unclear.

In detail, defining securities is crucial for law enforcement, as they must mandatorily register with the SEC. If a digital asset, or in the case of Coinbase the Lending program is NOT securities, then the agency doesn’t have a case against them. However, the definition is up for interpretation, which means more lawsuits could follow.

SEC chairman Gary Gensler has been open on his intentions to investigate the DeFi sector and exchanges in particular. He pointed out that DeFi projects, specifically the ones that reward participants with “valuable tokens or similar incentives” could come under investigation, no matter how “decentralized” they say they are.

“There’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees. There’s some incentive structure for those promoters and sponsors in the middle of this.”

commented the chair.

Also read: Bitcoin targets $53K on adoption boom in El Salvador and Germany

Some experts believe that the SEC is taking the idea of “regulation” too far. It is doubling down on crypto exchanges, without giving them a clear idea of the prosecution reasons.

Critical opinions

On September 3, UniSwap decentralized exchange came under scrutiny. Stuart Alderoty, the General Counsel at Ripple Labs (a blockchain startup currently involved in a lawsuit with the SEC over the “securities” issue), commented on the Uniswap investigation. He compared it to the Trojan Horse, criticizing the agency’s process of “collecting information”.

Attorney Jeremy Hogan, who is involved in the SEC vs Ripple case, criticized the course of events as well. He said that what the governmental agency truly seeks, is the “easiest way to control YOU”.

Also read: SEC vs. Ripple lawsuit wages war on obscure definitions while XRP consolidates

The US Securities and Exchange Commission intends to sue Coinbase if the exchange launches its Lenfind Program. As Coinbase reported, the agency gave no explanation as to why they view the program as securities. The SEC’s “sketchy” behavior fits into the chairman Gary Gensler’s overall strategy, as he intends to bring crypto exchanges to heel.

Also read: SEC compels Ripple to produce relevant video/audio recordings; XRP mum.

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