Photo by STRF/STAR MAX/IPx 2021 5/15/21
Around the time Tuesday’s cryptocurrency price crash sliced $400 billion off the $2 trillion crypto market, the CEO of cryptocurrency exchange Coinbase revealed that the U.S. Securities and Exchange Commission (SEC) has warned it will sue his company if he launches a new digital asset lending product.
U.S. securities regulators want information from Coinbase about quarterly revenue, founders and any analysis concerning whether digital assets are actually securities that should be registered with the SEC, Wall Street Journal reported.
The price of a Bitcoin fell Tuesday to $42,900 on the Bitstamp crypto exchange, down from more than $52,000 a few days earlier and other cryptos fell 15-to-30 percent on one of the most volatile trading days this year. Bitcoin rebounded somewhat to trade at $46,563.13 as of this writing.
In a series of tweets Tuesday, Coinbase co-founder and CEO Brian Armstrong went public with the SEC dispute, saying other crypto companies offer similar programs and the SEC’s actions are “sketchy” and “intimidation tactics behind closed doors.”
Coinbase’s lending platform, Lend, plans to let customers holding a stablecoin called USD Coin (USDC) earn interest by lending it to other traders. Stablecoins are crypto assets supposedly pegged to national currencies such as the dollar, making it easier to swap from one crypto asset to another.
At issue is whether the Coinbase lending platform sells securities or not.
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The rule in the U.S. is that an investment contract is a security and generally can’t be sold to the public without registering it with the SEC if the money is invested “in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” wrote Matt Levine in an opinion piece for Bloomberg.
Levine is a former investment banker at Goldman Sachs and has worked as a mergers and acquisitions lawyer.
For example, Levine wrote, “a Bitcoin lending program in which (1) a bunch of people pool their Bitcoins, (2) some manager or smart contract lends those Bitcoins to borrowers who pay interest, and (3) some or all of the interest is paid back to the people in the pool — is pretty straightforwardly an investment contract and thus a security.”
The SEC has been saying this for months, Levine wrote, but not in “a particularly clear way. There’s not an SEC press release saying ‘FYI crypto lending programs are obviously securities.'”
Crypto lending programs are a staple feature of decentralized finance (DeFi) platforms and “roughly none of them are registered with the SEC,” Levine said. The SEC and state regulators have sued a few of them including BitConnect, BlockFi and Blockchain Credit Partners but “there are about a zillion others that haven’t been sued by the SEC,” Levine wrote.
Coinbase CEO Armstrong whined on Twitter about the SEC being mean to him about his lending program, eliciting some responses that were uncomplimentary.
“A bunch of great companies in crypto have been offering versions of this for years,” Armstrong tweeted. “We were planning to go live in a few weeks, so we reached out to the SEC to give them a friendly heads up and briefing … They responded by telling us this lend feature is a security.”
John_Hempton tweeted back, “Seriously are you an idiot. Try the FIRST PAGE of The Securities Act of 1933” with an accompanying copy of said page.
Dare Obasanjo, a program manager at Microsoft, tweeted, “Going public against a regulator is a risky approach but given how hostile regulators are to tech all over the world, not much left to lose by getting public on their side.”
In a blog posted Tuesday, Coinbase Chief Legal Officer Paul Grewal wrote that the SEC had “also asked for the name and contact information of every single person on our Lend waitlist.”
Attorney and gamer Collins Belton questioned the SEC’s “asking-for-names” tactics in a tweet. “Putting aside my thoughts on the SEC’s behavior and hypocrisy, I think the below sentence buried in@coinbase’s posts deserves special attention separate from the securities law chicanery. This should leave you uncomfortable.”
SEC Chairman Gary Gensler promised in August to come down hard on the unregulated crypto platforms and police crypto to the maximum possible extent. “We just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West,” Gensler said in a prepared statement to the Aspen Security Forum. “We have taken and will continue to take our authorities as far as they go.”
Joe Weisenthal, co-host of the Odd Lots podcast, challenged Twitter users to come up with the best argument that Coinbase’s Lend product is not a security.
“It’s a deposit,” replied Cullen Roche, an author and founder @orcamgroup. “In which case they’re in breach of US banking regulations.”
Dan Awrey, a law professor at Cornell University, attempted to answer the Coinbase CEO’s question, “How can lending be a security?”
“1. Lending = debt. 2. Debt is mentioned in the definition of a “security” under the ‘33 Act on no less than FIVE separate occasions. 3. When you issue debt securities you’re not lending, you’re borrowing“, Awrey tweeted.
