The SEC Will Sue Coinbase if it Launches Lend

The US Securities and Exchange Commission intends to take legal action against Coinbase if the exchange follows through with plans to launch Lend, a program that would allow users to earn interest on lended assets, the company revealed late Tuesday. 

“As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it,” Paul Grewal, chief legal officer of Coinbase wrote in a blog post Tuesday. 

The SEC issued Coinbase a Wells notice, a formal statement sent to individuals or firms when an enforcement action can be expected, on September 1, according to the exchange.  

Coinbase is not the first exchange to venture into the lending space, but the exchange claims to be one of the few that sought SEC approval prior to launch. Coinbase has been in contact with regulators about the Lend product for the past six months, the company said. 

“We could have simply launched the product but we chose not to. This is far from the norm in our industry,” Grewal said. “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.”

The SEC is claiming that the lending feature is classified as a security, Coinbase said. When asked for clarification, Grewal said that Coinbase was given no further explanation. 

“They refuse to tell us why they think it’s a security, and instead subpoena a bunch of records from us (we comply), demand testimony from our employees (we comply), and then tell us they will be suing us if we proceed to launch, with zero explanation as to why,” Brian Armstrong, co-founder and CEO of Coinbase wrote on Twitter. 

Coinbase was offered the opportunity to submit a written defense of Lend, but Grewal said this would be difficult given the company’s lack of understanding of the reason for the lawsuit. 

“This is ‘Regulation via Litigation.’ They aren’t capable of working through this themselves and are afraid of making mistakes in doing so,” Mark Cuban, Dallas Mavericks owner and investor, wrote on Twitter in response to the news. “They leave it to the lawyers. Just the people you don’t want impacting the new technologies.  You have to go on the offensive.” 

The launch of Lend will be delayed until at least October as a result of the Wells notice, Grewal said. Armstrong and Grewal both said that users will be kept updated through this process, but it is currently unclear if or when litigation will begin. 

The news comes amid a tumultuous regulatory environment for digital assets as US officials continue to threaten the industry with new restrictions.  

“But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued,” said Grewal. “A healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation.” 

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