By Lucinda Shen
Few CEOs take their regulatory battles public to the Twitter-sphere, but Coinbase CEO Brian Armstrong has not exactly been a typical public company chief executive.
Early Tuesday, the chief executive of the country’s cryptocurrency exchange blew open the doors on its back-and-forth with the Securities and Exchange Commission over a new crypto lending product it hopes to offer called “Lend.”
“Some really sketchy behavior coming out of the SEC recently. Story time…” Armstrong wrote in a Twitter thread accompanying a company blog penned by Chief Legal Officer Paul Grewal on the issue.
In the blog post, the company says the regulatory agency has threatened to sue should Coinbase launch the product, and the SEC considers the product to be a security. But Coinbase says that while the company has been proactive in its communications, yet the agency has not been clear on why it has made that decision.
“In this case they are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors. Whatever their theory is here, it feels like a reach/land grab vs other regulators,” wrote Armstrong. The SEC’s actions, he contends, have also not been placed upon other crypto companies in the lending space.
So what exactly is the Lend program at the center of this firestorm? At its core, it allows users to earn interest on their crypto holdings. While it has yet to launch, the product offers 4% yield when consumers lend their USD Coin, a cryptocurrency that stays stable in price as it is backed by the U.S. dollar, to Coinbase. Coinbase in turn lends that crypto out to other borrowers and guarantees the principal. On its website, Coinbase touts the product’s high yield in comparison to other bank saving accounts that are largely offering less than 1% yields on deposits.
It may seem mundane, but this comparison is important. It is at the heart of the debate: On one end, Coinbase’s product looks like a bank interest account—accounts that aren’t facing the same regulatory scrutiny as the crypto exchange. But it goes deeper than that. While the SEC has yet to respond to a request for comment from Term Sheet, we can look to a prior incident for clues on why Coinbase is getting heat.
As Bloomberg notes, regulators in five states have issued warnings against products with a similar bent from BlockFi Lending, accusing the company of violating local securities law. Effectively, bank interest accounts are generally insured in some way by the FDIC—making them less risky. BlockFi’s product however sits in the newer space of crypto and is from a nonbank. Meanwhile, the definition of security is rather broad, as Preston J. Bryne, a lawyer at Anderson Kill, writes for Coindesk, encompassing any note, stock, treasury stock, security future, security-based swap, bond…” you get, it goes on. “‘Yield’ products are securities. They differ in no material respect from an unsecured bond. They just don’t use the name,” he continued in a more recent tweet on Coinbase’s Lend product.
Which means all this is worth watching because Coinbase’s case could have broader implications too for the industry, and those in the crypto lending business.
I also can’t help but wonder how this plays out for SEC Chair Gary Gensler and the Biden administration’s legacy within the crypto community. Many in crypto voiced optimism, dubbing Gensler as a crypto-friendly option (prior to Gensler’s appointment, Coinbase’s Grewal had said he was “cautiously optimistic” over the new crew in Washington D.C.). But as the industry has ballooned beyond recognition, regulators have been clear to show that they are not the hands-off aunts and uncles of the industry.