In a less-than-amicable notice from the Securities and Exchange Commission to Coinbase, the U.S. regulating body indicated further regulations aimed at the exchange’s crypto lending product.
The SEC and Coinbase square off
Not for the first time, crypto lending products are being targeted by U.S. regulators. This time, however, the SEC itself demanded that Coinbase halts its proposed crypto lending program “Lend.” Coinbase CEO Brian Armstrong rebuked the demands on Twitter, expressing dissatisfaction with the lack of useful guidance by the Commission, despite public assurances to the contrary. The SEC drew further criticism, which warned about the U.S. digging itself a hole with the government interfering with the adoption of new digital technologies.
While the SEC argued that lending is a security, Coinbase begs to differ. In fact, the company was trying to comply with existing regulations and planned its “Lend” program in the upcoming weeks. However, the SEC considers it a security since it behaves like an investment contract from its point of view. Thus, Coinbase cannot launch the product without explicit approval from the Commission. Coinbase countered this by arguing its customers lend the USDC stablecoin in their accounts in the course of an already existing relationship with the company. It would be mandatory to pay interest to Lend customers regardless of the outcome of its business activities.
Of course, all this haggling can be traced back to decades-old security regulations and a lack of transparency from the Commission in the interpretation thereof.
SEC asked for private data
To add insult to injury, the SEC asked Coinbase to provide customer details from its Lend waitlist. That’s further testament to the anti-crypto leanings of key political figures in Washington, who argue that giving crypto free reign would result in a powerful shadow banking industry competing with traditional banks.
Although only a fraction of the money circulating in cryptocurrencies is used for illicit purposes, the SEC’s demands have unsurprisingly drawn heavy criticism from the space. The approach resembles a move from the Treasury Department toward the end of 2020 when it sought to track self-hosted cryptocurrency wallets. Furthermore, SEC Chairman Gary Gensler has been particularly vocal about regulation of stablecoins and the decentralised finance space, particularly looking into Uniswap.
Overall lending crackdown
Coinbase was not the only centralised crypto company targeted by regulators. Crypto lending company BlockFi also received cease and desist orders from state securities regulators over the summer. This signals an overall desire to go after the crypto lending scene in particular. These products are understandably popular since they avoid the clunky user interfaces of decentralised products but enable people to take loans of up to 50% of the value of their cryptocurrency holdings without the need to liquidate their crypto assets. Instead of paying tax on their crypto assets, customers can leverage them as collateral; something tax authorities cannot be particularly pleased about. It remains to be seen whether this threat of legal action was merely a warning shot or an ominous sign of possible bans in the future.
