Is Coinbase Lend Legal?
Via their blog, Coinbase announced that the Securities and Exchange Commission (SEC) intends to sue the largest U.S. crypto exchange over its upcoming Coinbase Lend product.
“Last Wednesday, after months of effort by Coinbase to engage productively, the SEC gave us what’s called a Wells notice about our planned Coinbase Lend program. A Wells notice is the official way a regulator tells a company that it intends to sue the company in court.”
The SEC, in their own words, “enforces the securities laws to protect the more than 66 million American households that have turned to the securities markets to invest in their futures—whether it’s starting a family, sending kids to college, saving for retirement or attaining other financial goals.”
According to the SEC, Coinbase Lend would fall under what is defined as a security, hence the threat of a lawsuit. Coinbase disagrees with their assessment. “Coinbase’s Lend program doesn’t qualify as a security — or to use more specific legal terms, it’s not an investment contract or a note,” Coinbase said via Medium.
But I’d argue, quibbling over what exactly is a security is besides the point.
Regulator Friendly
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I never thought I’d see Coinbase put the SEC on blast like it did. After all, Coinbase was founded to be a regulator friendly alternative to the Wild West alternatives like MT Gox. Also, Coinbase’s co-founder and CEO, Brian Armstrong has been doing his best to rub elbows with the powers that be.
Unsurprisingly, what Coinbase did to draw the ire does not rise to the level of, say, offering tokenized stocks. Not to mention, Coinbase Lend program isn’t any different than what other American exchanges already offer. Gemini, for example, provides its users with a plethora of staking options.
So, why single out Coinbase? It’s unclear.
According to Coinbase, what they are offering is above board. But then again, Coinbase is also confused by what exactly constitutes a security.
Good Regulation
“They [the SEC] 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,” Armstrong said via Twitter.
The muddled argument from Coinbase didn’t help their case. Legal professor Dan Awrey pointed out that lending is debt, and “Debt is mentioned in the definition of a “security” under the ‘33 Act on no less than FIVE separate occasions.” Under that broad definition of what a security is, it appears Coinbase Lend falls under the SEC’s purview.
Caitlin Long of crypto bank Avanti didn’t disagree with Awrey, but pointed out the hypocrisy. “You’re right. The real issue he’s highlighting, tho, is inconsistent enforcement of the law.” Awrey replied, “And if he had stopped there Caitlin, he would absolutely have my sympathy. But the CEO of a publicly-traded, SEC-registered broker-dealer just revealed to the world he doesn’t know what a security is. That’s the part I find concerning.”
Moreover, Matt Stoller, author of Goliath, didn’t find the inconsistent enforcement argument compelling at all. Stoller said via Twitter, “Actually ‘enforcing the law’ is at the heart of good regulation.”
But what if “good regulation” is no good for the consumer?
Consumer Enrichment
The role of the SEC, as chairman Gary Gensler has stated repeatedly, is to protect the consumer.
Funny enough, what’s lost in the ‘What’s a security?’ debate is the average joe.
For example, Coinbase Lend will provide Coinbase users with interest in exchange for using their USDC. “We have an obligation to pay this interest regardless of Coinbase’s broader business activities.” Coinbase said via their blog. “What’s more, participating customers’ principal is secure and we’re obligated to repay their USDC on request.”
So, even if we choose to acknowledge Awrey’s definition of what a security is correct, what exactly is the problem with what Coinbase is offering? Coinbase isn’t exactly a house of cards. The crypto exchange has a rainy day fund to get through any potential bear market. And, its recent earnings call, which covered the recent market downturn, showed massive revenues for the exchange.
There is absolutely no evidence that Coinbase couldn’t make good on any debts it owes to its users. Moreover, The 4% APY on USDC is far more than what a retail investor can get from their trad savings account. Makes me think that, for a regulatory body that claims to protect investors saving for retirement, it might be worth looking the other way this time.
And, it’s not like the SEC has to blindly apply the law, either. As Chris Giancarlo, former CFTC chairman, said during an appearance on Coindesk TV, “Chairs have a fair amount of discretion in terms of applying rulesets.”
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