WILMINGTON, Del.–Coinbase, the largest cryptocurrency exchange in the United States, is stating that federal securities regulators are threatening to sue it over a financial product it is proposing that would let customers earn interest on digital asset deposits.
In a regulatory filing with the Securities and Exchange Commission, the company said regulators are claiming its “Lend” product could violate securities laws, and could respond to its release by seeking a civil injunction, the New York Times reported.
“The issue raised by Lend — an interest-generating service that somewhat resembles accounts traditionally offered by banks — is whether it will be engaged in trading or offering products to consumers that are considered securities, which the S.E.C. has the power to regulate,” according to the report. “The warning to Coinbase, which listed on the public market in April, is an indication that the S.E.C. is closely watching cryptocurrency companies — especially as they move into the territory of heavily regulated industries, such as banking.”
Interest on USD Coin
In June, Coinbase announced that Lend would allow customers to earn interest on cryptocurrency deposits. Specifically, customers would be able to earn interest on USD Coin, a so-called stablecoin value is tied to the dollar.
“Yields would be higher than those offered on classic bank accounts, and Coinbase would be among numerous cryptocurrency businesses entering this sector,” the Times reported.
Coinbase executives have been pushing back against the SEC in online postings, the Times noted, saying that the Lend program doesn’t qualify as a security and that the commission’s notice caught them off guard.
“The SEC has repeatedly asked our industry to ‘talk to us, come in.’ We did that here,” Coinbase’s chief legal officer, Paul Grewal, said in a blog post. “But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued.”
CEO Says SEC Won’t Meet With Him
The Times further noted Coinbase’s chief executive, Brian Armstrong, called the S.E.C. “sketchy” in an extensive thread on Twitter and said he went to Washington in May to meet with financial regulators at many agencies. “The SEC was the only regulator that refused to meet with me,” he stated.
The Times reported its interviews with securities lawyers found them divided over the SEC’s tactics in going after Coinbase, with some saying it appeared aggressive, while others suggested securities regulators appeared to be taking a somewhat cautious approach in giving Coinbase a “fair warning of its thoughts” as opposed to simply letting the company go forward with the lending product and then suing it later.