Why is the SEC Threatening Coinbase?

The SEC has threatened to sue Coinbase Global, Inc. over its plans to introduce a crypto lending product called Coinbase Lend :

The U.S. Securities and Exchange Commission has told Coinbase Global Inc (COIN.O) that it plans to sue the cryptocurrency exchange if it goes ahead with plans to launch a programme allowing users to earn interest by lending digital assets, Coinbase said.

Coinbase was working with the SEC prior to the surprise lawsuit threat, per CEO Brian Armstrong:

Why is the SEC Doing This?

It’s not every day that the SEC privately threatens a lawsuit against a major American corporation. What is the SEC’s motivation here? From Cointelegraph:

The Commission could have a reason for not being forthcoming with information related to cryptocurrency lending products and this stance could be related to upcoming enforcement actions against the interests of BlockFi.

If the SEC is preparing to go after BlockFi and other players in the crypto lending scene then perhaps responding to Coinbase’s request for guidance might have constituted revealing its enforcement playbook prematurely.

Behind the Crypto Lending Boom

Behind the rush into crypto lending: incredibly low interest rates. Whether you look at bank deposits or treasury bonds, returns on safe assets are well below the rate of inflation.

Coinbase planned to offer 4% interest in its Lend product.

Is the SEC Right?

It seems likely to me that Armstrong is wrong in saying his Coinbase Lend program isn’t a security, and thus need not comply with typical securities laws. Banks have an exception from these laws when they pay interest on an account.

But Coinbase is not a bank. So it’s hard to see how this product isn’t a security.

SEC Shenanigans

That said, I think the SEC’s behavior here is extreme and bad for American business. If the SEC has determined that Lend is illegal, they should tell Coinbase that. At least Coinbase could move on to other projects.

Instead, they’ve left Coinbase in regulatory limbo. They don’t know if their product is legal or not, they don’t know what the SEC’s standard is, and they can’t launch anything without being sued.

This is a recipe for stagnation, not innovation. How can American businesses compete in the global economy when regulators won’t work with them?

As part of its threats to Coinbase, the SEC is even digging into private citizens:

Apart from the threat of legal action, a move seemingly out of left field from the Commission’s usual approach to enforcement, the SEC also asked Coinbase to provide customer details from its Lend waitlist.

On what authority are they doing this? And what are they planning to do to those prospective customers?

Keeping investors safe has its place, but bringing business to a standstill and snooping on average Americans isn’t part of it.

The SEC needs to clean up its act.

More on tech:

How Solana Could Wipe Out Visa and MasterCard

What if Everyone on Earth Had Super Fast Internet for $1?

China’s Real Goal in Tech Crackdown: A Regimented, Obedient Society

Photo: “775208327GB00106_TechCrunch” by TechCrunchis licensed under CC BY 2.0

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