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Coinbase Braces for SEC Action as Regulatory Crackdown on DeFi Intensifies 

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 Less than a week after news broke that the U.S. Securities and Exchange Commission was investigating Uniswap, Coinbase, the publicly traded crypto exchange that’s become a bellwether for the burgeoning industry, said it expected to be sued by the agency in connection with its forthcoming offering, Coinbase Lend.

“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,” Paul Grewal, the company’s chief legal officer, wrote on the Coinbase blog on Sept. 7.

Attractive Interest Rates

Coinbase Lend was the platform’s bid to join the expanding market for crypto-based loans and debt products. The program  planned to offer customers a 4% interest rate on deposits of the stablecoin USDC, which was created by Circle in collaboration with Coinbase. Customers’ deposits would be used to make loans to borrowers, who would pay them back with interest.

The structure is similar to Compound Treasury, which has been designed to integrate smoothly with fintech products and offer attractive interest rates with a user experience similar to a conventional  savings account.

In preparation for the launch of Coinbase Lend, the company’s senior officers briefed the SEC on its plans and sought guidance, according to both the blog post and a Twitter thread by Coinbase CEO and co-founder Brian Armstrong. “We could have simply launched the product but we chose not to,” Grewal wrote “This is far from the norm in our industry. Other crypto companies have had lending products on the market for years, and new lending products continue to launch as recently as last month. But Coinbase believes in the value of open and substantive dialogue with our regulators. So we took Lend to the SEC first.”

Coinbase says the SEC has apparently conducted an analysis of Coinbase Lend but shared little on its findings. “They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves,” Grewal said. “The SEC won’t share the assessment itself, only the fact that they have done it.”

Howey and Reves are two prior court cases that have provided guidance  on determining what is or isn’t a security.

Broad-based Inquiry

According to Armstrong, the SEC said it was a security but would not explain why. “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,” he tweeted. “Whatever their theory is here, it feels like a reach/land grab vs other regulators.”

This is the latest evidence that under the Biden Administration, the SEC is ratcheting up scrutiny of the crypto industry. Last Friday, The Defiant reported that the agency is conducting a broad-based inquiry into DeFi. This comes at the same time that a $1T infrastructure spending bill is targeting crypto transactions for new taxation rules

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