Cryptocurrency exchange Coinbase revealed that the U.S. Securities and Exchange Commission (SEC) is investigating the company for a crypto-based lending program it plans to implement among its users.
Coinbase‘s lending system, invites its users to maintain a deposit of USD Coins — a Stablecoin equivalent to the value of the dollar — , minimum of $1, to lend directly to the exchange, which offers an effective annual return of 4 % for accounts that lend their money.
Coinbase co-founder and CEO Brian Amstrong claimed that weeks earlier the exchange approached the SEC to inform them about the new lending program, to which the SEC responded that the loans were considered a security — a financial instrument. In his tweet thread Amstrong called the SEC’s attitude “really sketchy.”
Amstrong claims that despite Coinbase disclosing information it had about the lending program and agreeing to offer testimony from its employees, the SEC never clearly explained why the lending program would be considered a security, instead threatening to sue the exchange if it proceeded with the new program.
In his thread Amstrong said that if the “SEC wants to publish guidance, we will be happy to follow that, […] But 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.”
“Meanwhile, plenty of other crypto companies continue to offer a lend feature, but Coinbase is somehow not allowed to,” Amstrong denounced.
The Coinbase manager is not wrong, companies like Ledger, which is based in New York, offers its users the option to make loans in cryptocurrencies. Other platforms such as Cryptostudio are also allowed to make user-to-user loans in different types of cryptocurrencies such as Bitcoin, XRP, Ether, or Tether.
The legal battle between Coinbase and the SEC is of great importance for the future of decentralized finance
Should the SEC determine that direct user-to-user lending is unlawful, the regulatory body could be faced with a conundrum, because while banks must submit to onerous regulations to lend money, the concept of Decentralized Finance (DEFI) relies on the versatility of transactions and allowing user-to-user lending without going through an intermediary such as a bank.
For the SEC, this type of investment must be registered under the U.S. government’s investor protection laws. Although the dispute between Coinbase and the SEC is the most notorious legal dispute regarding the decentralized lending system so far, several state regulators have already ruled against this type of activity, and the New Jersey Bureau of Securties accused crypto platform BlockFi of violating Securties law for engaging in this activity.
The Wall Street Journal recently reported that the SEC sent letters to several cryptocurrency startups requesting information about their lending platforms. The regulators requested information about their quarterly revenue, technical details about the design of their platforms, information about the platform creators, and a concept of what regulation to follow.
Many cryptocurrency and blockchain developers have argued that the SEC does not have the tools to adequately regulate their activity and this type of assets. In the absence of a federally enforceable commercial law, nor a large legal background behind it, the SEC remains the ultimate authority to determine the legality of this type of activities.