As if the crypto world wasn't hit hard enough yesterday with a sudden vacuum drop lower in prices across all the major coins, it appears US regulators may be getting a little more aggressive in their actions (and not just words).
"Some really sketchy behavior coming out of the SEC recently."
That is the first sentence in a lengthy Twitter tirade from Brian Armstrong, the CEO of Coinbase, as he revealed last night that the securities regulator had threatened to sue over the crypto exchange's new lending program.
As CoinTelegraph.com reports, Armstrong explained that the crypto exchange approached the SEC earlier this year to brief the enforcement body over the up-and-coming Coinbase Lend program that intends to offer 4% annual yield returns on deposits of the USD Coin (USDC) stablecoin.
According to the Coinbase CEO, the SEC responded by telling the firm that the lending program is a security without any explanation and threatened to sue if the service was launched:
“They 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 pointed out that there are other crypto firms on the market that currently provide similar lending services to their customers and called for the SEC to provide regulatory clarity on the topic. The SEC’s actions, if Armstrong has reported them accurately, appear to be bad news for competitors BlockFi and Celsius, which already offer crypto yield products. BlockFi is facing investigations in a number of states over its high-interest products.
Coinbase's Chief Legal Officer, Paul Grewal, announced the SEC threat in a blog post on Tuesday night. Decrypt.co reports that in the post, Grewal described how the company had been in discussions with the SEC about Lend for six months but that the agency then abruptly warned last Wednesday it may sue if Coinbase goes forward.
Coinbase publicly announced its plans to launch Lend in June. At the time, the company touted the product as a way for crypto owners to earn far high interest than what is offered at regular banks, and promised to offer a "peace of mind" guarantee as a substitute for the FDIC insurance that comes with traditional interest-bearing accounts.
The Lend proposal did not appear controversial at the time Coinbase announced it. The high yield product it described only applied to USDC stablecoins, which are akin to cash - a more conservative approach than the likes of BlockFi, which has for many months advertised returns of up to 8% on a variety of crypto assets.
In response to the SEC's legal threat, Coinbase CEO Brian Armstrong lashed out at the agency on Twitter, complaining that his company had attempted to do the right thing, but that the SEC has failed to be transparent about its crypto policies, and is instead "engaging in intimidation tactics behind closed doors."
8/ 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. Whatever their theory is here, it feels like a reach/land grab vs other regulators.— Brian Armstrong (@brian_armstrong) September 8, 2021
Armstrong also complained that the SEC has failed to enforce its policies evenly, allowing other companies that failed to seek out the agency's approval in the first place to operate for many months. He also hinted that Coinbase may choose to fight the SEC in court, but described that as a "last resort."
20/ If we end up in court we may finally get the regulatory clarity the SEC refuses to provide. But regulation by litigation should be the last resort for the SEC, not the first.— Brian Armstrong (@brian_armstrong) September 8, 2021
The new developments between Coinbase and the SEC are likely to frustrate consumers who have looked enviously at the high yields earned by veteran crypto traders, but who do not have access to easy-to-use investment platforms like the one Coinbase proposed in the form of Lend.
CoinTelegraph notes that SEC boss Gary Gensler has regularly urged crypto firms to work with the SEC so that they can operate under public frameworks and ensure their survival. Grewal said the SEC’s actions appear to contradict Gensler’s statements:
“The SEC has repeatedly asked our industry to ‘talk to us, come in.’ We did that here. But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued.”
“A healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation,” he said.
Billionaire Mark Cuban, who has had his fair share of run-ins with the SEC's over-reaching, explained to CEO Armstrong that this is their M.O....
Brian, this is "Regulation via Litigation". They aren't capable of working through this themselves and are afraid of making mistakes in doing so. They they leave it to the lawyers. Just the people you don't want impacting the new technologies. You have to go on the offensive— Mark Cuban (@mcuban) September 8, 2021
Meanwhile, the CEO of Ripple, which is ensnared in its own high stakes lawsuit with the SEC, tweeted a popular meme from the movie Die Hard to "welcome [Coinbase] to the party."
Having said all that, while COIN is lower this morning on the threat of litigation...
Bitcoin has bounced back from the overnight tumble after the Coinbase news...
Perhaps, as Mike Novogratz noted during a Bloomberg TV interview yesterday:
“There’s been a giant realization that crypto is not just Bitcoin being bought as a hedge against bad monetary and fiscal policy. More importantly, it’s the web 3.0,” Novogratz said Tuesday in an interview with Bloomberg TV.
“No investor wants to miss the next internet. I think we just got too excited and this was a little air being popped out of the balloon.”
As for the overall crypto market, it’s “really difficult to understand” where it’ll be in the short-term, he said. But over the long-term, he says Bitcoin’s trajectory is clear.
“There are enough institutions that have said they believe it’s a store of value,” he said.