Coinbase Gets Wells Notice From the SEC on Lend Product

·2 min read

(Bloomberg) -- Coinbase Global Inc. was warned by the Securities and Exchange Commission against launching a product that would allow consumers to earn interest on their crypto holdings.

The U.S.’s biggest cryptocurrency exchange said it received a Wells notice saying the agency will bring an enforcement action if the company goes ahead with its Lend product. Coinbase expressed surprise at the SEC’s move, in a blog post, adding it plans to delay the launch at least until October.

“The SEC has told us it wants to sue us over Lend. We have no idea why,” the post written by Chief Legal Officer Paul Grewal is titled. It goes on to say the SEC has told Coinbase it considers Lend “to involve a security, but wouldn’t say why or how they’d reached that conclusion.”

The agency has said it’s assessing Lend through Supreme Court cases called Howey from 1946 and Reves from 1990, Grewal said, adding that formal guidance about how the SEC plans to apply those tests to such products would be helpful.

“They’ve offered us the chance to submit a written defense of Lend, but that would be futile when we don’t know the reasons behind the SEC’s concerns,” Grewal continued.

The SEC didn’t immediately respond to an email and phonecall from Bloomberg News in overnight hours.

In recent months, various state agencies have issued warnings about similar yield-earning accounts from BlockFi Lending LLC. Regulators are considering going after other companies offering such products, Bloomberg reported recently.

Read more: Crypto Accounts Yielding 7% Spur Scrutiny as States Warn of Risk

New SEC Chair Gary Gensler, who’s repeatedly rung alarm bells over crypto exchanges during his tenure, said in an Aug. 5 letter to Senator Elizabeth Warren that regulators need more resources to protect crypto investors. He also said lawmakers should give watchdogs clear powers to write rules for exchanges, including decentralized finance, or DeFi, trading venues.

The SEC has also asked for the name and contact information of every person on the Lend waitlist, Coinbase’s Grewal said.

“We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information,” he said. “We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us.”

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