The US SEC targets Coinbase as crypto regulation becomes the focus of attention

The United States Securities and Exchange Commission (SEC) has served notice that it intends to sue the cryptocurrency exchange platform Coinbase Global.

While many companies do not comment when they are targeted by a regulatory agency, Coinbase has been vocal and has made it clear that it will take on the SEC.

The confrontation has arisen due to Coinbase’s plan to create Coinbase Lend, which would see customers being paid interest for lending their crypto holdings. The issue at stake is whether this can be considered a security and – looking at it from a wider perspective – whether governments and central banks have the power to control the movement of crypto by introducing rules that restrict the use of cryptocurrency. 

It appears that the current US government is intent on taking a more hands-on approach to crypto. While the SEC has signalled its intent to regulate cryptocurrency whenever it can, the rapid development of this sector has led to a lack of clarity regarding regulation. The SEC has said that digital assets “may be securities, depending on the facts and circumstances.” A security is a tradable financial asset and is governed by laws devised to prevent fraud. The SEC clearly believes it has the power to regulate Coinbase Lend as it considers it to be a security.

Coinbase’s plan for Lend involves investors letting others borrow from them a type of crypto known as USDC. USDC is a stablecoin whose value is tied to the value of the US dollar. Lenders were to receive 4% interest on the loan – a rate higher than that offered by banks’ saving accounts, which may attract many who would otherwise become involved in crypto.

But, according to Coinbase, the SEC said it would sue Coinbase if it went ahead with Lend but did not explain why it considered it to be a security. While the precise reasons for the SEC’s action are not known – for now at least – it does appear to be an example of regulators toughening their stance regarding crypto at a time when the cryptocurrency industry is starting to offer some of the financial services traditionally associated with the banks. 

Coinbase has expressed disappointment at the SEC’s action, which its chief legal officer Paul Grewal says comes after the company spent six months “proactively engaging’’ with the regulator about Lend. 

Grewal has made it clear that Coinbase does not consider Lend to be a security. He added that Coinbase answered all the SEC’s questions about Lend “in writing and then again in person. But we didn’t get much of a response.’’ According to Grewal, the row with the SEC means that Lend will not now be launched until October at the earliest.