SEC’s Campaign Against Crypto Lending Grows Beyond Coinbase


The other shoe has dropped on the Securities and Exchange Commission’s September crackdown on Coinbase’s plan to offer a high-yield interest account to stablecoin depositors.

The SEC is now investigating a number of other crypto firms, including Gemini Trust Co., Voyager Digital and Celsius Network, BNN Bloomberg reported on Jan. 26.

Coinbase pulled the planned Coinbase Lend product, which was going to offer a 4% annual percentage yield, on Sept. 17 after the SEC threatened to sue over it. But not before complaining loudly that plenty of its competitors already offered similar interest-bearing product and “by preventing Coinbase from launching the same thing that other companies already have live, they’re creating an unfair market.”

Other high-yield interest-bearing accounts already on the market offer far better rates — 8% and even more in some cases — to customers who allow their funds to be loaned out on decentralized finance (DeFi) lending platforms.

See: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?

The average FDIC-insured bank savings account paid 0.06% annual percentage yield.

In December, Coinbase rolled out a similar lending product in 70 other countries.

Read more: Coinbase Global Users Can Earn Yield with DeFi on Dai

Now the Rest

Regulator-friendly Gemini, a New York-based exchange run by Tyler and Cameron Winklevoss of Facebook fame, confirmed the investigation. Celsius and Voyager declined to comment beyond saying they frequently cooperate with regulators. Their product was announced last February.

See also: Bitcoin Daily: Gemini, Genesis Offer 7.4 Pct APY On Crypto Holdings

While one other exchange has been targeted this is the first time a broad regulatory campaign has been revealed. In November, news broke that the SEC was also scrutinizing the New Jersey-based BlockFi exchange over a lending product then offering 9.5% APY. The state’s Bureau of Securities issued a cease-and-desist order to BlockFi in July, accusing it of “selling unregistered securities in the form of interest-earning cryptocurrency accounts.”

BlockFi’s lending accounts are also under review by Kentucky, Texas, Alabama, and Vermont.

What’s the Problem?

The SEC’s move angered the generally regulator-friendly Nasdaq-listed exchange’s CEO, Brian Armstrong, who accused the agency of refusing to tell Coinbase why it was threatening an enforcement action or even explain its thinking — despite Coinbase reaching out repeatedly.

Accusing the regulatory agency of “really sketchy behavior,” Armstrong said in a Twitter thread that a few weeks before the planned launch “we reached out to the SEC to give them a friendly heads up and briefing.”

The agency responded by telling them Coinbase Lend was a security, which the exchange asked them to explain. The agency refused, subpoenaed records, called employees to testify about the plan, “and then tell us they will be suing us if we proceed to launch, with zero explanation as to why,” he said.

Armstrong — like others in the industry — said he didn’t see how a lending product could be a security.

One answer, according to CNBC, is that some investors have suggested Coinbase Land was very similar to a bond, which would make it part of the SEC’s bailiwick.

On top of that, Coinbase had been pitching Coinbase Lend as a less risky alternative to competing programs.

“We have recently seen the rise of crypto interest accounts that offer attractive rates on customers’ assets,” the company said. “While the high interest rates are appealing, they can present varying levels of risk. When you read the full terms and conditions, you may find that your assets are loaned to unidentified third parties and subject to their credit risk, which could result in a total loss of your crypto holdings.”

Coinbase, by comparison was targeting Coinbase Lend not at the general public but at risk-assessed institutional borrowers. It was also more upfront about the lack of FDIC insurance — and said it would protect investors — and that the interest rates could vary widely.

The Process is the Problem

In the 21-part thread, Armstrong’s complaints suggest he was more upset by how the SEC acted than what they wanted.

“We’ve always tried to be good actors in the space — leaning in to sensible regulation even when it is difficult or expensive,” Armstrong complained. “Yet here, we’re being threatened with legal action before a single bit of actual guidance has been given to the industry on these products.”

That’s especially galling as the SEC has been telling the crypto community “come talk to us” on a variety of issue for years.

Paul Grewal, Coinbase’s chief legal officer, made that point in a blog post, adding that a “healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation.”