Two weeks ago, Coinbase was in fighting form. Its CEO Brian Armstrong lambasted the Securities and Exchange Commission (SEC) for what he called “summary behavior”.
The SEC demanded that Coinbase abandon its lending product, which would have allowed borrowers to use crypto as collateral on loans. He also reportedly paid investors 4% APY on deposits in the stablecoin USD Coin (USDC). The SEC threatened to sue if Coinbase persisted with the offer.
After publicly lambasting the regulator’s demands, Coinbase has now quietly shelved the controversial project. In an update to an older blog post, the popular cryptocurrency exchange said, “As we continue our work to seek regulatory clarity for the crypto industry as a whole, we have taken the lead. tough decision not to launch the USDC APY program announced below. “He added,” We have also halted the waitlist for this program as we move our work forward. ”
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Why is the SEC worried about DeFi loan products?
Decentralized finance (DeFi) is an umbrella term for a multitude of services that eliminate intermediaries (often banks) from financial transactions. These include savings, loans, trading and even insurance.
Investors can earn 8% APY or more, which is much higher than a traditional savings account, but savers don’t have the same protections. For example, these accounts are not protected by FDIC insurance in the event of platform failure or bankruptcy.
Many DeFi loan products use stablecoins – cryptos that are pegged to another commodity such as the US dollar. Concerns have been expressed about the stablecoin Tether (USDT) as it has not always had enough funds in reserve to cover the coins in circulation. And SEC Chairman Gary Gensler has also previously said he believes stablecoins can be securities.
If stablecoins are securities, they fall under the jurisdiction of the SEC. This would mean that they have to follow strict rules on how they can be traded and how information is shared with investors.
Another issue is that the SEC may view Coinbase’s loan product as an investment contract. This is an agreement where one party invests money in the hope of getting a return, and it also falls under the oversight of the SEC.
SEC to sue crypto industry
The spat with Coinbase is the most recent indication that the SEC has set its sights on the ‘wild west’ of stablecoins, crypto loans and crypto platforms.
In Gensler’s testimony to the Senate Committee on Banking, Housing and Urban Affairs last week, he said: “Right now, a lot of the crypto field is straddling – not in – regulatory frameworks that protect investors and consumers. , guard against illicit activities and ensure financial stability.
He encouraged the platforms to come forward and speak with the commission, and reiterated that any platform trading in securities must register with the SEC.
Will U.S. cryptocurrency lenders abandon DeFi products?
A number of crypto apps and exchanges in the United States offer these types of lending and earning products. The premise is that platforms lend investors’ assets and use the proceeds to pay high interest rates.
Regulators fear that these are banking-type products that do not benefit from the customer protections of traditional banks. It is too early to know whether these products will be kicked out or forced to adhere to stricter rules. But it should be noted that the SEC is not the only authority to act.
At the state level, five states – Alabama, Kentucky, New Jersey, Texas, and Vermont – are taking action against the popular crypto platform BlockFi because of its lending product. And New Jersey recently took action against Celsius, another lending platform.
Bloomberg warned last week of an upcoming calculation. He said Treasury officials are ready to pass new political regulations, which people familiar with the issue say will be released in the coming weeks. And the Financial Stability Oversight Council is also said to be on the verge of deciding whether stablecoins pose a threat to the financial system – which could be a game-changer.
There are still many questions to answer as the net tightens on crypto lenders, including how US authorities will approach international exchanges that offer the same products on US soil. But for investors, it’s important to be aware of the potential impact on lending platforms and cryptocurrencies that power the DeFi industry.