SEC Campaign Against Crypto Lending Grows

The other shoe fell during 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 currently investigating a number of other crypto companies, including Gemini Trust Co., Voyager Digital, and Celsius Network, BNN Bloomberg reported on January 26.

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

Other high-yield, interest-bearing accounts already on the market are offering much better rates — 8% and even higher 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 an annual percentage return of 0.06%.

In December, Coinbase rolled out a similar lending product to 70 more countries.

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

Now the rest

Gemini, a New York-based exchange run by Facebook fame Tyler and Cameron Winklevoss, 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 and Genesis offer 7.4% APY on crypto holdings

While another exchange has been targeted, this is the first time an extensive regulatory campaign has come to light. In November, news broke that the SEC was also reviewing New Jersey-based exchange BlockFi over a lending product then offering 9.5% APY. The state Securities Office issued a cease and desist order to BlockFi in July, accusing it of “selling unregistered securities in the form of interest-bearing cryptocurrency accounts.”

BlockFi loan accounts are also being reviewed by Kentucky, Texas, Alabama, and Vermont.

What’s the problem?

The SEC’s decision angered the CEO of the generally sympathetic Nasdaq-listed exchange, Brian Armstrong, who accused the agency of refusing to tell Coinbase why it was threatening to take enforcement action or even explain his thinking – despite repeated contact from Coinbase.

Accusing the regulatory agency of “really sketchy behavior,” Armstrong said in a Twitter feed that a few weeks before the planned launch “we contacted the SEC to give them a friendly warning and briefing”.

The agency responded by telling them that Coinbase Lend was a security, which the exchange asked them to explain. The agency refused, subpoenaed cases, called employees to testify about the plan, “and then told us that they would sue us if we proceeded with the launch, without any explanation as to why,” he said. he declares.

Armstrong – like others in the industry – said he couldn’t see how a loan product could be security.

One response, according to CNBC, is that some investors have suggested that Coinbase Land is very similar to a bond, making it part of the SEC’s bailiwick.

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

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

Coinbase, by comparison, targeted Coinbase Lend not at the general public, but at risk-rated institutional borrowers. He was also more outspoken about the lack of FDIC insurance — and said it would protect investors — and that interest rates can vary widely.

The process is the problem

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

“We’ve always tried to be good players in the space — leaning into sensible regulation even when it’s difficult or expensive,” Armstrong complained. “Yet here we are threatened with legal action before a single real indication has been given to the industry on these products.”

This is all the more maddening considering that the SEC has been telling the crypto community to “come talk to us” on a variety of issues for years.

Paul Grewal, Chief Legal Officer of Coinbase, made this point in a blog post, adding that “a healthy regulatory relationship should never leave the industry in this kind of situation unexplained. Dialogue is at the heart of good regulation.

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