In a move that could rock the entire crypto lending industry, the Securities and Exchange Commission (SEC) has warned Coinbase not to pursue its proposal for the Coinbase Lend crypto lending feature. Brian Armstrong, co-founder and CEO of the leading cryptocurrency exchange, took to Twitter to protest the actions of the SEC.

Coinbase had planned to introduce its own decentralized finance loan (DeFi) product in a few weeks. This would have allowed investors to earn interest on their crypto holdings by making them available to borrowers. Several of Coinbase’s competitors already have similar paid loan products. But according to Armstrong, the SEC threatened to sue if the popular platform goes ahead.

Coinbase replica

Armstrong called the SEC’s behavior “sketchy” in a series of tweets. He explained, “Millions of crypto holders have generated a return on their assets over the past few years. It makes sense that if you want to lend your funds, you can get a return.”

However, Armstrong said that when Coinbase approached the SEC to give them a “friendly warning,” things turned sour. According to Armstrong, the SEC said the proposed feature of Coinbase Lend counted as security – and when Coinbase asked why, no response was provided.

“They refuse to tell us why they think it’s security,” Armstrong tweeted, “and instead assign us a bunch of files (we comply), demand testimony from our employees (we comply), then tell us they’re going to sue us if we do the launch, with no explanation as to why. ”

The concept of what is – and is not – security is at the heart of many questions about cryptocurrency law. If a product is a security, it falls under the authority of the SEC and strict trading and reporting rules apply. Right now, most cryptocurrencies are treated like commodities, although recent signals suggest the SEC wants this to change. (Although the Commodity Futures Trading Commission disagrees.)

Is this the start of a crackdown on crypto lending?

Crypto lending platforms have proven particularly popular this year after the interest rates on regular savings accounts fell. For example, BlockFi offers investors up to 8% APR, which it funds by lending crypto assets. Coinbase’s new product reportedly paid 4% APR on USD Coin, a rapidly growing stablecoin.

Stablecoins – cryptocurrencies pegged to the value of other commodities like the US dollar – seem to be part of the problem. In August, when SEC Chairman Gary Gensler spoke extensively about crypto for the first time since his appointment, stablecoins came under special scrutiny.

Speaking to the Aspen Security Forum, Gensler warned that these coins are “embedded” into crypto trading and lending platforms. He said: “These stablecoins can also be securities and investment companies.”

Not only can stablecoins be securities, Gensler believes they could undermine the banking system as a whole as well. “The use of stablecoins on these platforms can facilitate those seeking to circumvent a multitude of public policy objectives related to our traditional banking and financial system: fight against money laundering, tax compliance, sanctions, etc. . “, he explained.

The challenge for Coinbase, cryptocurrency exchanges, and DeFi lenders is that defining stablecoins as securities would put them under the authority of the SEC. And it looks like the SEC is planning to play hard.

Uneven playing field

If the SEC sues crypto lenders and requires stablecoins to be registered as securities, it would have a huge impact on the crypto industry as a whole. Gensler himself said that stablecoins were part of three-quarters of all crypto transactions in July. This suggests that the stablecoins upheaval could affect the fundamentals of the cryptocurrency market.

Additionally, the SEC will find it much easier to apply new restrictions on US-based exchanges like Coinbase. The challenge of regulating crypto is that it is a global industry. As such, the onerous US crypto lending regulations could give non-US platforms an edge. It could push US DeFi lenders to move to other jurisdictions as well, especially if they don’t feel like regulators are working against them.

There is still a lot of maybe. But as lawmakers continue to debate how best to regulate this sprawling industry, it looks like the SEC is just getting started.

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Emma Newbery has no position in any of the cryptocurrencies mentioned.

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