SEC threatens to sue if Coinbase launches new loan product
Coinbase, the first major U.S. crypto exchange to go public, announced in a blog post Last week, the SEC sent the company a notice from Wells stating the regulator’s intention to sue the company if it launched its digital asset lending project, Lend.
The loan would allow customers to earn interest on certain assets on Coinbase.
According to Coinbase, after initial meetings with the SEC about the product, the company learned that the SEC “considered the loan to involve a security, but would not say why or how it came to that conclusion.”
Coinbase has decided to keep Lend out of the market until at least October.
Coinbase said the SEC was doing its valuation using two Supreme Court cases, Howey and Dreams.
The Howey test refers to a Supreme Court case from 1946, SEC c. WJ Howey Co. The court’s final decision created four criteria for defining investment contracts. According to the Howey test, an investment contract exists when there is an investment of money in a joint venture with the expectation of profit derived from the efforts of others.
Dreams vs. Ernst & Young was a 1990 Supreme Court case used to decide whether an instrument is a note, and therefore a security. A note is essentially a written acknowledgment of debt from a borrower to a creditor or investor.
Under the Dreams vs. Ernst & Young “Family resemblance test”, all notes are considered securities unless they “resemble” one of the categories of court order notes list of exceptions.
David Freeman, head of the financial services practice of Arnold & Porter, told the FT that while it expected the SEC to use both the Howey test and the family likeness test, the regulator should have a formalized process for valuing crypto products.
The Coinbase co-founder and CEO took issue with the SEC’s opinion, saying in a lengthy Twitter feed that other crypto platforms offer products similar to Lend without encountering threats of litigation.
Armstrong went on to say: “If we end up in court, we could finally get the regulatory clarity that the SEC refuses to provide. But judicial regulation should be the SEC’s last resort, not the first, âand ended the thread by reiterating the crypto industry’s need for regulatory clarity.
Earlier this month, SEC Chairman Gary Gensler told the Financial Time that in order to survive its current size, the crypto space needs to pass regulations, claiming that many platforms “beg forgiveness, rather than ask permission.”
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