SEC Chairman Gary Gensler visited the Aspen Institute for a conference this summer and made it clear that the rules were “awfully clear” on digital assets. He said something similar in a recent interview with the Financial times, urging blockchain and fintech developers to “talk to us, go ahead!” The fate of the industry, like all finance, depends on trust, he added.
Encouraged by these words, one of the largest companies in the crypto industry, Coinbase, reached out for guidance on its new product.
What happened after? Well, Coinbase got a notice from Wells faster than “regulatory clarity” could say. This is now another chapter in the SEC’s love-hate relationship with cryptocurrency organizations. This time, however, it could be more personal than it sounds.
Brief flashback in 3, 2, 1 …
As previously reported by AMBCrypto, the United States Securities and Exchange Commission (SECOND) recently delivered a Wells notice to Coinbase on a silver platter. A Wells notice is a regulator’s way of telling a company that it intends to sue the company in court. The notice in question appeared on the back of Coinbase’s ‘Loan’ program. Needless to say, Coinbase CEO Brian Armstrong is on the edge of his wits.
On Twitter, Armstrong reclaimed The threat of legal action came as a surprise as the organization has been talking to the SEC for weeks before launching its loan product. Now, while many in the community are empathizing with Coinbase, it is difficult to look beyond the level of naivety displayed by the public company.
I mean, what did you expect, Brian? A good luck kiss and hello from America’s most ambiguous regulators?
SEC’s Coinbase reaction is not surprising
By adding Coinbase to its list of dissatisfied customers, it’s no wonder the SEC has continued to go on the offensive against cryptocurrency-related organizations. Regulators have often held their apparent view that the sheer size of the digital asset ecosystem forces them to ensure that these operations are within the purview of existing laws and guidelines.
However, Ripple is right next door and the SEC hasn’t exactly followed the rules.
According to Armstrong, Coinbase did not receive any conclusive explanation as to why its loan program or potential loan agreement is considered a securitization of an asset, in this case, USDC. It resonates quite well with the fact that the Commission also denied Ripple’s motion to test its Howey test application.
In fact, the SEC gloriously responded that Ripple No as the responses they received, therefore, they went ahead with the movement.
But aren’t regulators supposed to explain the reasoning behind such lawsuits? Coinbase executives are pondering the same question, as was Ripple a few months ago.
Additionally, the SEC also required the exchange to provide information about clients on its loan program waiting list. This is the SEC trying to violate privacy breaches, further lending credence to the impression that anti-crypto sentiment is popular with key policy makers.
An ulterior motive to protect the traditional financial system?
Before we dive into that narrative, here’s a rundown of what the Coinbase Lend program is all about.
The proposed plan is that the exchange will allow its clients to lend their USDC on the platform, in exchange for 4% annual interest.
Now, USDC is a cryptocurrency, but it is also a stablecoin. Therefore, its value is more or less than 1 dollar at all times. Now, 4% annual interest doesn’t seem like much. However, for comparison, here is the breakdown of variable rate products for consumer clients at Bank of America.
As illustrated above, the annual interest offered by Coinbase is much higher than that of Bank of America. According to the data, the annual interest of 4% is 8 times higher than the national average for savings accounts in the United States.
Now, it’s easier to understand why the SEC would want beef with unregulated crypto companies. Especially when your beloved banks are faced with the threat of capital outflows.
Coinbase currently offers higher annual interest than banks and is also a publicly traded company. Your $ 500 billion quarterly trading volumes may be enough to attract potential clients to your loan program. This would invariably lead to capital flows from banks to crypto assets. The SEC may be ambiguous, but the agency and its executives are not stupid. In fact, they have likely identified the big picture.
The SEC’s legal action against Coinbase could also be an indication of the upcoming federal enforcement against crypto loans. And what better way to send a message than to go after Coinbase’s leading brand?
However, are Coinbase’s hands clean?
Without sounding like an exchange cheerleader, it is imperative to follow both sides of a story. Now, it could be technically incorrect to suggest that Coinbase’s arguments about lending are reluctant to be a securitized asset. As far as US securities laws are concerned, a loan agreement can be proven as collateral, but the way the SEC has handled the matter can be considered misplaced.
However, here is the potential hook. According to David Canellis, the SEC and Coinbase have been having these conversations for about 6 months. That’s at least a month before the company went public in April 2021.
Now, speculation abounds that Coinbase may have known earlier that its loan program will fall under the banner of security.
Coinbase had to go public before launching the loan program because the credibility of going public obviously helps a lot.
Consider this: Regarding insider stock sales, Coinbase’s early investors threw in $ 5.44 billion in retail stock in 145 days. That’s 5 times more than the recent list of companies that launched their initial public offering.
Therefore, the arguments of Coinbase executives that they had no idea about the lawsuit until recently may be fallacious. The SEC has yet to respond to those claims, so there is still something to pay attention to.
Nobody wins the fight
Global financial innovation is currently at risk with the SEC-Coinbase dispute. It is not often that there are billionaire investors like Mark Cuban indicating that SEC actions can lead to the loss of trillions of dollars in economic benefit to the United States.
That is definitely true.
While Coinbase’s hands may not be clean here, it is also unfair to suggest that the loan program is wrong or immoral. Coinbase is propagating a properly vetted process for their investment program so that they can decouple the USDC from any kind of price volatility. Such cryptocurrency products can help the general investor to bridge the gap between existing investors.
It is no longer a “rich getting richer situation”. Without these options, the majority of the population is left with nominal bank accounts without interest. Those are not good alternatives either.
The SEC episodes with Coinbase and Ripple reflect the rigid financial regulation system. The SEC is not earning any brownie points by sealing its authority, as companies like Coinbase will continue to push the boundaries of fintech and crypto upheaval.
This is a machine translation of our English version.