The CEO of cryptocurrency exchange platform Coinbase says the Securities and Exchange Commission said it was planning to sue the company over a lending program.
Co-founder and CEO Brian Armstrong revealed the possible legal action in a lengthy series of tweets that began by accusing the regulator of “really sketchy behavior” over the past few months in the lead up to Coinbase Lend’s release.
The lending feature, which was set to be released in the coming weeks, would allow Coinbase users in possession of the stablecoin USD Coin to earn at least 4% interest by lending their assets to others on the platform. Coinbase, which was the first publicly traded cryptocurrency exchange, said that the SEC had contacted the company last week and said that it intended to sue.
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Stablecoins such as USD Coin have their value tied to another asset class, such as gold or fiat currency, and don’t fluctuate in value as unpredictably as other cryptocurrencies because of their asset backing.
A blog post on Coinbase’s website said that the regulator provided Coinbase with a Wells notice, which is sent by regulators to firms to notify them it is planning legal enforcement against them. The notice affords the company a month to provide a response.
Armstrong said that Coinbase had contacted the SEC about the product in advance to provide them with a “friendly heads up” and briefing on the new offering and that the regulator branded the feature a security.
The CEO said that his company, in an effort to work proactively on the matter, asked the SEC to clarify how the feature was a security but claimed the regulator refused to tell Coinbase why and subsequently subpoenaed the company for records and demanded testimony from employees. Armstrong said that Coinbase complied with the requests.
He said that if the SEC published guidance on the matter, Coinbase would be happy to follow those strictures because the company is committed to abiding by the law.
“But in this case they are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors. Whatever their theory is here, it feels like a reach/land grab vs other regulators,” he tweeted.
In the blog post, Coinbase described what it has provided federal regulators, including that the company handed over documents and written responses to questions and had a corporate witness spend a full day in August testifying to the SEC about the Lend feature.
Coinbase had started, and still has, pre-enrollment for its lending product. It claimed the SEC requested the names and contact information of every person on the waiting list but that it did not comply because it takes a “very cautious” approach to providing private information and didn’t understand how the demand pertained to the questions at hand.
The company and Armstrong repeatedly accused the SEC of lacking clarity and communication about its issues with the lending feature, in particular why the federal regulator considers it a security.
“If we end up in court, we may finally get the regulatory clarity the SEC refuses to provide. But regulation by litigation should be the last resort for the SEC, not the first,” Armstrong said. “Our door remains open. Hopefully the SEC steps up to create the clarity this industry deserves, without harming consumers and companies in the process.”
Coinbase said that, in light of the action, it will not be launching Lend until at least October and will keep customers informed as the situation evolves.
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The revelation hit Coinbase’s stock, which fell by more than 4% on Wednesday. Prices of Bitcoin, the flagship cryptocurrency, were also in the red, hovering at about $46,500, a decrease of 8.75% over the past 24 hours.
The news comes a day after El Salvador became the first country to adopt Bitcoin as a national currency, although the rollout was marred by technical issues, and the cryptocurrency shed as much as 16% at one point on Tuesday morning.
