Earlier this month, Coinbase CEO Brian Armstrong announced in a Twitter thread that the U.S. Securities and Exchange Commission (SEC) was threatening to sue Coinbase should they launch their “Lend” product due to concerns it may be a securities offering.
CoinBase has since quietly edited an old blog post from June
to announce they “are not launching the USDC APY program announced.”
The uninsured lending products were supposed to power a crypto savings account that would earn customers a 4% per year, a return that’s multiples higher than most savings accounts at traditional banks.
Crypto lending market on the radar?
Coinbase isn’t the only one being targeted by regulators
BlockFi and Celsius’s current regulatory problems also bring up the larger issue of crypto lenders seemingly coming under greater scrutiny from regulators. Judging by the exact wording contained in the notices served by multiple states, regulators appear to have classified BIAs as a product rather than an account.
Despite being a non-bank entity, there is an argument to be made that crypto lending platforms offer what is akin to the usual savings account provided by banks — albeit in BlockFi’s case, for Bitcoin, Ether, and stable coins. By commingling user deposits, the company is able to offer loans to retail and institutional clients alike.
Depositors are incentivized with high 4-8%+ annual returns for "dollar-pegged” stablecoins, which is several orders of magnitude higher than the 0.03% on average
for U.S. savings accounts. Apart from high-interest yields, depositors also have access to loan facilities against their crypto deposits.
By treating BIAs as a product, it is possible for regulators, like those in New Jersey and Alabama, to state that BlockFi’s interest-bearing crypto lending accounts qualify as securities. Meanwhile, such a designation is usually not given to certificate of deposit (CD) accounts, despite the latter behaving in much the same way as a security under the definitions set forth under the Securities Act of 1933.
However, it is important to note that these actions are based on unique state laws and might not have anything to do with federal mandates. America’s jurisdictional diversity, which often leads to a patchwork of regulations along state lines, is a common compliance hurdle for crypto businesses and the broader fintech industry in general.
Thus, with the absence of federal mandates that may offer some form of preemption, BlockFi and crypto lenders might soon be dealing with more onerous state laws.
Dean Steinbeck, president and general counsel at blockchain development company Horizen Labs, stated that regulatory action against companies like BlockFi is inevitable, adding:
“Unfortunately, I think it’s only a matter of time before federal regulators go after centralized ‘crypto banks’ that offer their users fixed interest on crypto deposits. Regulators may elect to target these investments as unregistered securities offerings or as unlawful banking activity depending on the particular agency that decides to pursue these claims.”
Commenting on the possible route for such regulatory actions, Steinbeck stated that since interest-bearing instruments are “already well-regulated products,” there might not be a need for specialized legal policies concerning their crypto counterparts. “Regulators simply need to clarify what regulatory regime governs these types of crypto deposits and loans,” added Steinbeck.
Thus far, the U.S. Securities and Exchange Commission has limited its oversight involvement in the crypto lending space to
probes and indictments against a handful of companies operating in the market. However, with the increased focus on America’s cryptocurrency industry by some members of Congress, an SEC ruling on whether or not crypto loan “products” are securities might be a possibility in the future.
Good News for Retail: CoinBase is Corrupt.
While the SEC has made plenty of mistakes over the years, I think their eagerness to tackle crypto lending schemes makes sense.
Since last year, I’ve been warning
about these high-risk lending platforms, many of which will exit scams or be shut down by regulators.
When it comes to Coinbase, them offering a lending service would be disastrous, and not end well. Let’s not ignore this company’s lengthy history of scandals, which would only be amplified with this scheme.
They were found guilty of wash trading, insider trading, and market manipulation over years, and all long-time CoinBase users know of their horribly slow customer support.
While Coinbase executives are sad they can’t milk more money from retail traders, I think the news of them finally ending their product is very good. After all, crypto is meant to be decentralized… Having your coins held by some centralized third party makes absolutely no sense.