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Coinbase is in hot water with the U.S. Securities and Exchange Commission (SEC) over its plans to award users interest on the crypto-coins that they are not trading at the moment.
A blog post by Paul Grewal, chief legal officer at Coinbase, reveals the company's bewilderment at having received a so-called Wells notice from the regulator.
A Wells notice is a letter that the SEC sends to people or firms when it is planning to take enforcement action against them. The regulator issues it at the conclusion of an investigation.
Neither the SEC nor the Financial Industry Regulatory Authority (FINRA) are legally obliged to warn firms about impending enforcement, but they usually do. The notice describes, in broad strokes, the offence that the SEC believes to have occurred. It derives its name from an SEC committee, chaired by John Wells, which recommended the practice in 1972.
The beleaguered Coinbase lawyer wrote: "We could have simply launched the product but we chose not to. This is far from the norm in our industry. Other crypto companies have had lending products on the market for years and new lending products continue to launch as recently as last month, but Coinbase believes in the value of open and substantive dialogue with our regulators, so we took Lend to the SEC first."
How the product might work
Coinbase plans — or, at least, planned — to lend each participating user's parked stablecoin (redeemable on a one-to-one basis for US dollars) to various borrowers, allowing that user to earn 4 percent average yield, which is more than eightfold the national average for high-yield savings accounts. The user can opt out at any time. Coinbase guarantees the principal (i.e., the cryptocurrency) and the user can continue to send and sell their crypto-coins without delay and with no fees.
Litigation not inevitable?
In this case, the SEC appears not to be absolutely dedicated to the idea of suing Coinbase. Its letter, according to the lawyer, threatens Coinbase with action unless it withdraws its project, which it calls "Lend".
The regulator's stance appears to Coinbase to be a trifle hypocritical. Coinbase informed the SEC of its intention to go ahead before doing so, unlike its competitors in recent years. The SEC, according to Grewal, replied that it considered "Lend" coins that were resting on the firm's platform to be securities, but did not say why when asked.
Coinbase then publicised its intention to go ahead anyway and of compiling a waiting list of customers who wanted to play along. However, the SEC followed this by opening a formal investigation, demanding and obtaining information and sworn testimony from Coinbase.
Grewal says that the SEC has assessed the project "through the lens" of the cases of Howey (1946) and Reves (1990), but has refused to explain how these cases have led to its ultimatum.
