The SEC threatens to sue Coinbase over its crypto lending product - and CEO Brian Armstrong responds by calling the regulator's actions 'sketchy'

• The SEC intends to sue Coinbase if it releases its crypto lending product, the exchange said Wednesday.
• CEO Brian Armstrong complained about the SEC's "sketchy behavior" in a rundown of events on Twitter.
• Armstrong said the regulator was the only agency that refused to meet with him earlier this year.

Coinbase said Wednesday that the Securities and Exchange Commission plans to sue the crypto exchange if it releases its lending product, a move that led CEO Brian Armstrong to complain about the regulator's "sketchy behavior".

The largest crypto exchange in the US said it had contacted the SEC to give it a heads-up about its Lend product, which will enable people to earn interest on their crypto holdings, before it goes live.

For six months, Coinbase made sure it was "proactively engaging" with the regulator to ensure the Lend program complied with the law, according to Paul Grewal, the company's chief legal officer.

During that time, the SEC told Coinbase that its lend feature is considered to involve a security, but didn't explain how it reached that conclusion.

So the company was surprised last week when it received a Wells notice, which is a letter sent by the SEC to an entity when it plans to take enforcement action.

"The SEC has told us it wants to sue us over Lend. We don't know why," Grewal wrote in a blog post Wednesday.

Coinbase boss Armstrong took to Twitter to complain about the regulatory agency.

"Some really sketchy behavior coming out of the SEC recently," he said in a series of tweets.

"They refuse to tell us why they think it's a security, and instead subpoena a bunch of records from us (we comply), demand testimony from our employees (we comply), and then tell us they will be suing us if we proceed to launch, with zero explanation as to why," Armstrong added.

"Plenty of other crypto companies continue to offer a lend feature, but Coinbase is somehow not allowed to," he added.

In June, the company revealed it planned to introduce its lending program and set up a waitlist. At launch, it will offer 4% interest on holdings of USD coin. Those funds will be lent out, and Coinbase may no longer be their custodian. Lend will now not launch publicly until at least October, Grewal said.

He said the Lend program doesn't qualify as a security, as it doesn't involve an investment contract or a note.

"Customers won't be 'investing' in the program, but rather lending the USDC they hold on Coinbase's platform in connection with their existing relationship," he said.

The SEC has said it's evaluating Lend on Supreme Court rulings in Howey and Reeves cases from 1946 and 1990 respectively, Grewal said, but has not offered formal guidance.

It also asked for names and contact information of every person on Lend's waitlist, but the company refused to comply as the data is sensitive, he said.

The SEC didn't immediately respond to Insider's request for comment.

The move is just the latest in the SEC's actions taken against crypto companies. It filed a lawsuit against Ripple late last year over how the company marketed its XRP token and is currently investigating the operator of the biggest DeFi exchange Uniswap.

Armstrong met Fed Chair Jerome Powell and other agency heads in May "to help answer questions about crypto," but said the SEC was the only regulator that refused to meet with him despite Coinbase being the first crypto company to go public.

"Gensler had been confirmed just a month prior, so I brushed it off as the SEC still getting its feet under it. Now I'm not so sure," Armstrong said.

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