Coinbase (NASDAQ:COIN), the largest digital asset trading platform in the US, has received a Wells Notice from the US Securities and Exchange Commission. A Wells Notice is a legal document that indicates the SEC is investigating the company indicating it may pursue an enforcement action while giving the company an opportunity to respond as to why it should not sue the firm.
Coinbase said that its planned Coinbase Lend program has riled the regulator. The yielding interest on parked crypto has emerged as a popular method for investors to generate income on digital asset holdings. In a time of historically low-interest rates for more traditional savings accounts, Lend was expected to generate around 4% for holders of USDC – a dollar-based stablecoin. While not qualifying for FDIC insurance, Coinbase has planned to “guarantee” the crypto people lend. The service was expected to be made available across the US with the exception of several states.
Coinbase has always pursued a path of compliance and in a blog post, the company said that it took Lend to the SEC first – before announcing the service. Coinbase stated:
“We shared this view and the details of Lend with the SEC. After our initial meeting, we answered all of the SEC’s questions in writing and then again in person. But we didn’t get much of a response. The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion. Rather than get discouraged, we chose to continue taking things slowly. In June, we announced our Lend program publicly and opened a waitlist but did not set a public launch date. But once again, we got no explanation from the SEC. Instead, they opened a formal investigation. They asked for documents and written responses, and we willingly provided them. They also asked for us to provide a corporate witness to give sworn testimony about the program. As a result, one of our employees spent a full day in August providing complete and transparent testimony about Lend. They also asked for the name and contact information of every single person on our Lend waitlist. We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information. We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us.”
Coinbase now finds itself in a bit of a conundrum. Launch Lend and the SEC will likely sue. Meanwhile, digital asset investors lose out on a path to generate income while the SEC ruminates as to whether holding a dollar stablecoin can morph into a security.
Coinbase points to the fact that the SEC has repeatedly said in the past they want Fintech innovators to come talk to them to work through issues and questions. Unfortunately for Fintechs, this open discussion approach may have ended when Jay Clayton left and the new Chairman of the SEC Gary Gensler took over.
The digital asset industry has long grumbled about the ambiguity of the regulatory environment in the US. But while industry insiders criticized the last Commission for its cautious approach it seems clarity may have arrived in this Commission as digital asset innovation may simply be squelched.