Coinbase says SEC threatened to sue over its yet-to-be-launched Lend program, following discussions with the regulator that have lasted almost six months

The Block 2021-09-09 Frank Chaparro

Context & Ripple Effects

The Lend dispute became the opening point in a longer Coinbase-SEC confrontation. Coinbase later tabled the interest-paying token-lending product after the regulator's pressure, turning a proposed product launch into an early enforcement boundary.

The conflict subsequently widened from Lend to Coinbase's broader challenge to the SEC's approach: the company contested a 2023 Wells notice and later sought internal agency records through FOIA lawsuits over the SEC's crypto-industry crackdown.

First-order effects

Coinbase faces litigation risk before launching Lend, and the program's planned interest payments for users are put on hold as a result of the SEC's position.
The SEC establishes that it is prepared to use enforcement pressure against Coinbase's proposed token-lending product rather than resolve the issue through the nearly six-month discussion alone.

Second-order effects

Coinbase's product planning shifts toward legal defense and regulatory disclosure: the later Wells-notice response shows the Lend disagreement developing into a broader challenge to the SEC's regulatory model.
The dispute raises the stakes for Coinbase's trading business as well; Brian Armstrong later said the SEC had sought a halt to trading in all crypto assets except bitcoin, linking product-level friction to the exchange's wider regulatory exposure.

Third-order effects

Repeated product disputes, enforcement threats, and records litigation point to a US crypto-market structure shaped increasingly through adversarial SEC-Coinbase processes rather than clear negotiated rules.
If that pattern persists, large exchanges' ability to introduce lending and trading products will depend as much on their capacity to contest agency interpretations as on product demand.

The trend: US crypto regulation is moving from informal engagement toward enforcement-led boundary setting, with Coinbase using public challenges and litigation to contest the SEC's interpretation.

Discussion

@brian_armstrong Brian Armstrong on x
1/ Some really sketchy behavior coming out of the SEC recently. Story time...
@brian_armstrong Brian Armstrong on x
5/ They responded by telling us this lend feature is a security. Ok - seems strange, how can lending be a security? So we ask the SEC to help us understand and share their view. We always make an effort to work proactively with regulators, and keep an open mind.
@coinbase @coinbase on x
After months of trying to engage with the @SECGov on our planned Coinbase Lend product, we recently received notice that it intends to pursue legal action against us. We believe dialogue is at the heart of good regulation, even if the SEC may not. https://blog.coinbase.com/...
@john_hempton @john_hempton on x
@brian_armstrong Seriously are you an idiot. Try the FIRST PAGE of The Securities Act of 1933. https://twitter.com/...
@brian_armstrong Brian Armstrong on x
6/ 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.
@econoar Eric.Eth on x
The most interesting thing about the SEC going after Coinbase and Uniswap is I'm not sure they've ever dealt with ANYTHING like the united crypto community. Typically they go after someone or some company that may have a few vocal supporters. Good luck...
@bgarlinghouse Brad Garlinghouse on x
https://twitter.com/... https://twitter.com/...
@brian_armstrong Brian Armstrong on x
20/ 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.
@mcuban Mark Cuban on x
@brian_armstrong Brian, this is “Regulation via Litigation”. They aren't capable of working through this themselves and are afraid of making mistakes in doing so. They they leave it to the lawyers. Just the people you don't want impacting the new technologies. You have to go on t…
@ldrogen LeighDrogen.eth on x
Here's what's really going on with the SEC and Coinbase Gensler is desperate to prevent a mainstream financial application from integrating a yield product with decent UX for mass adoption because he knows that's the killer app that on boards everyone to Crypto
@prestonjbyrne Preston Byrne on x
“Yield” products are securities. They differ in no material respect from an unsecured bond. They just don't use the name. Other countries, like England, have debt crowdfunding rules. US cos should check that out and we should emulate those rules here. https://twitter.com/...
@twobitidiot Ryan Selkis on x
1/ The SEC isn't protecting investors, or promoting fair, efficient, & safe domestic crypto markets with their intimidation tactics. Their approach has been so poor it's indistinguishable from an active effort to *hurt* American retail investors, which looks increasingly likely. …
@joemccann @joemccann on x
Regulatory capture 101. Banks don't want this type of lending because the rates are higher than they can offer. SEC protects the banks (Dodd-Frank Act handed the banks the keys to the castle). It's a pity. https://twitter.com/...
@brian_armstrong Brian Armstrong on x
21/ Our door remains open. Hopefully the SEC steps up to create the clarity this industry deserves, without harming consumers and companies in the process. America could really use us all working together to figure this out right now.
@brian_armstrong Brian Armstrong on x
8/ 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.
@brian_armstrong Brian Armstrong on x
2/ Millions of crypto holders have been earning yield on their assets over the last few years. It makes sense, if you want to lend out your funds, you can earn a return. Everyone seems happy.
@milwaukeebonds Will Slaughter on x
When fintech arrogance collides with staggering ignorance of over a century's worth of securities & banking laws, epic stupidity supernovas like this thread are the result: https://twitter.com/...
@johnedeaton1 John E Deaton on x
Not true. But when you carefully read the Complaint filed against both #Ripple and #XRP by the SEC and you ignore the irrelevant noise contained therein (which is meant to distract and divide the crypto community), you see the true and dangerous intentions of the SEC.
@econoar Eric.Eth on x
So glad that Brian is putting this shady behavior by the SEC in the spotlight. As a US citizen, I'll do all I personally can to vote against anyone that supports this type of behavior. https://twitter.com/...
@faryarshirzad Faryar Shirzad on x
Crypto and digital assets markets need clear and sensible regulations. There's broad consensus on the need for Congress to take up this important area of policy, and we at @coinbase look forward to contributing to that effort. https://twitter.com/...
@johnedeaton1 John E Deaton on x
@GaryGensler in his letter to @ewarren and in his recent public remarks makes clear that he is coming after exchanges and #DeFi next. Brian's tweet proves it. It's time the community ends the bullshit tribalism and organizes an entity designed not only to fight back, but win. htt…
@fintechfrank Frank Chaparro on x
Wow big crypto regulatory development Brian Armstrong responds to SEC subpoena, threats to shut down Coinbase yield product https://www.theblockcrypto.com/ ...
@jungleincxrp @jungleincxrp on x
😆 and now maybe u see why when one is attacked we all are under attack. #relistxrp and together we will fight this https://twitter.com/...
@pinboard @pinboard on x
Cryptocurrency is basically the sovereign citizen movement for money, which is why it's so important not to lend it legitimacy. The SEC's manifest desire to fire it all into the Sun is gratifying if overdue
@machiavellecon Neil Smith on x
Everyone has been discussing the Howey Test for months/years. It needs to be tested for ‘crypto deposits’. It's not ‘zero explanation’. This is how it works. https://twitter.com/...
@erikvoorhees Erik Voorhees on x
“But once again, we got no explanation from the SEC. Instead, they opened a formal investigation.” Thank you @coinbase for opening up about this. Most companies wouldn't. https://twitter.com/...
@adamsamson Adam Samson on x
This SEC intervention could potentially have wide-ranging implications for crypto/DeFi. Yield products are an absolutely huge business & if they are considered securities, it would obv really raise the bar on issuing them. (Story by @MsHannahMurphy) https://twitter.com/...
@ricardobsalinas Ricardo Salinas Pliego on x
It reminds me of a famous quote : “ We are from the government and we are here to help you ”. Lovely kind of people. https://twitter.com/...
@crypto_chase Crypto Chase on x
Imagine thinking the SEC is gonna let one of the only legitimate exchanges (actual USD on/off ramp) offer 4% yield. You have to put your money in the hands of their banker friends for 0.2% APY like every other pleb. https://twitter.com/...
@fordm Matt Ford on x
In this thread, the CEO of Coinbase criticizes the SEC for not explaining to them why lending an asset for yield is a security. https://twitter.com/...
@carnage4life Dare Obasanjo on x
CEO of Coinbase calls out the SEC for blocking them from shipping features using selectively enforced rules. Going public against a regulator is a risky approach but given how hostile regulators are to tech all over the world, not much left to lose by getting public on their side…
@brian_armstrong Brian Armstrong on x
13/ Shutting these down would arguably be harming consumers more than protecting them, and by preventing Coinbase from launching the same thing that other companies already have live, they're creating an unfair market.
@sirrobartii1 @sirrobartii1 on x
I'd feel bad for you, but then I remember how you delisted #XRP and partook in the process of dumping it 80%. I feel bad for the hundreds of thousands of investors instead, fren.🤝 https://twitter.com/...
@twobitidiot Ryan Selkis on x
This is state behavior I would expect from the CCP, not the American financial regulators, tbh. cc: @SenLummis @tedcruz @SenToomey this is truly unbelievable and it would be good to have some answers from the SEC. https://twitter.com/...
@matthlamers Matt Lamers on x
the CEO of coinbase asking the SEC ‘how lending can be a security?’ is just deeply funny https://twitter.com/...
@fintechfrank Frank Chaparro on x
Here's a blog from Paul Grewal, chief legal officer at Coinbase. The SEC has told us it wants to sue us over Lend. We don't know why. https://blog.coinbase.com/...
@man_growth GrowthStockGuru on x
SEC looking into how $COIN can offer a double digit yield on its $USDC offerings. The obviously juicy return is operating in murky regulatory waters. $VMNT is launching its yield generating stablecoin $USDV with compliance in mind. Soon everyone will know about it https://twitter…
@novogratz Mike Novogratz on x
I hope @GaryGensler responds. I have known him to be a straight shooter. Let's see. Thanks for the update @brian_armstrong. https://twitter.com/...
@brian_armstrong Brian Armstrong on x
11/ If you don't want this activity, then simply publish your position, in writing, and enforce it evenly across the industry.
@quantian1 Quantian on x
Remember when Robinhood tried to turn their SIPC protection into an unregulated checking account before someone immediately called them to say “knock it off, dipshit”? That's basically this, but with a significantly dumber management picking up the phone
@prestonpysh Preston Pysh on x
Uh oh. Looks like Gensler, is making a play against interest bearing coins (PoS staking - which may be crypto asset securities), and Coinbase is the prime candidate for establishing the precedence. Brian appears to be publicly proclaiming differential treatment against Coinbase. …
@laurashin Laura Shin on x
👀 I feel the positive sentiment from earlier this year about Gensler helming the SEC has shifted ... https://twitter.com/...
@bondhack Robert Smith on x
CEO of a $50bn company hasn't heard of the bond market https://twitter.com/...
@brian_armstrong Brian Armstrong on x
4/ We were planning to go live in a few weeks, so we reached out to the SEC to give them a friendly heads up and briefing https://blog.coinbase.com/...
@pinboard @pinboard on x
This thread about how the SEC is being mean to the company trying to hook cryptocurrency scams into the real economy creates an acute crisis for nanoluthiers, who are still decades away from being able to build an atomic scale violin and thought they had more time https://twitter…
@thestalwart Joe Weisenthal on x
This isn't about sympathy with $COIN per se. But new lending products, built by anonymous teams, are being spun up every day. They're a little different than something like Lend, but it still creates essentially two different tracks, with one being at a major disadvantage.
@brian_armstrong Brian Armstrong on x
17/ We've always tried to be good actors in the space - leaning in to sensible regulation even when it is difficult or expensive. We try to think about what products we would want for ourselves, and what risks we would want our families to be aware of, before launching products.
@mattparlmer @mattparlmer on x
It is an extremely good development that more people are coming forward with complaints about extralegal pressure emanating from USG https://twitter.com/...
@brian_armstrong Brian Armstrong on x
9/ Meanwhile, plenty of other crypto companies continue to offer a lend feature, but Coinbase is somehow not allowed to.
@thestalwart Joe Weisenthal on x
This seems like the general problem with the state of crypto regulation right now. Any company that tries to make a point of being a good player automatically falls behind https://blog.coinbase.com/... https://twitter.com/...
@birdyword Mike Bird on x
Me on my first day of financial journalism out of university 🤝 The CEO of a $56bn company Not understanding securities https://twitter.com/...
@quantian1 Quantian on x
The entire point of having a regulatory apparatus- as distinct from a legal one- is so someone can say “Yeah, absolutely do not do that specific thing you think is very clever, I'll come up with a general reason why not after I think of it”. https://twitter.com/...
@decryptmedia Decrypt on x
The SEC warned it will sue Coinbase over a planned high yield crypto savings product. The company's CEO lashed out on Twitter https://decrypt.co/... https://twitter.com/...
@_danielsinclair Daniel Sinclair on x
Armstrong is really good at these types of comms. He brings issues into the open, rather than solely pumping money into traditional lobby groups behind closed doors. Will the SEC cave? I don't know! But Coinbase will own the public perception. https://twitter.com/...
@nycsouthpaw Southpaw on x
*angrily demanding someone at the SEC personally invite me to google the term “bonds"* https://twitter.com/...
@jebus911 Jebus on x
Welp, if the SEC doesn't want us to stake usdc in coinbase I guess we'll just have to withdrawal to ethereum, lock it in aave, borrow usdt against it, buy uni with that, bridge the uni to bsc, lock the uni in cream, borrow bnb against the uni, and buy nudey nfts on treat
@carnage4life Dare Obasanjo on x
Props to Coinbase's top lawyer who after being told by the SEC exactly what Supreme Court cases their product violates responded with “These two cases are from 1946 and 1990.” Somebody better not tell them how old the Constitution is. https://blog.coinbase.com/...
@notmrmanziel Manz on x
This ISN'T about CoinBase offering 4% APY This IS about the fact is threatens the traditional banking system in our country. Why are you letting money sit in a bank ever again? https://twitter.com/...
@owenthomas Owen Thomas on x
I think ... the SEC just subtweeted the CEO of Coinbase. https://twitter.com/...
@jelenaaa____ Jelena on x
Imagine the innovation and economic growth that would be unleashed if Canada became a regulatory safe haven for crypto while Biden continued along this archaic path. American companies would flock here. A girl can dream! https://twitter.com/...
@matvelloso Mat Velloso on x
When crypto bros start learning about bonds, after literally copying every practice they used to criticize financial companies for doing, expect they don't want regulations, cause what could go wrong. https://twitter.com/...
@katie_martin_fx Katie Martin on x
'Brian Armstrong, Coinbase's chief executive, took to Twitter to attack the SEC, arguing that its actions constituted “sketchy behaviour”.' *chef kiss* https://www.ft.com/...
@thestalwart Joe Weisenthal on x
I'm ideologically pro-trolling (though I would never engage in it myself). That being said, you could make the argument that governments shouldn't engage in it. https://twitter.com/...
@notmrmanziel Manz on x
If you haven't read this thread yet, I highly recommend it. Things are getting ready to change in a major way👇🏼 Good for Brian. https://twitter.com/...
@lutherlowe Luther Lowe on x
Crypto needs to grow up. Uber's early government relations playbook is not a helpful model to emulate here. https://www.techmeme.com/...
@jason @jason on x
Can someone explain to me how a crypto company can afford to pay 7% interest on your crypto holdings? Who are they loaning the crypto to & how much interest are those folks paying? https://twitter.com/...
@buccocapital @buccocapital on x
This is an incredible and hilarious dunk on @coinbase and @brian_armstrong. I am LOVING having a social-media literate SEC https://twitter.com/...
@pt Parker on x
I'm wondering if anyone at the SEC has read this great blog post on how to respond to attacks in (social) media. https://blog.coinbase.com/...
@jowens510 Jeremy C. Owens on x
1. Asking the SEC “How can lending be a security?” is like asking the IRS “Whaddayamean you just get to keep some of my paycheck?” Um, what do you really expect them to say to that? 2. Some reporter heard of this dispute and is living the “He just ... He tweeted it out” meme rn. …
@tommorris Tom Morris on x
Coinbase blog: “They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves. ...These two cases are from 1946 and 1990.” Bold defence strategy: “the Offences Against the Person Act 1861 is too old”.
@jfleming2870 Joel Fleming on x
Dude runs a multibillion-dollar crypto company and doesn't understand what a security is https://twitter.com/...
@migueldeicaza @migueldeicaza on x
The replies and quote tweets are gold: https://twitter.com/...
@jerrybrito Jerry Brito on x
1/ If true, this is pretty underhanded. I know it's easy for me to say, but Coinbase should go ahead and launch its product, let the SEC sue, and go to court. Let the SEC make its case and let a judge decide what the law is. https://blog.coinbase.com/...
@siberianmi @siberianmi on x
This is what happens when you constantly think you are innovating by recreating the existing financial system bit by bit. You fail to realize your new idea is essentially a very old regulated idea. The Howey Test, which the SEC cited is simple, Coinbase is just being childish. ht…
@george_balance George Bordianu on x
I'm having a hard time believing @brian_armstrong built Coinbase into what it is today without understanding why this yield product would create a security. It neatly satisfies all 4 prongs of the Howey test, textbook style. https://twitter.com/...
@quinnypig Corey Quinn on x
“How can lending be a security?” asks the CEO of a $55 billion publicly traded company that issued $1.25B of convertible bonds earlier this year. https://twitter.com/...
@chadmreese Chad Reese on x
If you want to know why the finreg community often harps on things like “chilling effects” and “regulatory uncertainty.” This thread is a pretty brutal example of why innovation is extremely hard under a murky enforcement regime. https://twitter.com/...
@danawrey Dan Awrey on x
The CEO of Coinbase asks “how can lending be a security?” 1. Lending = debt. 2. Debt is mentioned in the definition of a “security” under the '33 Act on no less than FIVE separate occasions. 3. When you issue debt securities you're not lending, you're *borrowing*. https://twitter…
@ryanlawler Ryan Lawler on x
It's a shame this guy can't talk about politics at work https://twitter.com/...
@bopinion @bopinion on x
Coinbase may not like SEC regulation, but would it prefer bank regulation? https://www.bloomberg.com/...
@petersterne Peter Sterne🌹 on x
I'm don't think he'd put it this way, but @matt_levine makes a really great case here for why aggressive state action is really the only viable response to climate change. If you just leave it to the existing markets, the most you'll get is greenwashing. https://twitter.com/...
@fordm Matt Ford on x
It's a fun throwback to when Uber simply ignored local laws until it was popular enough to change them, except it's with banks and securities and a lot of things that can be pretty risky even when regulated. What could go wrong?
@conorsen Conor Sen on x
Matt Levine on Coinbase/lending/securities: https://www.bloomberg.com/... https://twitter.com/...
@fordm Matt Ford on x
This gets at a deeper issue about last night's Coinbase thing, which is that a lot of DeFi stuff appears to be (either intentionally or unintentionally) regulatory arbitrage https://www.bloomberg.com/... https://twitter.com/...
@thestalwart Joe Weisenthal on x
This part of @matt_levine's Coinbase column is particularly good https://www.bloomberg.com/... https://twitter.com/...
@ryan_browne_ Ryan Browne on x
I was waiting for the @matt_levine take on Coinbase Lend. I wasn't disappointed. https://www.bloomberg.com/... https://twitter.com/...
@matt_levine Matt Levine on x
I won't share this newsletter itself, only the fact that I have done it. https://www.bloomberg.com/...

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