In a bid to end potentially damaging lawsuits filed by the regulator, Crypto exchange Coinbase shelves LEND, the DeFi interest bearing product it had planned to launch later in the year.
CEO Brian Armstrong said that the plan to cancel LEND was directly due to the warning the company was issued by the SEC, and later clarified and expanded on this with a press release later in the day:
“Last Wednesday, after months of effort by Coinbase to engage productively, the SEC gave us what’s called a Wells notice about our planned Coinbase Lend program. A Wells notice is the official way a regulator tells a company that it intends to sue the company in court. As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it.”Coinbase shelves LEND: Statement from the company.
As Coinbase shelves LEND, the company made it clear that they could not really understand the regulators actions, as they had been “proactively engaging” with the SEC on compliance for at least six months that the product had been in their pipeline. The company said that it has ‘chosen not to’ launch LEND because they believe in the ‘value of open and substantive dialogue’ with regulators.
The major point that the SEC seemed to be pushing was that LEND would fail the Howey test, essentially meaning that they would regard LEND as a security, and as such Coinbase were essentially promoting an unregistered security, which is illegal.
“The SEC won’t share the assessment itself, only the fact that they have done it. These two cases are from 1946 and 1990. Formal guidance from the SEC about how they intend to apply Howey and Reves tests to products like Lend would be a big help to regulating our industry in a responsible way. Instead, last week’s Wells notice tells us that the SEC would rather skip those basic regulatory steps and go right to litigation.”Paul Grewal, Chief Legal Officer, Coinbase
So it would appear that the SEC has won without having to go through a lengthy court process. It might be that Coinbase simply decided that it just wasn’t worth going through the pain which litigation might cause to its stock price and reputation, especially as the company just went public less than 6 months ago (and which has recently launched a Private Senior Note Offering to raise $1.5B). Perhaps they’ve seen the hoops that Ripple Labs have had to go through in their ‘unregistered securities’ claim by the SEC.
It also seems like the SEC is really going after DeFi lending platforms at the moment, with BlockFi and Celsius seemingly also on the regulators hit list. The LEND product would have allowed users to participate in a 4% APY program on the USDC coin, which the company said was aimed at “financial empowerment” of it’s customers, allowing them to earn interest on a range of assets, including the USDC stablecoin.
Coinbase shelves LEND but proceeds with Prime
Coinbase have however announced that the company will still proceed with the relaunch of the Coinbase Prime platform with a number of updated features for institutional investors.
Coinbase Prime combines advanced trading, battle-tested custody, and financing in a single solution. Along the way, we’ve continued to add more venues to our smart router which allows clients to achieve the best available price, more assets to our custody capability, enhanced our post-trade reporting capabilities, and added to our post trade credit financing options.Greg Tusar, Coinbase VP of Institutional Product
So although the news that retail investors may lose access to a much demanded product as Coinbase shelves LEND, the company does seem to be doing what it can to ensure it doesn’t continue to meet the ire of regulators, and to do whatever it can to grow. Whilst this clearly makes good business sense, it may have the effect of simply encouraging the SEC to continue to go after crypto companies, and inviting those in the crosshairs to fold their hand early. This isn’t really good for innovation in the crypto market.