On Tuesday, June 30th, the United States Securities and Exchange Commission (SEC) announced that it had filed a lawsuit against Coinbase, one of the largest cryptocurrency exchanges in the world. The SEC’s lawsuit alleges that the company’s Lend program is a security, and therefore subject to securities law, and that Coinbase has therefore violated federal securities law by failing to register the program with the commission.
Coinbase’s Lend program, which has not yet launched but was due to be available in a few months, would allow users to earn interest on their cryptocurrency holdings by lending them to other Coinbase users. According to the SEC, because the Lend program involves Coinbase customers investing funds in a common enterprise with the expectation of profit, it constitutes a security under the Howey test, which looks at whether an investment involves an investment of money in a common enterprise with the expectation of profit from the efforts of others.
Coinbase had reportedly been in discussions with the SEC about the Lend program since at least May, but the agency ultimately decided to file a lawsuit after the company failed to provide adequate answers to its questions about the program. In a tweet, Coinbase CEO Brian Armstrong called the SEC’s action “sketchy behavior” and accused the agency of “really hurting crypto.”
Coinbase, which went public earlier this year and is valued at more than $50 billion, has become a major player in the cryptocurrency space in recent years and has been seen as a key driver of wider adoption of digital currencies. The company has faced regulatory scrutiny in the past, including from the Commodity Futures Trading Commission over its margin trading practices, but the SEC lawsuit represents a significant new challenge for the company.
The lawsuit also highlights the ongoing uncertainty around the regulatory status of cryptocurrency and other blockchain-based assets. While some cryptocurrencies have been deemed securities by the SEC, others have not, and there is ongoing debate about what regulations should apply to the industry as a whole. The SEC’s lawsuit against Coinbase is likely to be closely watched by other companies in the sector and could have implications for how cryptocurrency exchanges operate in the future.
Coinbase has said that it intends to fight the SEC’s lawsuit and has pledged to keep its Lend program on hold until the matter is resolved. The case is likely to play out over the coming months or even years, and could have significant implications for the wider cryptocurrency industry.
