The United States Securities Exchange Commission (SEC), served Coinbase with what is known as a “Wells Notice,” for its “Lend” program. Due to this, “Lend” is now off the market “indefinitely.” In a recent blogpost, Coinbase CLO Paul Grewal expressed surprise at the notice, stating[1],
“The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion.”
As per the SEC[2] regulations, “security” includes an “investment contract.” Though more clarity is needed on how Coinbase fits the bill, there are certain hints in its official offering. “Lend” offered a 4% interest or annual percentage yield for lending USDC stablecoin to borrowers. Amy Lynch, a former SEC regulator and president of FrontLine Compliance, explained[3],
“When does a crypto asset become a security? When you start lending it out.”
It is noteworthy that a lending contract is being looked at as securitization of an asset by some experts. Even if cryptocurrency is not considered a security in itself. In this context, the SEC website states that the “Howey test” applies to any “contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.” And, the regulator makes it clear that any securities product would require registration or exemption under the federal securities laws.
Simplifying further, Crypto attorney Preston Byrne, partner a Anderson Kill stated[4],
” ‘Yield’ products are securities. They differ in no material respect from an unsecured bond. They just don’t use the name.”
In contrast, Grewal specified[5] that the “Lend program doesn’t qualify as a security.” On the back of diverse views, SEC chief Gary Gensler[6] has been calling for tighter crypto regulations lately. And, the new
