On Tuesday, outspoken Coinbase CEO Brian Armstrong revealed that Coinbase is being investigated for offering a product that enables its users to earn interest of 4% APY on their holdings of the Circle USD stablecoin by lending them to Coinbase, which in turn loans them to traders.
MarketWatch was told by both financial experts and crypto specialists that the legal battle over the digital asset called DeFi, which is the growing sector of the cryptocurrency market in which investors loan out digital coins to collect interest, could help define the rules of the game.
1/ Some really sketchy behavior coming out of the SEC recently.
— Brian Armstrong (@brian_armstrong) September 8, 2021
Crypto derivatives and other related products are designed to take advantage of the coins that are loaned out by clients. This mimics the stock market.
The SEC’s Warnings Over DeFi
The SEC has warned other companies providing or considering similar products by issuing a threat to prosecute Coinbase if the exchange allows consumers to earn interest on their digital tokens. Gensler is also demonstrating that, as a regulator, he would use his authority to hinder any product he doesn’t like, even before it hits the market.
Coinbase announced in a blog post on Tuesday that they were surprised by the SEC’s stance.
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://t.co/OumvyTPQdj
— Coinbase (@coinbase) September 8, 2021
Many cryptocurrency aficionados rejoiced when Gensler took over at the SEC in April. But that’s because Goldman Sachs’ former partner, a finance specialist, had previously taught a class on digital assets at MIT — a background totally unlike that of most D.C. bureaucrats, who understood nothing about the growing industry.
Gensler Taking Aim at Crypto
However, that euphoria was short-lived since Gensler made it plain in speeches and congressional testimony that an increase in regulations was on the horizon. “Our financial system’s wild west” is how he described the sector in July, adding that “a lack of clear guidelines is plaguing the market.”
The SEC will also devote more resources to make companies liable for selling services that may be securities, such as those available on decentralized financial or DeFi platforms. A popular new offering in the form of Coinbase’s Lend program, which claims to provide a 4% yearly interest rate for those who loan out their USDC tokens, is in the spotlight.
USDC, a stablecoin created by Coinbase and other financial companies, is an easy-to-use medium of exchange that enables traders to quickly convert digital currency into cash and vice versa. As stablecoins are in the SEC’s line of sight, there may be concern for USDC as well.