Coinbase shares fall after it reveals SEC plans to sue over interest-earning product

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People watch as the logo for Coinbase Global Inc, the biggest U.S. cryptocurrency exchange, is displayed on the Nasdaq MarketSite jumbotron at Times Square in New York, U.S., April 14, 2021.
Shannon Stapleton | Reuters

Coinbase has received notice of a possible enforcement action from the Securities and Exchange Commission related to its interest-earning product, which the company had planned to launch in the coming weeks.

The cryptocurrency exchange and services firm received a Wells notice from the SEC last Wednesday saying the regulator intends to sue Coinbase over the product, called Coinbase Lend, the company disclosed in a Tuesday night blog post.

Shares of Coinbase fell 3% in premarket trading Wednesday.

Chief legal officer Paul Grewal indicated in the post that the company was caught off guard by the threat considering its efforts to engage with the regulatory agency for the last six months. CEO Brian Armstrong claims in a series of tweets that when he traveled to Washington, D.C. in May, the SEC “refused” to meet with him.

That visit took place shortly after Coinbase became the first publicly traded crypto exchange and about a month after Gary Gensler had been confirmed as chairman of the SEC.

“We’re committed to following the law. Sometimes the law is unclear. So if the SEC wants to publish guidance, we are also happy to follow that,” Armstrong said.

The product in question is billed as allowing users to earn a 4% annual percentage yield on a so-called stablecoin (USD Coin) by allowing Coinbase to lend those funds to verified borrowers. Coinbase backs USD Coin and guarantees that it can always be redeemed for $1. High interest accounts have become popular among crypto users, with companies like BlockFi and Gemini similarly offering a high yield on stablecoin and other cryptocurrency balances.

Armstrong said when the company initially reached out to the SEC for a briefing ahead of the launch, the regulator responded by saying the Lend feature is a security. When the company asked the SEC to help it understand their view, the agency responded with a number of demands, with which Coinbase complied, according to Armstrong.

The product’s launch has been delayed until at least October.

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