Coinbase CEO Brian Armstrong hit back at the SEC over its move to block a new feature that would let users earn interest by lending their crypto assets.
Armstrong kicked off the online condemnation of the agency with a Twitter thread late Tuesday evening: "Some sketchy behavior coming out of the SEC recently."
He was referring to an SEC letter, formally known as a Wells notice, to Coinbase declaring that the agency plans to sue the company over a new product, called Lend, which would let users lend their USDC stablecoins to verified borrowers, allowing them to earn 4% annually.
The dispute highlighted brewing tensions between the crypto industry, led by Coinbase, and the SEC, led by Chairman Gary Gensler, who has taken an increasingly critical view of the industry. It also resurfaced the debate over whether cryptocurrencies should be classified as currencies or securities.
The SEC could not be immediately reached for comment.
In a blog post, Paul Grewal, Coinbase's chief legal officer, said the company shared details of the plan with the SEC but the agency has not offered a clear explanation why it views Lend as a security.
"We answered all of the SEC's questions in writing and then again in person," Grewal said. "But we didn't get much of a response. The SEC told us they consider Lend to involve a security, but wouldn't say why or how they'd reached that conclusion."
Armstrong sounded even more combative in the Twitter thread, saying, "They responded by telling us this lend feature is a security. Ok — seems strange, how can lending be a security?"
That prompted some scathing responses that ridiculed Armstrong's question, including one that said, "Lending has always been a security. We literally had a financial collapse over debt securities." An official SEC account tweeted a video explaining what bonds are.
Stephen Diamond, a business law professor at Santa Clara University, said there are "long-standing judicially created tests" for evaluating financial products like the one Coinbase is planning to roll out.
"The SEC has apparently decided that Lend fits one or both of these tests," he told Protocol. "Any security must be registered with the SEC or be issued under an available exemption from registration."
Coinbase will not launch Lend "until at least October," Grewal said, as the company tries to get some clarity on the SEC's position.
"Coinbase continues to welcome additional regulatory clarity," he wrote. "Mystery and ambiguity only serve to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver.
But Armstrong suggested Coinbase may take the matter to court, tweeting, "If we end up in court we may finally get the regulatory clarity the SEC refuses to provide. But regulation by litigation should be the last resort for the SEC, not the first."
Coinbase's dilemma led some crypto enthusiasts to revisit the company's decision to suspend trading in XRP, the cryptocurrency used by Ripple, after the SEC sued the company arguing that XRP is not a currency but a security and therefore subject to securities laws.
In an apparent dig at Coinbase, Ripple CEO Brad Garlinghouse responded to Armstrong's tweet with a GIF of Bruce Willis' character in "Die Hard" with the caption, "Welcome to the party, pal!"
