Coinbase Global is at a standstill with its main regulator on lending practices that the Securities and Exchange Commission says are running existing securities standards.
Brian Armstrong, the head of Coinbase COIN,
on Tuesday afternoon revealed that the cryptocurrency platform is being investigated over a lending program that allows customers who own Circle’s stable currency (an asset intended to serve as a digital dollar) to earn interest around 4% APY, lending it to Coinbase, which in turn lends it to traders.
Cryptography experts and financial specialists told MarketWatch that the legal dispute could set clearer rules for the expanding segment of the digital asset market known as decentralized finance or DeFi, where investors lend digital currencies to earn commission income. additional.
Also read: What is decentralized finance? An expert on bitcoins and blockchains explains the risks and benefits of DeFi
Cryptography professionals say DeFi has grown and Coinbase, which currently offers a variety of services, including BTCUSD bitcoin trading,
active memeco dogecoin DOGEUSD,
and Ether ETHUSD,
– wants to expand its rate-generating offers as a listed company.
Similar to the stock market, currencies leased by customers can facilitate speculation through cryptocurrencies and other products.
However, in the eyes of the SEC, the lending program secures cryptography, with interest passed on to the customer, similar to how bonds pay interest to holders or how shares pay dividends.
Armstrong, in a series of tweets, claimed that the SEC, led by Gary Gensler, who took over the reins of the regulatory body in mid-April, has not made clear its position on what is and what is not a security.
However, at least one former regulator said the SEC has been very clear about its stance on the matter.
“When does a cryptocurrency become a security? When do you start lending it,” Amy Lynch, a former SEC regulator and president of FrontLine Compliance, told MarketWatch in a phone interview Wednesday afternoon.
Coinbase had planned to expand its cryptocurrency lending program to assets other than USD Coin.
Lynch said he advises that companies offering cryptocurrency services register with the SEC or go through an intermediary / dealer to comply with regulatory standards.
For example, Gemini is partnering with Genesis, a subsidiary of Digital Currency Group. In this case, Gemini, owned by twins Cameron and Tyler Winklevoss, picks up part of the differential between the interest paid by cryptography and the interest Genesis makes on its loans to institutions.
Lynch said Coinbase may not be anxious to establish such a deal, as it would mean sharing fees.
“If the SEC decided this is an area of concern, they will start looking more closely at the companies that do this,” he said.
In fact, The Wall Street Journal recently reported that the SEC sent letters to companies looking for information about cryptocurrency lending platforms. The sister publication MarketWatch reported that the regulator sought information, including whether the digital assets being offered are securities that should be recorded.
RA Farrokhnia, a professor at Columbia Business School, said Coinbase represents financial innovation and that regulation should not stifle the “new new thing”.
“What you’re witnessing is the evolution of cryptography, and specifically the next phase is decentralized funding,” Farrokhnia said.
“Unfortunately, even though crypto has been in our financial ecosystem for the past few years, there has been no clear regulatory framework … that indicates what is allowed and what is not allowed,” he said.
“Therefore, this lack of regulatory clarity on what exactly is considered a security in the existing framework …[without the] the creation of a new regulation, tailored to our new reality, is causing all sorts of confusion, “Farrokhnia said, explaining that he believes the SEC should express a greater willingness to collaborate with the nascent cryptographic industry.
Gensler, who has coached the SEC’s focus on investor protections (perhaps more so than any other regulator so far), has openly said he also intends to update the cryptography rules.
“To the extent that something is a security, the SEC has a lot of authority. And a lot of cryptocurrencies (for now I won’t call them cryptocurrencies) are indeed values, “Gensler told CNBC in an interview in May.
“We need to update and update our rules to make sure that even though retail investors and anyone have the rights to the first amendment to speak and so on, they don’t mislead the public, they don’t manipulate the public, or they manipulate markets, ”he said.
Lynch said the SEC’s stance on Coinbase lending may be influenced by a recent lawsuit against BitConnect, which offered its own digital security in 2016 in exchange for bitcoin and created an automated program that made money through trading. of the bitcoin contributed. Investors thought the profits were shared, but the SEC alleges the program was an elaborate Ponzi scheme.
Shares of Coinbase on Wednesday ended 3.2% and fell 7.3% during the week, compared to a weekly decline in the Dow Jones Industrial Average DJIA,
and the S&P 500 SPX index,
0.5% and 1%, respectively.