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Coinbase: SEC fight plays to the crypto crowd

Coinbase updates

Twitter rants are not a good negotiating tactic. Coinbase’s decision to use the site to complain about the US Securities and Exchange Commission, with boss Brian Armstrong dubbing its actions “sketchy”, suggests a poor grasp of regulatory diplomacy. 

Coinbase says the SEC has threatened to sue the trading app if it launches a product called Lend, which would allow users to earn interest on their crypto holdings. 

As the number of retail crypto investors has grown, so has the number of high-yield account offers. Many boast they can pay out far better rates than bank cash accounts. Gemini, created by twins Cameron and Tyler Winklevoss, advertises 8.05 per cent.

Coinbase, which has 8.8m active monthly users, wants in. Rising crypto prices mean revenues are rocketing — up more than 1,000 per cent in the second quarter to just over $2bn. It is keen to expand its universe of products before prices fall and trades slow. Lend would offer a 4 per cent annual yield on stablecoin holdings pegged to the dollar.

The company’s supposed surprise about the SEC’s wariness of such products seems disingenuous. Even if cryptocurrencies and stablecoins are not deemed securities, the SEC has made clear, via its references to the Howey case, that the investment contracts in them count as such.

Coinbase chief legal officer Paul Grewal acknowledged the company was told the SEC regarded the lending product as involving a security. It opted to open a customer wait-list anyway. 

US state authorities have already brought legal actions against BlockFi, which offers interest-paying crypto accounts. New Jersey regulators dubbed them unregistered securities.

Yet Coinbase’s share price did not move in after-hours trading. The $56bn company has salted away more than $4bn — plenty of cushion for potential lawsuits. Plus its share price had already dipped the previous day following service problems that prevented users from trading. More importantly, Twitter threads and blogs play to the crypto crowd who see watchdogs as the enemy. Coinbase’s intended audience may not be regulators at all.

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