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SEC Threatens Coinbase With Lawsuit Over Lending Scheme

The U.S. Securities and Exchange Commission (SEC) is threatening to sue the cryptocurrency exchange platform Coinbase over its loan product Coinbase Lend — and the company said in a blog post that it has no idea why.

Coinbase said it was hit with a Wells notice — an intent to sue — from the SEC after being in talks with the exchange for six months about its planned lending product. Coinbase said it was surprised by the “SEC’s threat to sue without ever telling us why,” Paul Grewal, Coinbase’s chief legal officer, said in the post.

See also: Coinbase CEO’s Tweet Storm Fuels Escalating Fight With SEC Over Regulation of Crypto, Stablecoins

Instead of just rolling out Coinbase Lend, the exchange decided to seek input from the SEC, a move that is “far from the norm in our industry.”

The product isn’t an investment contract, security or note. Customers can use Coinbase Lend to loan the USDC they’re holding on the platform and earn interest while keeping their principal secure, according to the post.

According to the exchange, they answered all of the SEC’s questions in writing as well as in person, but “didn’t get much of a response.” All the watchdog said was that it considered the product to involve a security “but wouldn’t say why or how they’d reached that conclusion,” per the post.

Read more: SEC’s Gensler Vows To Go ‘After Misconduct Wherever We Find It’

Instead of setting a launch date for Coinbase Lend, the company started a waitlist. The SEC, in turn, asked for the data on everyone on the list. Coinbase said it declined to provide that information, citing privacy issues.

“We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us,” Grewal said.

If Coinbase launches Lend, the SEC said it will sue, basing its premise on “the prism of decades-old Supreme Court cases called Howey and Reves,” cases from 1946 and 1990.

“The SEC has repeatedly asked our industry to “talk to us, come in.” We did that here. But today all we know is that we can either keep Lend off the market indefinitely without knowing why, or we can be sued,” Grewal said.

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