CoinBase Cancels Proposed Lending Program after SEC Scrutiny

 As we posted last week, CoinBase's proposed lending program, where its customers would be able to use cryptocurrency to make loans to third parties raised objections from the SEC. Coinbase objected to the objections in a public statement, claiming it didn't know what the problem was.

There isn't much public information available about the program, but as we dug in a bit it certainly appeared that the proposed program would be a security, which would require registration with the SEC, or compliance with an exemption. Our examination of the issue is at CoinBase Plan May Be a Security

Well, apparently CoinBase has figured out what the SEC's issue is, or simply decided that the cost of registration, or of the fight with the SEC wasn't worth the benefit. Yesterday they announced the cancellation of the proposed LEND program.

From their website:

Our goal is to create great products for our customers and to advance our mission to increase economic freedom in the world. As we continue our work to seek regulatory clarity for the crypto industry as a whole, we’ve made the difficult decision not to launch the USDC APY program announced below. We have also discontinued the waitlist for this program as we turn our work to what comes next. We had hundreds of thousands of customers from across the country sign up and we want to thank you all for your interest. We will not stop looking for ways to bring innovative, trusted programs and products to our customers.

CoinBase Plan May Be A Security

The CoinBase Wells Notice is creating quite a stir. My original comments are here, but more information has come to light.

It appears from other comments that the CoinBase Lend program is not simply a loan by depositors to others. According to other posts, CoinBase is planning on pooling the assets of its depositors and then creating loans from that pool.

That my friends, is a different kettle of fish, for the pooling of assets for investment purposes is in fact a security. If that is what they are planning on doing, the interest in the pool meets the Howey test - an investment of money in a common enterprise, with the expectation of making a profit from the efforts of others. The customer's interest in the pool would be a security.

Adam Levitin has an excellent analysis of the plan at the Credit Slips blog.

Other posters are mocking the General Counsel of CoinBase for "whining" about the SEC's lack of transparency in the Wells Notice. I suspect that those posters have never dealt with an SEC Wells Notice, which quite often is simply a statement that the Staff intends to recommend enforcement action for violation of a particular statute.

While it is true that a Wells Notice comes after an investigation, in which the target participated, and after discussions with the Staff, the often cryptic language presents a problem for the target in deciding whether to respond and how to respond. Assuming too much raises additional questions, not saying enough dooms the response to failure.

Rather than mock the GC, we should be applauding the public posting objecting to the Wells Notice and the lack of clarity that apparently exists in this particular notice.

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