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Coinbase Abandons Lending Product

  • Cryptocurrency exchange Coinbase Global abandons its cryptocurrency lending product
  • Buckling to regulatory pressure Coinbase Global may serve as a warning to other fintech innovators to walk in the shadows as opposed to cooperating with regulators
“I fought the law and the law won.”
– “I Fought the Law” by Sonny Curtis and the Crickets, off the album “In Style with the Crickets” © 1958 Sonny Curtis

U.S.-listed cryptocurrency exchange Coinbase Global (-3.53%) has dropped plans to launch a cryptocurrency lending product after bowing to pressure from the U.S. Securities and Exchange Commission, which threatened to sue the former if it went ahead.

The product in question, called “Lend” is not a new concept.

Unregulated cryptocurrency exchanges have been offering depositors as much as 7% on dollar-based stablecoin deposits for some time now and Coinbase Global was simply following a prevalent trend in the industry.

In a statement late last Friday, Coinbase Global said it had made a “difficult decision” to shelve its plans to offer the Lend product.

While Coinbase Global CEO Brian Armstrong had lashed out publicly at the SEC, arguing that the Lend product did not constitute a security, he ultimately had to backdown to regulatory pressure.

The move comes as regulators globally are looking to exercise greater oversight over cryptocurrency exchanges, regardless of jurisdiction.

Binance, the world’s largest cryptocurrency exchange by traded volume, has come under increased scrutiny by U.S. regulators, the latest of which has been an investigation into allegations of insider trading at the exchange.

Coinbase Global had first floated its Lend product in June, and was set to offer an initial 4% annual yield for holders of its stablecoin the USD Coin.

Exchanges gain doubly by offering such products because deposits can then be re-lent to other cryptocurrency traders who take leverage at high multiples of such interest rates or used to provide liquidity on their exchanges.

But the SEC’s threat to classify the Lend product as a security becomes somewhat problematic when viewed in the context that it operates similar to a bank deposit.

By the SEC’s definition of a security, current U.S. bank accounts, which are overseen by the U.S. Comptroller of the Currency, would also fall within the purview of the SEC, which would be a clear jurisdiction issue.

The SEC’s action actually muddies the waters for cryptocurrency companies, especially those who may have at least considered submitting themselves to more enhanced and visible regulation.

Given how volatile the digital asset markets already are, the move by the SEC to muddy the definition of what constitutes a “security” is actually a retrograde step and may force stakeholders to think twice about cooperating with regulators in the conduct of their business.

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