For cryptos in general, through the past few years and continuing into today, there has been an existential question: Security or currency? Or something else entirely?
Bitcoin has been exhibit A here, of course. Ripple’s XRP offering has also been a focus. Various regulatory agencies, most notably the Securities and Exchange Commission (SEC), have taken the question into hand.
See also: Ripple Files Response to SEC Suit Over XRP Sales
Now comes the news that the SEC has lobbed a possible suit across the bow at Coinbase, alleging that the company’s crypto yield program is in fact a security.
And in a series of tweets about the matter (at this writing nearly two dozen), Coinbase CEO Brian Armstrong has said the company had approached the SEC about its program, known as Coinbase Lend, which would offer a 4% yield on holdings of USD Coin, known as USDC. That’s a dollar-backed stablecoin that has reached more than $27 billion in circulation.
19/ Yet here, we’re being threatened with legal action before a single bit of actual guidance has been given to the industry on these products.
— Brian Armstrong (@brian_armstrong) September 8, 2021
Circle CEO: Stablecoin Too Big to Ignore
Per Armstrong’s tweets, the Commission said the offering would be classified as a security and threatened to sue over the matter, should the lending product be launched.
“They refuse to tell us why they think it’s a security, and instead subpoena a bunch of records from us (we comply), demand testimony from our employees (we comply), and then tell us they will be suing us if we proceed to launch, with zero explanation as to why,” Armstrong tweeted.
Other details on the Coinbase site – through a blog post penned by Chief Legal Officer Paul Grewal – said the SEC has offered no reason for its threatening of a suit. Customers won’t be investors in the program, he said, and instead would be lending the stablecoins as part of an existing relationship. The money earned on the digital coins would be part of the obligations Coinbase has with the customer, “regardless of Coinbase’s broader business activities.”
The SEC, said Coinbase management, has invoked the Howey test in its conversations with the company. As noted in a conversation with Karen Webster, former SEC enforcement attorney Ashley Ebersole said that the 1946 U.S. Supreme Court case SEC v. W.J. Howey Co. (and, by extension, the Howey Test derived from that case), found that “investment contracts,” a type of securities, involve an investment of money in a common enterprise with an expectation of profits from the entrepreneurial or promotional efforts of others. As PYMNTS wrote last week, the SEC broadcast with the 2017 “DAO Report” that the securities laws could apply to digital assets, and in 2019 it offered up a framework illustrating how Howey is applied to digital assets.
Now, with stablecoins at the “foundation” of the proposed lending program, the heart of this matter seems to be whether the activity (lending) is fundamentally altered because stablecoins are in the mix. If stablecoins are indeed deemed securities, the fundamentals of business activities are altered. But stablecoins, according to their proponents – at least the ones backed by dollars or liquid holdings that are, essentially, as “good” as cash – do not have the risks or volatility that’s inherent in securities.
But SEC Chair Gary Gensler has said in recent months that at least some stablecoins could be treated as securities, and that much depends on the classification of the “backing” assets.
Two things are all but certain: The debates will continue, and so will the legal jousting.