Dive Brief:

• Coinbase has scrapped its planned launch of Lend, a product that would have allowed customers to earn an annual percentage yield starting at 4% by lending their holdings of a stablecoin, USDCoin, to other users.
• “We have also discontinued the waitlist for this program as we turn our work to what comes next,” the company wrote in a blog post around the close of business Friday. “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.”
• The muted nature of the post stands in stark contrast to the tone the company struck earlier this month, when Coinbase’s CEO, Brian Armstrong — in a series of tweets — accused the Securities and Exchange Commission (SEC) of "sketchy behavior" and “intimidation tactics” for threatening to sue the company if it launched Lend.

Dive Insight:

Over the past few months, the power struggle over how to police interest-bearing accounts has spilled beyond communications between regulators and individual companies. 

In a hearing last week in front of the Senate Banking Committee, SEC Chairman Gary Gensler told lawmakers, “we just don’t have enough investor protection in crypto finance, issuance, trading or lending,” likening the space to “the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”

Gensler rekindled that comparison Tuesday in a virtual event held by The Washington Post. “We’ve got a lot of casinos here in the Wild West, and the poker chip is these stablecoins at the casino gaming tables,” Gensler said, according to The Wall Street Journal.

Gensler said stablecoins have aspects of both SEC-regulated investment contracts and banking products but that federal bank regulators don’t have the authority to supervise all of them.

At last week's hearing, Sen. John Kennedy, R-LA, voiced the most direct objection to Gensler’s view. “As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?” he asked.

The panel’s ranking member, however, met Gensler’s comments with concern that the regulator, in warning crypto companies of potential legal action, could curb innovation without first laying out guidelines as to what’s permissible. 

“I think we need clarity on this,” said Sen. Pat Toomey, R-PA. “I think you should publicly disclose this. ... And we certainly shouldn’t be taking enforcement action against somebody without having first provided that clarity.”

Coinbase cited the desire for “regulatory clarity for the crypto industry as a whole” in Friday’s notice that it would put Lend on hold. That update, however, came not as its own announcement but as an addendum to a June 29 post meant to persuade users to pre-enroll for Lend. A Sept. 7 post in which Coinbase’s chief legal officer, Paul Grewal, reveals the SEC’s intent to sue over the product is still at the top of the company’s blog. 

"The SEC told us they consider Lend to involve a security but wouldn't say why or how they'd reached that conclusion," Grewal wrote Sept. 7, adding that the regulator "would rather skip” that step “and go right to litigation.” 

"Mystery and ambiguity only serve to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver," Grewal continued.

Armstrong echoed that idea in his tweets.

"Regulation by litigation should be the last resort for the SEC, not the first," he wrote Sept. 8. "If we end up in court we may finally get the regulatory clarity the SEC refuses to provide.”

Other crypto targets

Coinbase is not the only crypto company whose interest-bearing accounts are under scrutiny. State regulators in New Jersey and Texas in July ordered BlockFi to stop selling that type of account to state residents, also on the grounds that the product represents an unregulated security. Regulators in Alabama, Kentucky and Vermont followed. 

Alex Mashinsky, head of digital asset lending platform Celsius, told the Financial Times last week that Coinbase was “fighting the good fight.” 

“If they lose  … the SEC will get even more aggressive,” Mashinsky said. “They will draw the lines way into crypto territory.”

Celsius on Friday also saw New Jersey and Texas officials issue orders to halt new interest-bearing accounts in those states.

Grewal said Sept. 7 that Coinbase had been communicating with the SEC for about six months regarding Lend, and that it would delay the product’s rollout until “at least October.”

Friday’s update extends that delay indefinitely, and notes that the waitlist had attracted “hundreds of thousands” of customers.

Neither a Coinbase spokesperson nor the SEC would comment on the Lend update.

How Howey may apply

At issue is how interest-bearing accounts qualify as securities. Coinbase has contended Lend doesn’t constitute an investment contract. "Customers won't be 'investing' in the program, but rather lending the [USDCoin] they hold on Coinbase's platform in connection with their existing relationship," Grewal wrote Sept. 7.

A 1946 Supreme Court case determined that an "investment contract," by the Securities Act's standard, is one in which "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."

In the case, which established the "Howey test," investors bought rows of orange trees in Florida and agreed to let the Howey Company manage the trees, harvest and sell the fruit, and give investors a share of the proceeds. By that measure, a Bloomberg op-ed writer said in July, the oranges, trees and land are not securities, but the agreement is.

Another consideration for regulators may be Lend’s tie-in with a stablecoin, which, despite its peg to national currency, resides in a regulatory gray area.

"We have a pretty strong regulatory framework around bank deposits, for example, or money market funds. That doesn’t exist really for stablecoins," Federal Reserve Chair Jerome Powell told the House Financial Services Committee in July. "If they are going to be a significant part of the payments universe — which we don’t think crypto assets will be but stablecoins might be — then we need an appropriate regulatory framework, which frankly we don’t have."  

The Financial Stability Oversight Council (FSOC), incidentally, has the capacity to label stablecoins and its issuers as systemically important, which would put affected parties under the Federal Reserve’s purview.

Still another regulator, the acting chief of the Office of the Comptroller of the Currency (OCC), told the Blockchain Association on Tuesday that cryptocurrencies and decentralized finance may evolve to threaten the financial system much the way credit default swaps did ahead of the 2007-08 financial crisis.