The U.S. Securities and Exchange Commission has sent a letter to Coinbase Global Inc. stating that it will file a lawsuit against the company if it goes ahead with the launch of a planned cryptocurrency lending service.

Coinbase disclosed the development this morning. Paul Grewal, the company’s chief legal officer, accused the SEC in a blog post of not providing enough information about why it believes a lawsuit may be warranted.

Nasdaq-traded Coinbase operates the most popular cryptocurrency exchange in the U.S. The company disclosed that it has about 8.8 million monthly transacting users in its most recent earnings report and also provides financial services to thousands of institutional investors. 

The planned cryptocurrency lending service at the center of the dispute with the SEC is called Lend. It would allow Coinbase users to earn a 4% annual percentage yield by lending cryptocurrency via the company’s platform. Lend is initially set to support USDC, a so-called stablecoin pegged to the U.S. dollar.

The issue around which Coinbase’s dispute with the SEC revolves is the question of whether or not Lend qualifies as a security. The SEC argues that it does, Coinbase says, while the company believes that it does not. 

“Coinbase’s Lend program doesn’t qualify as a security — or to use more specific legal terms, it’s not an investment contract or a note,” Grewal wrote in the blog post. “What’s more, participating customers’ principal is secure and we’re obligated to repay their USDC on request.”

Grewal added that the SEC has not been sufficiently transparent about how it had reached the conclusion that Lend constitutes a security. Coinbase, the executive wrote, decided to engage the SEC about Lend before launching the service rather than after the fact as financial technology firms often do when introducing new products. Grewal detailed that the SEC in response “told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion.”

Coinbase continued holding off on launching Lend, but opened a public waitlist for the service earlier this year. The SEC subsequently opened a formal investigation into the company. Afterwards, Coinbase shared additional documents related to Lend with the agency and an employee provided sworn testimony about the service in August. 

“Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused,” Grewal wrote. “They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves. The SEC won’t share the assessment itself, only the fact that they have done it. These two cases are from 1946 and 1990.”

The executive added that “formal guidance from the SEC about how they intend to apply Howey and Reves tests to products like Lend would be a big help to regulating our industry in a responsible way. Instead, last week’s Wells notice tells us that the SEC would rather skip those basic regulatory steps and go right to litigation.”

Photo: Coinbase