Coinbase, the largest cryptocurrency exchange in the United States, is facing a potential SEC investigation

The cryptocurrency has a problem with the SEC – and it just got bigger.

The Biden administration is taking a more practical approach to the highly volatile, little-understood and barely regulated cryptocurrency industry. Cryptocurrencies are decentralized digital currencies backed by blockchain technology. Bitcoin, etherium and other cryptocurrencies have become almost as accessible as the currency issued by the government in recent years, but the government offers little consumer protection for them.

The Securities and Exchange Commission (SEC) – chaired by Gary Gensler, who teaches a cryptocurrency course at MIT – is trying to prove that it can and will regulate all cryptocurrency investment schemes it deems fall within its remit. The relative novelty and rapid expansion of the cryptocurrency industry has placed it in a regulatory gray area. The Internal Revenue Service (IRS) classifies crypto as property. The Commodity Futures Trading Commission (CFTC) considers crypto to be a commodity. And the SEC said that digital assets “can be securities, depending on the facts and circumstances.” A security is a financial asset that can be traded, such as stocks and bonds, and which is governed by several laws designed to prevent fraud and protect investors.

The SEC appears to have decided that the forthcoming offer from Coinbase, the largest cryptocurrency exchange in the United States, meets its definition of a security. And this shows that it will intervene and regulate it accordingly – and as an extension it will regulate more closely the rest of the cryptocurrency industry.

Cryptocurrency exchanges allow people to buy and sell cryptocurrencies. Coinbase is one of the largest in the world and has recently become public. He planned to launch a program called Lend, which would allow investors to allow others to borrow a form of cryptocurrency called the USDC, a “stable coin” whose value is tied to the value of the US dollar (a USDC is always equal to and to be traded for the value of one US dollar). In return, lenders will receive 4 percent interest on the loan – a much higher interest rate than traditional banks, which currently offer on their savings accounts. This could make Coinbase Lend’s offering very attractive to consumers who would not otherwise risk investing in crypto.

This is where the SEC intervened, according to Coinbase. The company announced on Wednesday (or late Tuesday if you count a Thread on Twitter by CEO Brian Armstrong) that the SEC threatens to sue the company if it launches Lend, but that the agency will not tell Coinbase why it considers Lend a security other than doing so “through the prism of decades of Supreme Court cases. “These cases, informally known as Howie and Dreams, are the prism through which any potential security, including crypto services, is considered. Coinbase said it wanted formal guidance from the SEC on how to use these cases to determine if Lend was collateral, but the SEC would not provide it.

The SEC has not yet commented officially, although some people believe the tweet qualifies as a response.

The people behind Coinbase may be (or at least claim to be) pointless, but the SEC almost certainly knows what it’s doing here: asserting its regulatory control over the world of banking and cryptocurrency finance. And this is done with an atypical attitude for the agency, according to anonymous former SEC employees who spoke to Bloomberg.

“The announcement that the SEC is investigating Coinbase Lend’s program is in line with regulators’ ongoing cryptocurrency aggression,” George Monaghan, an analyst at market intelligence firm GlobalData, told Recode.

As the New York Times recently explained, cryptocurrency is moving into the banking sector, offering services that are typically reserved for traditional banks, whose services are backed by a government-issued currency (the dollar, for example) and operated under consumer protection laws and regulations. which date back decades. For example, some crypto companies now offer crypto accounts, debit cards and credit cards with cryptocurrency rewards

Senator Elizabeth Warren called these “shadow banks,” noting that they are not federally insured and could be more susceptible to hacks and fraud than traditional banks. She wrote to Gensler about her concerns, and in a reply on August 5, the SEC president agreed that “investors using these platforms are not adequately protected.” He also said that there are certain activities that the SEC can regulate, and that he believes that legislators should give priority to legislation that deals with crypto trading and lending.

The SEC has previously shown interest in combating crypto. He launched an initiative to regulate crypto in 2018, which became a separate office within the agency in December last year. And recently, it charged another cryptocurrency lending platform, BitConnect, $ 2 billion in fraud to run what the Department of Justice called a “Ponzi textbook.” Another crypto company, BlockFi, which offers high-interest loans and deposit accounts backed by cryptocurrency and a credit card with a crypto rewards program, has been the subject of investigations by several state-level security regulators.

But Coinbase is bigger and better known than these companies. GlobalData’s Monaghan did not expect the consequences to be significant for Coinbase itself, as the Lend program was not yet active. But the SEC’s interest in Coinbase is a sign to any crypto finance company that there are still rules they must follow, and they must expect consequences if they do not.

These rules may accumulate in the near future as the Biden administration and lawmakers work to address the regulatory gaps that cryptocurrencies fall into. Biden’s proposed budget for 2022 includes requirements for cryptocurrency reporting, the IRS is collapsing, and crypto regulations are even becoming a temporary obstacle to the adoption of the infrastructure bill. Adding to this – or perhaps exacerbating – is concern about how cryptocurrency can be used to facilitate criminal activity; ransomware attacks often require bitcoin payments due to the difficulty of tracking those payments.

Crypto regulations are forthcoming. The question now is whether the slow process of rule-making and law-making will be able to cope with the rapidly evolving world of cryptocurrency.