The SEC had threatened to sue the Coinbase exchange over a lending feature

Crypto exchange Coinbase CEO Brian Armstrong responded Tuesday evening to planned enforcement by the U.S. Securities and Exchange Commission (SEC) pertaining to the firm’s recently announced yield-generating product.

Coinbase is in hot water with the SEC

Coinbase went public on the Nasdaq stock exchange in April and while still not seeing any outstanding developments, then they received a subpoena by the SEC. It’s actually less than three months after it announced to the market a product, dubbed Lend, that would allow users the opportunity to earn double-digit yields on deposits of USD Coin (USDC) on its platform. That’s a much juicer yield than what is offered by consumer banks, which provide less than a basis point for savings accounts.

According to Armstrong, after reaching out to the SEC, the company learned that the product would be classified as an unregistered security. Armstrong claims that the regulator didn’t explain how it made such a determination and gave no guidance on compliance with existing laws.

“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”, in a tweet, Armstrong added.

Now, the securities watchdog claims that it will take Coinbase to court if the exchange goes ahead with the launch of the profitability feature in question.

In a blog post, Paul Grewal, Coinbase’s chief legal officer, says that the company has already received a Wells notice, a letter sent by the SEC that notifies recipients about the substance of its charges. Grewal adds that submitting a written defense would be futile since the company doesn’t know why exactly it could face a lawsuit.

“The SEC has repeatedly asked our industry to talk to us, come in. We did that here. But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued”, he added.

Coinbase has been proactively engaging with the SEC about Lend for nearly six months. He said that if the product officially launched, the SEC would sue:

“Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem. Rather they have now told us that if we launch Lend they intend to sue. Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused.”

The case of the SEC as well as BlockFi, a cryptocurrency financial services provider. They have also been opposed to a similar product, which gives users high returns when they use stablecoins with the company. Five states have said the company violated securities laws and regulations.

In addition to the plan to provide returns on USDC held by the company, Coinbase offers other profit-making services through proof-of-stake protocols such as Ethereum 2.0 and Tezos. One source said the SEC’s action does not apply to staking. So you don’t worry.

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