U.S. markets regulator takes aim at Coinbase lending product

© Reuters. FILE PHOTO: The logo for Coinbase Global Inc, the biggest U.S. cryptocurrency exchange, is displayed on the Nasdaq MarketSite jumbotron and others at Times Square in New York, U.S., April 14, 2021. REUTERS/Shannon Stapleton/File Photo

WASHINGTON/HONG KONG (Reuters) -The U.S. Securities and Exchange Commission has told Coinbase (NASDAQ:COIN) Global Inc that it plans to sue the cryptocurrency exchange if it goes ahead with plans to launch a programme allowing users to earn interest by lending digital assets, Coinbase said.

The top U.S. markets regulator has issued Coinbase with notice it intends to legally charge the company, Coinbase's chief legal officer, Paul Grewal, said a statement on Tuesday. Coinbase now plans to delay the launch of its 'Lend' product until at least October.

"The SEC does not comment on the existence or nonexistence of a possible investigation," a spokesperson for the agency said.

The SEC has been ratcheting up scrutiny of the crypto world. Crypto proponents have hoped that Gary Gensler, who became SEC chair in April, would bring rule clarity to an industry that has been operating in a regulatory gray area.

But Gensler is seeking more authority for the agency to oversee cryptocurrency trading, lending and platforms, a world he described last month as a "Wild West" that is riddled with fraud and investor risk.

Gensler has said some digital assets and platforms are operating as or offering securities, bringing them under the SEC's oversight.

In a lengthy Twitter (NYSE:TWTR) thread, Coinbase CEO Brian Armstrong criticized the agency's handling of the firm's plans to roll out a lending product the SEC has determined to be a security. Both the CEO and chief legal officer said Coinbase disputes that view.

Armstrong said he had tried to engage with regulators for months and received the legal notice after notifying the SEC of plans to move ahead with 'Lend' in a few weeks.

Programmes that allow owners of cryptocurrencies to lend them in return for interest are becoming more common around the world, but some regulators, particularly in the United States have started to raise concerns, arguing that such products should comply with existing securities laws.

The U.S. state of New Jersey ordered the cryptocurrency platform BlockFi Inc https://www.reuters.com/legal/transactional/new-jersey-orders-blockfi-cryptocurrency-firm-stop-offering-interest-bearing-2021-07-20 in July to stop offering interest-bearing accounts that have raised $14.7 billion from investors.

"If we end up in court we may finally get the regulatory clarity the SEC refuses to provide. But regulation by litigation should be the last resort for the SEC, not the first," Armstrong said on Twitter.

Shares of Coinbase were down 3.8% by 10:26 a.m. EDT (1334 GMT).