Coinbase, still spooked by the SEC, offers crypto yield everywhere but US
Coinbase Global has launched a DeFi yield product to allow users in more than 70 countries (not the US) to earn interest on stablecoin DAI.
Coinbase users outside the US can deposit DAI into Compound Finance (COMP) to earn a variable annual yield (APY).
In October, such deposits earned an annualized APY between 2.83% and 5.39%.
With the partnership between Coinbase and Compound Finance, users can continue to trade their DAI like they normally would. Coinbase says it will cover Ethereum’s gas fees associated with those transactions.
The Maker Protocol and MakerDAO (MKR) token holders manage DAI, an Ethereum-based token theoretically pegged to the US dollar.
A basket of overcollateralized crypto (which includes other stablecoins) gives DAI its value.
Holders can vote on governance for the Maker Protocol, MakerDAO, and DAI with the weight of votes scaled to token balances.
Popular apps of the MakerDAO ecosystem include decentralized wallet-slash-portfolio tracker DeBank and lending platform InstaDapp.
Coinbase and a white whale called ‘clarity’
Earlier this year, Coinbase aggressively pursued offering a DeFi yield product in the US, Coinbase Lend. Regulators more-or-less rejected the company’s plan before it could launch.
Lend would’ve enabled users to deposit Coinbase and Circle’s stablecoin USD Coin (USDC) into Lend for consideration of 4% APY.
Coinbase shelved Lend in September, just 12 days after the SEC effectively threatened to sue the company if it moved forward. The SEC affirmed that Lend would be a security and require registration.
For its part, Coinbase alleges the SEC wasn’t clear about how crypto yield products fail the Howey Test, a legal framework for determining whether asset sales constitute investment contracts.
Coinbase also claims that the SEC failed to clarify if or how Lend failed the second test of securities law that crypto assets often do: Reves v. Ernst & Young.
This Supreme Court case from 1990, a four-prong “family resemblance test,” describes how to determine if a capital raise becomes a note of indebtedness:
- Motivation of the seller and buyer (is the seller looking for investment and the buyer looking for profit?)
- Plan of distribution of the note (is the product marketed as an investment?)
- Expectation of the creditor/investor (would the investing public reasonably expect the application of securities laws to the product?)
- Presence of alternative regulation (will the product be registered as a banking product and the offeree registered as a bank?)
The SEC is not responsible for individually crafting explanations for each failed submission. It provides guidance or references Supreme Court tests like Howey, then encourages applicants to seek competent counsel if they’d like to reapply.
Armstrong wants you on Coinbase’s side
On Twitter, Coinbase chief Brian Armstrong complained extensively about receiving a Wells Notice from SEC regulators.
Armstrong said he met with regulators while preparing Lend and claimed he doesn’t understand why the SEC hasn’t provided clarity. Like many critics before him, he accused the SEC of “sketchy behavior.”
Coinbase general counsel Paul Grewal even whinged on his blog about the SEC failing to craft a personalized response for Coinbase.
SEC chair Gary Gensler responded by saying that the goal is never to protect investors from themselves.
The SEC simply requires applicants soliciting public investment into securities disclose sufficient information to allow the public to make informed decisions.
Gensler’s predecessor Jay Clayton also frequently urged crypto companies to provide enough transparency to the public, particularly audits and other financial statements.
In a 2018 appearance at a legal industry event, Clayton criticized lawyers who were providing bad legal advice to firms that sold cryptocurrencies with initial coin offerings.
Senator Pat Toomey has also repeatedly asked the SEC to clarify its classification of digital assets and DeFi yield products.
Read more: [Coinbase, MicroStrategy execs dump stock as Bitcoin buoys share prices]
In any case, Coinbase execs were upset they did not get their way. They took to the media and spun history into a version that made them noble; an apparent bid to recruit crypto faithfuls to fight for their cause.
But ultimately, Armstrong and his team failed to convince the SEC that Lend did not require the same level of information disclosure to US residents as any other security.
Many analysts consider DeFi applications high-risk ventures, noting their security-like features and egregiously risky APYs of hundreds, thousands, and even millions of percent.
Armstrong continues to believe that DeFi remains a long-term goal of Coinbase for its US customers. He just can’t offer them interest on crypto deposits just yet.
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