The SEC has threatened to sue Coinbase for a cryptocurrency dividend programme that it regards as a security.

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“They refuse to explain us why they believe it is a security and instead request a bunch of information from us,” Brian Armstrong stated after revealing that the SEC threatened to sue Coinbase.

The Securities and Exchange Commission of the United States has reportedly threatened to sue Coinbase for a crypto dividend programme that it considers a security.

Coinbase CEO Brian Armstrong tweeted on Wednesday that there has been some “really sketchy behavior coming out of the SEC recently” before launching into a 21 post thread detailing the SEC’s dealings with the firm.

Armstrong added that the crypto exchange approached the SEC early this year to update the regulator about the upcoming Coinbase Lend programme, which will offer 4 percent annual yield back on deposits of the USD Coin (USDC) stablecoin.

According to the CEO of Coinbase, the SEC responded by notifying the company that the lending programme is a security without providing any justification and threatening to sue if the service was launched:

“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.”

Armstrong said that there are other crypto enterprises on the market that now offer comparable loan services to their consumers, and he urged the SEC to provide regulatory clarification on the subject. If Armstrong’s reporting is correct, the SEC’s moves appear to be bad news for competitors BlockFi and Celsius, which already provide crypto income products. BlockFi is being investigated in several states for its high-interest products.

In a blog post published on Wednesday, Paul Grewal, chief legal officer of Coinbase, expressed his dismay at the SEC’s actions as he questioned the assertion the lending feature can be deemed as an “investment contract or a note.”

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“Customers won’t be ‘investing’ in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship. And although Lend customers will earn interest from their participation in the program, we have an obligation to pay this interest regardless of Coinbase’s broader business activities,” he said.

Grewal went on to explain that the only clarification the firm has been provided is that the lending program is currently being assessed under the Howey Test:

“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.”

Gary Gensler, the SEC’s chairman, has repeatedly asked crypto businesses to collaborate with the SEC so that they can operate under public frameworks and assure their existence. Grewal stated that the SEC’s actions appear to contradict Gensler’s claims:

“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.”

“A healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation,” he said.

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Grewal added that the firm will delay the launch of the lending programme until at least October in order to receive additional feedback from the SEC.

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