On September 7, 2021, the chief legal officer (CLO) of Coinbase Global Inc. (Coinbase), Paul Grewal, published a public blog post (CLO post) on the Coinbase blog page in which the CLO asserted that the SEC issued a Wells notice to Coinbase regarding its planned cryptocurrency product Coinbase Lend (Lend), a program that would allow users to earn up to 4% interest annually by lending USD Coin (USDC), a stablecoin pegged to the US dollar. According to the CLO's blog post, Coinbase plans to delay the launch of its Lend product until at least October 2021.

Also on September 7, 2021, in a tweet on the Coinbase blog, Coinbase CEO Brian Armstrong criticized the SEC's handling of the Coinbase plans to roll out Lend, which he believes the SEC had already determined to be a security. Armstrong asserts in these tweets that he attempted to engage with the SEC for months and received the Wells notice shortly after notifying the SEC of Coinbase's plans to move ahead with the Lend product. Coinbase disputes that the Lend program is a security.

According to the CLO post, Coinbase customers would not be "investing" in the program, but rather lending the USDC they hold on Coinbase’s platform. While Lend customers would earn interest from their participation in the Lend program, the CLO post states that Coinbase would have an obligation to pay this interest regardless of Coinbase’s broader business activities. According to the post, customer principal is secure and Coinbase is obligated to repay their USDC upon request. According to the CLO post, the SEC has told Coinbase that it is assessing the Lend product through the prism of the Howey test, which determines when an investment contract (and thus an equity security) has been created, and the Reves test, which determines when a note instrument is a security. The CLO post states that the SEC has not yet shared this assessment, but only that the SEC has conducted it.

For details on the Howey test, as applied to digital assets, see Practice Note, SEC Regulation of Digital Assets: The Howey Test and the SEC's April 2019 Framework for Digital Asset Regulation.

For details on the Reves test under the 1990 US Supreme Court decision in Reves v. Ernst & Young (494 U.S. 56 (1990)), see Legal Updates, Kirschner v. JPMorgan Chase Bank: Syndicated Loans Are Not Securities and When Are Promissory Notes Securities? Fletcher International v. ION Geophysical Corp.

The SEC procedures for Wells notices is set out in Section 2.4 of the SEC Division of Enforcement - Enforcement Manual (November 28, 2017), which states that a Wells notice is a communication from the SEC staff to a person involved in an investigation that:

Coinbase has 30 days, unless SEC grants an extension, to reply to the Wells notice. For more information on the SEC's Wells notice, see SEC Enforcement Manual § 2.4, 17 C.F.R. § 202.5(c) and Practice Note, Roadmap of the SEC's Investigation and Enforcement Process: The Wells Process.

Update: On September 17, 2021 Coinbase posted an updated notice on its blog page announcing that it will not launch the USDC lending program.

In a tweet dated September 16, 2021, Coinbase stated that it has submitted an application to the National Futures Association (NFA) to register Coinbase as a futures commission merchant (FCM) in order to offer cryptocurrency futures and derivatives trading on the company's exchange platforms.

For further information on regulation of digital assets, see Practice Notes:

Cryptocurrency and Virtual Currency Regulatory Tracker.

SEC Regulation of Digital Assets.

FinCEN Regulation of Virtual Currency: Overview.

Decentralized Finance (DeFi): Overview.

See also Practical Law's Blockchain Toolkit.