Mark Cuban to Coinbase: ‘Go on the offensive’ against SEC over high-yield product

Billionaire investor Mark Cuban says Coinbase should “go on the offensive” against the U.S. Securities and Exchange Commission in its feud over high-yield savings account Lend. Brad Garlinghouse, CEO of Ripple — which is itself embroiled in ongoing litigation with the SEC — quipped “Welcome to the party” in a GIF tweet.

Fast facts

• In a tweet to Coinbase CEO Brian Armstrong, Cuban said the U.S. securities watchdog is using a “Regulation via Litigation” approach and that the SEC is not “capable” of working through the regulation by itself. “They … leave it to the lawyers. Just the people you don’t want impacting the new technologies. You have to go on the offensive,” he wrote.

• The debate is over Lend, a new Coinbase yield-generating crypto product that promises to enable approved customers to lend their tokens in return for high rates of interest. The product was publicly announced in June and is yet to be launched. The SEC considers Lend a security, or an investment contract, while Coinbase disagrees.

• The exchange has held discussions with the SEC for six months, only to receive last week a formal notice of intention to sue from the SEC if Coinbase launches Lend. Armstrong claims the regulator is acting “sketchy” by refusing to offer explanations behind its conclusion that Lend is a security, especially when similar products already operate in the U.S. Coinbase’s share prices dropped 3.2% on Wednesday after Coinbase announced the dispute. Ripple’s Chief Technology Officer claimed on Wednesday that the SEC treating Lend as a security is obvious although Coinbase says it is clueless about it.

• Crypto litigator Benjamin Sauter told Forkast.News today that Lend appears more like an “interest-bearing account” that is not ordinarily classified as a security. “Of course, the SEC has not yet shared with the public what is different about Lend than standard interest-bearing accounts, and as such, we lack insight into why the agency appears to want to adopt a different view for crypto,” Sauter said. “Ultimately it will probably require a motivated company testing the SEC’s theories in court before we have meaningful clarity. Just because the SEC might want to regulate doesn’t mean that it has the authority to do so.” 

• However, Preston Byrne, a popular crypto lawyer, believes U.S. law classifies all yield products as securities. ” ‘Yield’ products are securities. They differ in no material respect from an unsecured bond. They just don’t use the name. Other countries, like England, have debt crowdfunding rules. US cos should check that out and we should emulate those rules here,” Byrne tweeted.

• SEC Chair Gary Gensler had recently said in an interview that crypto companies should consult regulators before launching products. Despite doing that, Coinbase feels its move to be cooperative has brought it much trouble, but Sauter says it is not a surprise. “Regulators are looking for the path of least resistance to garner company information, and they are publicizing the cooperative approach as a way to do so. In reality, though, the SEC is not signing off on crypto projects, and those that do cooperate with them are often met with roadblocks or litigation,” Sauter said. 

• Both Gensler and the SEC Enforcement Director Gurbir Grewal want to expand the SEC’s enforcement, jurisdictional and regulatory capabilities, so “relying on an interactive dialogue is often an exercise in futility,” Sauter said. According to Sauter, regulators use company self-disclosures and cooperation as an “opportunity to wield regulatory leverage without providing meaningful guidance in return,” as in the case of Coinbase, which Sauter believes is “one of the best actors in the industry.” Therefore, crypto businesses should consider the SEC and other regulators as “adversaries” and treat discussions with them as “negotiations” rather than cooperation or obligation, Sauter said.

• If and when Coinbase does launch Lend, the company will be sued by the SEC and as Cuban says, it should be ready to be aggressive. Sauter says there are several ways companies “can, and often should, push back,” and that being aggressive can also “yield favorable results for companies in the crypto industry.”