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SEC threatens to sue Coinbase over crypto lending product

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MoffettNathanson Partner Lisa Ellis joins the Yahoo Finance Live panel to discuss the latest outlook for Coinbase amid increased regulatory scrutiny.

Video Transcript

[MUSIC PLAYING]

- All right. We're watching, in the Crypto Corner, shares of Coinbase. They're off right now as we head toward the closing bell, about 3%. And part of this is obviously what they blogged about in regards to the Securities and Exchange Commission threatening to take legal action before they can launch this thing that they call Coinbase Lend. We're going to invite into the stream someone who's going to help us understand exactly what's at play here. That would be Lisa Ellis from MoffettNathanson. She's a partner there. And we appreciate you being here.

Let me just jump right into this, because essentially, if I've got it right, Coinbase wanted to create this program called Lend where they would pay interest on the assets-- or let me-- I won't use the word "asset." They pay interest on the currency that you keep in Lend. But the Securities and Exchange Commission is saying you can't go there because it becomes a security. I'm a bit confused. Can you help us understand it?

LISA ELLIS: Yeah, I mean, we wish we all knew, I guess. But yes, Coinbase is planning to launch a product they call Lend which was announced back in the spring whereby they'll pay investors interest if they allow Coinbase to lend out their USD coin, the stablecoin balances being held in their Coinbase account. Now, the SEC has said, no, that type of transaction then makes that a security, presumably under some concept of essentially this is like lending out securities for use for margin.

But they have not-- and Coinbase has been clear about this-- they have not detailed to Coinbase or made public to anyone what their rationale is exactly for determining that this product now qualifies as a security. And in fact, many other exchanges, unregulated, less regulated exchanges than Coinbase, already offer products very similar to this. So it's not clear really why Coinbase is specifically being targeted for this specific product at this time. It seems like they are apparently being made a bit of an example of in this case.

- Lisa, how big of a deal is this for Coinbase? Because when you take a look, you don't want to make too much of one day's action. But you take a look at the stock today. Shares are off. Investors are obviously a little bit concerned. But from your perspective, how significant of a challenge is this for the company going forward?

LISA ELLIS: Yeah, this specific product they haven't even launched yet. And so from that perspective, it's not you core to the revenue or earnings outlook for the business. But the issue, really, here is that Coinbase has deliberately taken the strategy since inception to be very regulator-friendly. They work very closely with regulators. They're licensed, far more regulated and licensed than many of their competitors. And that's been a competitive advantage of theirs.

And so being now targeted by the SEC-- and based on the tweets and whatnot, it's seeming to have escalated to be a little bit antagonistic-- calls into question that positioning. And I think that's a little bit of what investors are concerned about, that maybe now, despite all of their efforts to the contrary, Coinbase is going to become more of a target of regulators. And that could potentially be a challenge.

Also, this is just-- I think in general, we would love to see more clarity in the regulatory side in crypto. That will bring more mainstream investors into crypto if there's more clarity. But the fact that the SEC is coming at this through an enforcement action, a lawsuit, which is intrinsically a bit antagonistic, rather than being collaborative and figuring out how to put guardrails around this industry, is also a source of concern and a worry that this is now going to become more of an overhang on the overall sector.

ADAM SHAPIRO: Well, how likely is it that the SEC in this has-- it's an overreach? Because you used the-- trying to make them, Coinbase, an example. It seems like this is the wrong example, especially with the rumors that they're about to approve US-based ETFs. And you're going to want to have players like Coinbase in your corner.

LISA ELLIS: Yeah, it's a little bit odd. I think that's what everyone is scratching their heads about, because-- and trying to understand what exactly the SEC is going after here, because I agree with you on all of those fronts. If you're going to approve ETFs which then require a lot more transparency and reporting, you want players like Coinbase onboard.

Also, in the world of stablecoins, which are essential to creating stability in the crypto markets and also creating on ramps and off ramps between fiat and crypto, USD Coin is one of the most above-board stablecoins out there, far more so than Tether, for example, where there's always questions about the reserves, et cetera. So it just does strike, I think, everyone. And that's why you're seeing a little bit of this reaction of a bit unexpected and odd that the SEC would be coming at Coinbase related to USD Coin in a fairly antagonistic way. It just is kind of-- it's contrary to the stance that we expected that they would be taking.

- Lisa, when you take a look at the volatility in crypto-- I mean, obviously this is nothing new, but the huge drop that we saw yesterday, Bitcoin falling to its lowest level in about a month-- there's been talk about whether or not this-- the fact that volatility seems to be here to stay when it comes to crypto, if that's going to keep some potential investors on the sideline and keep them a little bit skeptical about jumping in. What do you think? And I guess, how big of-- I guess, what does this mean for a company like Coinbase?

LISA ELLIS: For a company like Coinbase, volatility is good because Coinbase does make about 96% of their revenue from trading-related activity, and trading-related activity benefits from volatility when you have a lot of these price movements back and forth. So it's good for their revenues. I think the challenge the crypto market is having right now is that yesterday's drop was driven by the technical challenges occurring in El Salvador as they tried to roll out Bitcoin as legal tender. And I guess what's coming to head here is that you can't have a healthy crypto trading market that thrives on volatility, and at the same time, have Bitcoin be usable as legal tender to buy things, because people aren't going to buy things with an asset that moves 15% in a day.

And so it's a little bit of shaking out, where do we want Bitcoin to go, and where is this whole market really going to go? It's a little bit at a crossroads. I think we would say Bitcoin itself is more likely to remain volatile, whereas things like stablecoins are what are more likely to be usable for purchases for things like using it as legal tender for everyday purchases where you're actually backed by a fiat currency.

ADAM SHAPIRO: Which adds to this confusion over what the SEC may or may not be trying to accomplish here. And another reason why, Lisa Ellis, we want to put you on speed dial-- because this story will be changing repeatedly over the next couple of days and weeks. Lisa Ellis is a partner at MoffettNathanson. Thank you so much for joining.