Coinbase/SEC Spat Could Hamper Stablecoins

The regulatory landscape continues to evolve for stablecoins — and to steal a line from the Beatles, perhaps “forever, not for better.”

Coinbase, after having been threatened with lawsuits by the Securities and Exchange Commission (SEC), canceled its plans to launch a lending product tied to USDC stablecoins.

The scuttling of USDC APY offers proof that stablecoins will see growing pains and will bump up against agencies and lawmakers that are concerned that traditional financial activities will be laden with more risk amid growing digital currencies and assets.

Read also: Coinbase Kills Lend Product Amid SEC Ire 

In terms of mechanics, as noted in previous reports, users of that lending offering would have been able to loan out their stablecoins and earn 4% interest, while keeping the principal risk-free. And though the SEC’s concerns were not fully delineated in reports — and while Coinbase itself wasn’t clear on the SEC’s concerns — much debate over cryptos in general, and stablecoins in particular, has hinged on “investment contracts,” as defined in a decades-old Supreme Court case known as “Howey.” The SEC has stated that securities laws can apply to digital assets.

Securities or Assets?

The range of that oversight may hinge on whether the cryptos are defined as securities or assets. And if they are deemed securities, that pushes up against the contention that stablecoin advocates harbor – namely, that they are commodity-like in nature, with “stable” backing of dollars and highly liquid holdings that have none of the risks or volatility of other offerings, such as traditional cryptos.

Related news: Circle Squares Transparency on Dollar Reserves 

But there’s a larger issue at play here. With the waters still murky over just what stablecoins are – it stands to reason that it’s not clear how, when or where they can be used. The fact that Coinbase scuttled its lending product launch rather than moving ahead and risking legal action could have a chilling effect on Coinbase’s and other firms’ strides toward stablecoin-underpinned innovation, even while central bank digital currency explorations continue. And the regulators may feel a bit emboldened that the threat of lawsuits got Coinbase to back down.

In a way, the Wells notice (the SEC’s formal notice that an enforcement action is coming) is a way to keep stablecoins “in their lane” at least for now, while definitions and regulatory frameworks are further crystallized. That “lane” seems to be tied to cross-border transactions, as done by commercial firms. A recent PYMNTS study found that 58% of national firms are using cryptos – and of that tally, 29% are using stablecoins. Drilling down even further, almost a third of those firms are using stablecoins for a range of activities, including investing and transacting. The desire is there, but the parameters of what can be done, with USDC and other offerings, have yet to be established.

More details: New Report: 58% of Multinational Firms Are Using Cryptocurrency      

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