Crypto Lending Programs Suffer a Multi-Pronged Attack from State and Federal Regulators

Written by
Jorge Pesok
Published on
September 22, 2021


After an explosive rise in popularity, the future of crypto lending is now in doubt. In recent days, crypto lending programs offered or planned to be offered by companies such as Coinbase, BlockFi, and Celsius Network have become the targets of state and federal securities regulators which claim that their lending programs constitute securities offerings. In this post, we will answer the question posed by Coinbase’s CEO, Brian Armstrong, who after receiving a Wells Notice from the SEC claiming that Coinbase’s planned Lend program was a securities offering, tweeted, “[H]ow can lending be a security?” In doing so, we will quickly analyze Howey and Reves, two seminal Supreme Court Cases that the SEC cited to Coinbase in response to this same question.


Generally, crypto lending programs act much like high yield savings accounts at a bank; a user deposits their crypto with the platform, the platform then uses the deposited crypto to either lend to other customers or for their own proprietary trading desks. In exchange for the deposit, the user receives periodic interest payments. Many crypto lending platforms promise returns ranging from 4 to 14.5 percent for various coins such as bitcoin and stablecoins including USDC and USDT.[1] Considering that the best high yield interest savings account on the market currently offers a whopping 0.50% APY, it is easy to see why these programs are incredibly attractive.


As the SEC explained to Coinbase, it looked to Howey and Reves to support its position that Coinbase’s planned Lend product was a security. The Howey test determines whether an instrument is an “investment contract,” and the Reves test determines whether an instrument is a “note,” both of which are securities.

Howey Test

The Howey test consists of four prongs, all which securities regulators would likely argue are met by crypto lending programs. Below is an analysis of how the SEC likely applied Howey to Coinbase’s Lend program.

  1. Investment of Money - Lend involved an investment of money because Coinbase customers would have invested money in the form of USDC.
  2. Common Enterprise - To fulfill the common enterprise prong, some courts apply a horizontal commonality test: determining whether investor funds are pooled together such that the value of all or most investments rise and fall together. In contrast, other courts apply a vertical commonality test: analyzing whether the investor’s returns are correlated to the returns or efforts of those offering the investment such as the product’s promoter, even if no other investors exist, such that their collective fortunes rise and fall together. Coinbase’s Lend program meets both commonalities. Under the horizontal commonality test, Coinbase proposed to pool its customers’ USDC that it would use to fund loans to other customers, and the profits of those loans would be used to pay the interest to customers. Likewise, under the vertical commonality test, the profits of a Lend customer would have depended on the efforts of Coinbase in lending out the USDC to generate enough profit to pay the interest.
  3. Expectation of Profits - Lend involved an expectation of profit because Coinbase incentivized customers to participate in the program by promising 4% APY.
  4. Profits Solely from the Efforts of the Promoter or a Third Party

Reves Test

By citing to Reves, the SEC was likely indicating that Lend could also be a “note.” The Securities Act of 1933 defines “security” to include, among other things, a “note,” but not all notes are securities. The Supreme Court in Reves identified certain characteristics that make it more or less likely that a “note” qualifies as a security.

In short, if the seller’s (Coinbase) purpose is to raise money for the general use of a business enterprise or to finance substantial investments, and the buyer (the Lend customer) is interested primarily in the profit that the note is expected to generate, the instrument is likely to be a security. In contrast, if the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, or if the product is regulated by another regulator, e.g., if the product is registered as a banking product and the offeree is registered as a bank, then the note is less sensibly described as a security.

The SEC would argue that Lend meets the Reves test and is, therefore, a security because Coinbase marketed the Lend program as an investment, and its intended customers were looking to profit from their investment.

Lastly, Coinbase is not registered as a bank, meaning there is no other applicable alternative regulatory regime overseeing the program and protecting investors. Unlike traditional yield bearing interest savings accounts, crypto lending products are not protected by the Securities Investor Protection Corporation (“SIPC”), the Federal Deposit Insurance Corporation (“FDIC”), or the National Credit Union Administration (“NCUA”). Therefore, in the absence of these alternative investor protection programs, the SEC stepped in to and fulfill one of its mission statements, which is to protect investors.

Though the facts of the state actions brought against BlockFi and Celsius Network are strikingly similar to those of Lend, it is possible that the parties reach a different resolution. An alternative approach would allow such programs to continue to be offered as long as certain safeguards are put in place, e.g., the deposits are fully insured such that the customers face no risk of loss. There is good reason to be hopeful of such a resolution given BlockFi’s announcement that yesterday, September 22, 2021, it received its third extension from New Jersey regulators on its order banning the company from creating new interest-bearing accounts as part of its lending program. The ban was initially supposed to become effective July 22, 2021, but has now been delayed through at least December 1, 2021.

In contrast to Coinbase’s initially defiant posts, the company quietly announced that it would not pursue the Lend program by editing an old blog post. In part, this decision probably reflected Coinbase’s weighing the benefits and disadvantages of a protracted battle with the SEC. The real question that remains is: whether the investors that the SEC seeks to protect are better off now or was this a missed opportunity to negotiate a resolution that provided guidance to the market, allowed this product offering to move forward, and addressed the SEC’s concerns?

For future updates on crypto lending and other rapidly developing regulatory changes that are shaping the new Crypto Frontier, be sure to follow the Tacen Regulatory Corner.


On September 17th, Coinbase, one of “the giants of financial services,” announced that it would not pursue its Lend program, which would have enabled users to earn 4% APY on USD Coin deposits, after receiving a Wells notice from the SEC.

Coinbase’s decision came on the heels of state actions against BlockFi’s crypto lending program, which New Jersey, Texas, and other states had earlier in July designated as an unregistered securities offering.

Texas’ complaint against BlockFi, as a representative sample of other states’ arguments, contended that BlockFi’s lending crypto program constituted an unregistered securities offering because the company was not registered with the SEC and consumer accounts were not protected by the SIPC, the FDIC, or the NCUA.

The Texas complaint against BlockFi emphasized that BlockFi was “not disclosing material information necessary for investors to make an informed decision, including critical material information about the risks associated with purchasing its unregistered securities.”

On September 17th, the same day that Coinbase announced it would not be pursuing its Lend Program, the same group of states who had cracked down on BlockFi announced that they are pursuing actions against Celsius Network’s crypto lending program.

Texas’ complaint against Celsius Network emphasizes the same key reasoning and language as the BlockFi action: undisclosed risks, lack of SEC registration, and the inapplicability of federal banking regimes to provide consumer protections.

[1] See, e.g., BlockFi,, and Gemini.

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