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Coinbase says : The Securities and Exchange Commission has threatened to sue it over a plan to pay interest.

Federal securities regulators have threatened to sue Coinbase, the largest cryptocurrency exchange in the United States, over a proposed financial product that would allow clients to earn interest on digital asset deposits.

The Securities and Exchange Commission alerted the company on Sept. 1 that its Lend product might violate securities rules, according to a regulatory filing. Regulators may pursue a civil injunction in response to Lend's release, according to the company.

The issue raised by Lend — an interest-generating service that resembles traditional bank accounts — is whether it would participate in trading or offer items to consumers that are considered securities, which the Securities and Exchange Commission has the authority to regulate.

The warning to Coinbase, which listed on the public in April, shows that the SEC is keeping a tight eye on cryptocurrency startups, especially when they enter heavily regulated industries like banking. The chairman of the Securities and Exchange Commission, Gary Gensler, has expressed concern about the potential impact of unregulated crypto exchanges and products on markets and investors.

Customers might earn interest on cryptocurrency deposits via Lend, which Coinbase announced in June. Customers will be able to earn interest on USD Coin, a stablecoin whose value is tied to the dollar. Yields would be higher than those available on traditional bank accounts, and Coinbase would be one of many cryptocurrency companies to enter the market.

In online postings, Coinbase executives pushed back against the SEC, claiming that the Lend programme isn't a security and that the commission's notification took them off guard.

“The Securities and Exchange Commission has frequently requested that our industry to "talk to us and come in." "We did that here," says Paul Grewal, Coinbase's chief legal officer, in a blog post. “However, all we know for now is that we can either take Lend off the market indefinitely without knowing why, or we can get sued.”

In a lengthy thread on Twitter, Coinbase's CEO, Brian Armstrong, referred to the SEC as "sketchy" and stated that he travelled to Washington in May to speak with financial regulators from a variety of agencies. “The Securities and Exchange Commission was the only regulator who declined to meet with me,” he added.

Coinbase is facing more regulatory resistance than other bitcoin startups that have released similar goods, according to Mr. Armstrong, because it is asking licence to act.

The Securities and Exchange Commission's (SEC) strategies in going after Coinbase have divided securities lawyers. The SEC's attempt to halt a product launch "seems aggressive," according to Daniel Hawke, an attorney at Arnold & Porter and a former chief of the SEC's market abuse division.

However, some legal experts believe that securities regulators are being cautious in providing Coinbase a fair warning of their concerns, rather than simply letting the business go through with the lending product and then suing it later.

Former S.E.C. official Tyler Gellasch, who now runs the nonprofit Healthy Markets Association, said the commission understood the necessity of properly handling a new type of product entering the market.

“This is a major player in the cryptocurrency space, and they are quite careful when it comes to bringing a hammer down,” he said.

Coinbase isn't the only crypto-based interest-generating service provider in hot water with securities regulators. BlockFi, a cryptocurrency company that provides large profits on assets, has being targeted by officials in five jurisdictions. The CEO of BlockFi, Zac Prince, stated that the company was following the law, but that regulators did not fully comprehend the company's offerings.

In a statement to consumers, he added, “Ultimately, we see this as a chance for BlockFi to assist define the regulatory climate for our ecosystem.”

By the close of trading on Wednesday, Coinbase's shares had fallen a little more than 3%.