Coinbase Falls After Disclosing Regulatory Inquiries Over Lending Product

Coinbase shares slumped Wednesday after the largest U.S. cryptocurrency exchange disclosed that federal securities regulators had threatened to sue if it moves forward with a planned lending product.

The stock ($COIN) slid 4.1% on Nasdaq to $256, after falling over 4% on Tuesday amid a broad retreat in cryptocurrency markets.

Coinbase Chief Legal Officer Paul Grewal wrote late Tuesday in a blog post that the U.S. Securities and Exchange Commission (SEC) had sent the company a regulatory warning known as a Wells notice, threatening to sue the exchange if it launches the planned “Lend” program offering a 4% annualized yield on deposits of the dollar-linked stablecoin USDC.

While the regulator has alleged the crypto loan is an unregulated security, Grewal wrote in the blog post that the Lend program isn’t an investment contract or note and doesn’t qualify as security.

”Customers won’t be ‘investing’ in the program but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship,” he wrote. “And although Lend customers will earn interest from their participation in the program, we have an obligation to pay this interest regardless of Coinbase’s broader business activities. What’s more, participating customers’ principal is secure and we’re obligated to repay their USDC on request.”

The SEC’s threat has already drawn the ire of the crypto community, with one top executive arguing on Twitter early Wednesday that the regulator is “directly undermining its own mission to promote those markets.”

Stock investors selling now don’t appear to be waiting for a quick resolution.