Cryptocurrency exchange Coinbase is facing legal action from the regulator, as the US Securities and Exchange Committee warned the firm it will sue if a proposed lending product is launched.

In a blog post, Coinbase's chief legal officer Paul Grewal said the firm had received a Wells notice from the regulator, stating it would pursue legal action against it if a yield product called Lend was brought to market.

The issue stems from whether or not Lend, which is intended to allow users to earn interest on digital assets on the Coinbase platform, is considered an investment contract, which would make it a security under federal law.

Chief executive of Coinbase Brian Armstrong expressed his dismay at the current situation via Twitter, on which he accused the SEC of "sketchy behaviour".

He claimed the firm had complied with all the demands and subpoena requests from the regulator but has still been threatened with legal action despite "zero explanation as to why".

However, Armstrong's comprehension of the situation has been called into question as the CEO seemed to misunderstand the notion of a security, when he asked, "how can lending be a security?".

Founder and CIO of Bronte Capital John Hempton pointed out that The Securities Act of 1933 offers the definition of a security on its first page, which includes lending products, such as bonds.

In light of the current issues, Lend is not due to launch until "at least October".

First published by our sister title Investment Week