Coinbase CEO: we're preparing to go to court with the U.S. SEC(cnbc.com)
cnbc.com
Coinbase CEO: we're preparing to go to court with the U.S. SEC
https://www.cnbc.com/2023/04/18/coinbase-ceo-says-it-is-preparing-to-go-to-court-with-the-us-sec-.html
235 comments
There's a few people picking sides here in the comments. Just reminding everybody that it's possible for two sides to be at issue; the SEC can be trying its best to apply its mandate in a world where technology has surpassed the law, and in a void of congressional action, and as a result giving very vague guidance so that it can squeeze its mandate into the crypto realm. And Coinbase can be purposely threading the needle in an area they know could probably be interpreted as being SEC regulated. In my opinion, Congress is the problem here, and their inaction is going to cause this to get duked out in the court, when it didn't have to be so.
I think part of the issue here is that the SEC is being decidedly coy. The remedy they are seeking is for the industry to essentially end itself.
I think it's fine to say that the SEC is trying it's best to apply a mandate and them seeking guidance from congress are all good ideas, but them beating around the bush and attempting some subterfuge is not a good look for a regulatory agency.
I think it's fine to say that the SEC is trying it's best to apply a mandate and them seeking guidance from congress are all good ideas, but them beating around the bush and attempting some subterfuge is not a good look for a regulatory agency.
> The remedy they are seeking is for the industry to essentially end itself.
Or in other words "register as securities exchange".
Or in other words "register as securities exchange".
... which would require ditching all of their customers and establishing a brokerage. We're talking about a fundamentally different business that is not distinguishable from any existing business. Coinbase as we know it would be dead.
And what's the fundamental problem with that?
No business has an inalienable right to government support or sanction for their business model, least of all when their business is 100% in an area that is brand-new, poorly-understood, poorly-regulated, and absolutely rife with scams.
No business has an inalienable right to government support or sanction for their business model, least of all when their business is 100% in an area that is brand-new, poorly-understood, poorly-regulated, and absolutely rife with scams.
Sure, but I don't think it should be the government's prerogative to shut down businesses either, just on the grounds that regulators find the industry annoying. If people want to buy their silly crypto trinkets I don't see how moving it behind the curtain of a brokerage actually helps anyone.
I mean, the whole SEC thing is a bit of theater: they can't actually do anything to protect against frauds and scams and bad investments. All they can do is to push assets into the high-speed traffic of professional traders and hope that the market sorts things out for itself.
I mean, the whole SEC thing is a bit of theater: they can't actually do anything to protect against frauds and scams and bad investments. All they can do is to push assets into the high-speed traffic of professional traders and hope that the market sorts things out for itself.
"Find the industry annoying" is an interesting way to characterize a regulatory agency that has investigated a situation and determined that it breaks the law.
Uh, that's not at all how I would characterize the situation. There was no real investigation - the determination that crypto assets are securities is really a philosophical one. Like a court determining whether a tomato is a fruit or a vegetable.
And again, the implication here is that anyone buying and selling a crypto asset outside of a brokerage is breaking the law. According to the grounds the SEC is using here, if I wanted your Dogecoin there would be no legal way for us to transfer it without involving a brokerage firm.
And again, the implication here is that anyone buying and selling a crypto asset outside of a brokerage is breaking the law. According to the grounds the SEC is using here, if I wanted your Dogecoin there would be no legal way for us to transfer it without involving a brokerage firm.
> There was no real investigation
Do you know this? Because I haven't seen anything one way or another.
If the SEC did an extensive months-long project researching the cryptocurrency space, the philosophy and technology behind it, and how it's used in practice, why would that necessarily be something that was made public? Seems to me that sort of thing is just doing their jobs, and not something they would need to loudly announce.
As for the specifics...I don't pretend to understand the relevant laws well enough myself to state with any confidence what the SEC does or doesn't hold to be illegal, except for one thing: whatever it is Coinbase is doing, which they clearly think is illegal. You're the one making bold broad claims, with very little evidence, about what the SEC is or isn't doing—and these claims seem very much slanted to paint the SEC as being in the wrong.
So, again: Do you know what the SEC has and hasn't done here? If so, then please share with us, as that would be very relevant information to this discussion as a whole.
Do you know this? Because I haven't seen anything one way or another.
If the SEC did an extensive months-long project researching the cryptocurrency space, the philosophy and technology behind it, and how it's used in practice, why would that necessarily be something that was made public? Seems to me that sort of thing is just doing their jobs, and not something they would need to loudly announce.
As for the specifics...I don't pretend to understand the relevant laws well enough myself to state with any confidence what the SEC does or doesn't hold to be illegal, except for one thing: whatever it is Coinbase is doing, which they clearly think is illegal. You're the one making bold broad claims, with very little evidence, about what the SEC is or isn't doing—and these claims seem very much slanted to paint the SEC as being in the wrong.
So, again: Do you know what the SEC has and hasn't done here? If so, then please share with us, as that would be very relevant information to this discussion as a whole.
Like when the government shut down a startup by some guy named Ross who was just trying to make a buck on the internet with his unregulated pharmacy. What a travesty.
/s
/s
Then why won't they let them do exactly that? https://finance.yahoo.com/news/coinbase-says-just-no-way-to-...
The SEC isn't being coy at all. The current SEC chair has said repeatedly ever since he was appointed that most crypto assets are clearly securities under the existing law, and therefore crypto exchanges must register as securities exchanges. Crypto industry execs would just prefer to be unregulated, and are pretending to be confused about what the SEC wants to trick you into taking their side.
> Crypto industry execs would just prefer to be unregulated, and are pretending to be confused about what the SEC wants to trick you into taking their side.
It's also why they are loudly calling for Congress to weigh in. They know that their business will be nuked from orbit the second the laws on the books will be applied to them, so they are hoping that Congress carves out an exemption for them.
It's also why they are loudly calling for Congress to weigh in. They know that their business will be nuked from orbit the second the laws on the books will be applied to them, so they are hoping that Congress carves out an exemption for them.
Well, it's not just their business. The SEC is telegraphing that they want to label all cryptocurrencies as securities. Without action from congress the entire technology is practically dead. No one is going to contribute to Ethereum if they have to log into a Schwab account to buy Ether.
I've only seen bad behavior from the SEC since I started following their crypto-crusade. Both Coinbase and Telegram came to the SEC voluntarily and asked for guidance. The SEC did not consult in good faith, instead springing the trap when either company announced their crypto product. For Telegram, it was TON, for Coinbase, it was Lend. [1]
Whatever your feelings on crypto, these are bad actions and if embodied in a person, I would tell the world far and wide of this person's poor character and total lack of ethics.
[1] https://www.coinbase.com/blog/the-sec-has-told-us-it-wants-t...
Whatever your feelings on crypto, these are bad actions and if embodied in a person, I would tell the world far and wide of this person's poor character and total lack of ethics.
[1] https://www.coinbase.com/blog/the-sec-has-told-us-it-wants-t...
Why would the SEC need congressional action to regulate securities (which is what some of the crypto tokens traded on exchanges are)?
Why would Coinbase think that it could run a securities brokerage, exchange, and clearing house without registering with the SEC?
Just because you've added '... But on the internet' to your business model does not require additional legislature to determine whether or not you are trading securities.
Why would Coinbase think that it could run a securities brokerage, exchange, and clearing house without registering with the SEC?
Just because you've added '... But on the internet' to your business model does not require additional legislature to determine whether or not you are trading securities.
Back in 2018, the SEC considered decentralization as an excluding criterion.
https://corpgov.law.harvard.edu/2022/12/06/why-cryptoassets-...
https://corpgov.law.harvard.edu/2022/12/06/why-cryptoassets-...
Why not link to the actual SEC guidance, instead of an op-ed by a crypto CEO that is reading what she wants[1] to read from it?
https://www.sec.gov/files/dlt-framework.pdf
It's only a few pages, and nothing in it indicates that decentralization is sufficient as an excluding criterion.
> Although no one of the following characteristics of use or consumption is necessarily determinative, the stronger their presence, the less likely the Howey test is met:
You can't just cherrypick the words that you want to hear in a sentence, exclude all the other words, and claim that the SEC gave the green-light to decentralized crypto! In fact, nearly all of the exculpatory characteristics listed just below that paragraph focus on the utility value of a crypto token, as opposed to its speculative value! The real versus speculative value (Storing data on filecoin, versus trading filecoin around) is what's most important to the SEC, not how decentralized the network is!
... Also, most crypto is ridiculously centralized, and if Coinbase listed even one of the problem tokens, they are... Running an illegal securities exchange.
---
[1] Read the actual SEC guidance, and try to square it with this quote by Jai Massari, the author of that op-ed:
> First set out in a 2018 speech by SEC Corporation Finance Division Director William Hinman, and then described in more detail in 2019 staff guidance,[6] the core idea is that where a blockchain project is sufficiently decentralized, the cryptoasset associated with the project will not be or represent an “investment contract” under the so-called Howey test,
If that's what she gets out of the SEC document (linked above), Jai doesn't have the reading comprehension of a high-schooler[2], let alone one that's appropriate for a 'visiting lecturer' at Berkeley!
[2] What she seems to have is an incredibly motivated reading comprehension. The same kind of motivated reading comprehension that's currently landing Coinbase into hot water.
https://www.sec.gov/files/dlt-framework.pdf
It's only a few pages, and nothing in it indicates that decentralization is sufficient as an excluding criterion.
> Although no one of the following characteristics of use or consumption is necessarily determinative, the stronger their presence, the less likely the Howey test is met:
You can't just cherrypick the words that you want to hear in a sentence, exclude all the other words, and claim that the SEC gave the green-light to decentralized crypto! In fact, nearly all of the exculpatory characteristics listed just below that paragraph focus on the utility value of a crypto token, as opposed to its speculative value! The real versus speculative value (Storing data on filecoin, versus trading filecoin around) is what's most important to the SEC, not how decentralized the network is!
... Also, most crypto is ridiculously centralized, and if Coinbase listed even one of the problem tokens, they are... Running an illegal securities exchange.
---
[1] Read the actual SEC guidance, and try to square it with this quote by Jai Massari, the author of that op-ed:
> First set out in a 2018 speech by SEC Corporation Finance Division Director William Hinman, and then described in more detail in 2019 staff guidance,[6] the core idea is that where a blockchain project is sufficiently decentralized, the cryptoasset associated with the project will not be or represent an “investment contract” under the so-called Howey test,
If that's what she gets out of the SEC document (linked above), Jai doesn't have the reading comprehension of a high-schooler[2], let alone one that's appropriate for a 'visiting lecturer' at Berkeley!
[2] What she seems to have is an incredibly motivated reading comprehension. The same kind of motivated reading comprehension that's currently landing Coinbase into hot water.
> most crypto is ridiculously centralized
That is true.
IMO Bitcoin is the only crypto is that is legitimately decentralized; no single governing organization.
That is true.
IMO Bitcoin is the only crypto is that is legitimately decentralized; no single governing organization.
It's not the only one. Dogecoin, for example. I do not mean to defend Dogecoin or lend it any legitimacy. But it clearly does not meet the criteria for a security as it was simply a very early fork of Bitcoin where some zeros were added and "Bit" was replaced with "Doge."
True
> Why would Coinbase think that it could run a securities brokerage, exchange, and clearing house without registering with the SEC?
They saw Uber and Airbnb steamroll through taxi and hotel regulations successfully. But that was local, and SEC is federal.
They saw Uber and Airbnb steamroll through taxi and hotel regulations successfully. But that was local, and SEC is federal.
You're getting downvoted, but you're 100% correct.
> Why would Coinbase think that it could run a securities brokerage, exchange, and clearing house without registering with the SEC?
Coinbase is a public company on NASDAQ. They are about as registered with the SEC, as possible.
Update: cause I'm getting downvotes. See below. The point that I'm making is that if this company is acting illegally, then why is it still trading?
Coinbase is a public company on NASDAQ. They are about as registered with the SEC, as possible.
Update: cause I'm getting downvotes. See below. The point that I'm making is that if this company is acting illegally, then why is it still trading?
The registration under discussion here is registration as a broker-dealer, or an exchange, or whatever, not as a listed company.
Tom Anderson, of myspace? Wow. Hi!
Let me direct you to this:
https://finance.yahoo.com/news/coinbase-says-just-no-way-to-...
The whole point here is that Coinbase is acting in good faith by trying to do things "the right way"... including becoming a public company and trying to register in whatever compliance ways they can. All the way to announcing that they will go to court over all of this. All because their existing efforts haven't worked.
Update: the discussion is happening right now around how coinbase is a public company that is being declared that it is doing illegal things. If so, then why is it still trading?
https://www.youtube.com/live/DSsp8Rvh5n0?feature=share
-4:15
Let me direct you to this:
https://finance.yahoo.com/news/coinbase-says-just-no-way-to-...
The whole point here is that Coinbase is acting in good faith by trying to do things "the right way"... including becoming a public company and trying to register in whatever compliance ways they can. All the way to announcing that they will go to court over all of this. All because their existing efforts haven't worked.
Update: the discussion is happening right now around how coinbase is a public company that is being declared that it is doing illegal things. If so, then why is it still trading?
https://www.youtube.com/live/DSsp8Rvh5n0?feature=share
-4:15
> If so, then why is it still trading?
Because breaking the law does not cause your stock to be delisted?
I'm not informed enough of the SEC complaint to have much of an opinion on how valid the SEC's or Coinbase's respective cases are, but "I can still by stock" is no evidence that Coinbase isn't breaking the law or violating regulations. Companies do illegal things all the time, delisting the stock and shuttering the company is a resolution of last resort, not first resort.
Because breaking the law does not cause your stock to be delisted?
I'm not informed enough of the SEC complaint to have much of an opinion on how valid the SEC's or Coinbase's respective cases are, but "I can still by stock" is no evidence that Coinbase isn't breaking the law or violating regulations. Companies do illegal things all the time, delisting the stock and shuttering the company is a resolution of last resort, not first resort.
> Tom Anderson, of myspace? Wow. Hi!
No, i'm the one from Beavis and Butt-Head.
No, i'm the one from Beavis and Butt-Head.
If what you are doing requires registering with the SEC for it to be legal, and there's no way to register what you are doing with the SEC, then that means that it is illegal to do what you are doing (like how could you think that possibly means you are free to go do that thing?).
If there is no way to register with the SEC to run a securities brokerage, exchange, and clearing house, then what's the point of the SEC again?
There's no way to register these securities with the SEC, because their creators aren't interested in being in compliance with securities laws. It would require more transparency and accountability than they would like.
As a result, the SEC does not allow anyone to run an exchange that trades those illegal securities.
Being a registered security isn't hard, all sorts of stupid and speculative instruments get registered. If your shitcoin isn't able to get registered, the fault is with it, not the SEC. If your exchange isn't allowed to trade that shitcoin, the fault is with the coin, not the SEC. It's not the SEC's job to provide guidance on how to run an exchange that trades in unregistered securities. The only guidance it should provide in answer to that query is 'You can't.'
As a result, the SEC does not allow anyone to run an exchange that trades those illegal securities.
Being a registered security isn't hard, all sorts of stupid and speculative instruments get registered. If your shitcoin isn't able to get registered, the fault is with it, not the SEC. If your exchange isn't allowed to trade that shitcoin, the fault is with the coin, not the SEC. It's not the SEC's job to provide guidance on how to run an exchange that trades in unregistered securities. The only guidance it should provide in answer to that query is 'You can't.'
> Being a registered security isn't hard, all sorts of stupid and speculative instruments get registered. If your shitcoin isn't able to get registered, the fault is with it, not the SEC.
You're contradicting yourself there. If it isn't hard, it should be easy for a shitcoin to get registered then.
You're contradicting yourself there. If it isn't hard, it should be easy for a shitcoin to get registered then.
Not necessarily a contradiction, no. It can be very easy to do something, and lots people failing to do so because they refuse to follow the simple rules around it. (how much that is the case with shitcoins I don't know, but it's at least believable that many of them didnt make a serious attempt because it'd get in the way of making lots of money by exaggerated marketing)
Now you're just generalizing with platitudes and snarky comments about exaggerated marketing. This isn't just about shitcoins and you know it.
Gensler, just yesterday, couldn't even answer a simple question about ETH being a security and that's the second largest marketcap crypto out there.
Pretending that crypto is only made up of shitcoins doesn't mean that it is going to magically go away. It is here to stay. The cat is out of the bag.
The SEC can only bury its head for so long and that's clearly coming to light now. You've got Warren with her stupid 'war on crypto' and Gensler as her puppet talking head.
Things need to change and Coinbase is going to have to sue them to get that change. That speaks more to the lack of clarity in the SEC, than to anything Coinbase is or isn't doing well.
Gensler, just yesterday, couldn't even answer a simple question about ETH being a security and that's the second largest marketcap crypto out there.
Pretending that crypto is only made up of shitcoins doesn't mean that it is going to magically go away. It is here to stay. The cat is out of the bag.
The SEC can only bury its head for so long and that's clearly coming to light now. You've got Warren with her stupid 'war on crypto' and Gensler as her puppet talking head.
Things need to change and Coinbase is going to have to sue them to get that change. That speaks more to the lack of clarity in the SEC, than to anything Coinbase is or isn't doing well.
If a shitcoin can't meet the low, low bar for registration, that's an indictment of the shitcoin, not of my argument. Don't walk, run away from it.
What about ETH then?
https://twitter.com/twobitidiot/status/1648732457448120321
https://twitter.com/twobitidiot/status/1648732457448120321
No, coinbase is trying to trade unregulated securities and asking the SEC to give them the OK before hand so they don't end up in court. Predictably, the SEC's not going to do that.
> No, coinbase is trying to trade unregulated securities
And why are those securities (if they are actually securities, which Gensler and the SEC can't even agree on), available to purchase and not regulated? Someone else in this thread just compared this to buying fentanyl. It isn't like there is the FDA giving out spec sheets on drugs.
And why are those securities (if they are actually securities, which Gensler and the SEC can't even agree on), available to purchase and not regulated? Someone else in this thread just compared this to buying fentanyl. It isn't like there is the FDA giving out spec sheets on drugs.
> cause I'm getting downvotes. See below. The point that I'm making is that if this company is acting illegally, then why is it still trading?
Is your position that no publicly traded company has ever done anything illegal?
Is your position that no publicly traded company has ever done anything illegal?
Not what I'm saying at all. I'm saying that a publicly traded company went through all of the due diligence that it takes to become a publicly traded company (if you've ever been through that, it is pretty intense) and then asked for further clarification on their existing practices, couldn't get that, then got served a wells notice and is now having to go to court to get further clarification. All because the SEC can't or won't give clear guidance on things that they are supposed to be in charge of.
> asked for further clarification on their existing practices, couldn't get that,
That's not right. They got clarification they just didn't like the answer.
That's not right. They got clarification they just didn't like the answer.
https://finance.yahoo.com/news/coinbase-says-just-no-way-to-...
"When we ask specific questions: How do we get to a path to registration? There's never an answer," Shirzad said.
"When we ask specific questions: How do we get to a path to registration? There's never an answer," Shirzad said.
I asked the DEA how to get a path to register to be able to sell fentanyl to anyone, they didn't have any answer so I just opened up shop.
Terrible analogy. fentanyl requires a prescription to get access to it. There are well defined processes for this.
Until the SEC defines what sort of requirements there are to purchase crypto (like the FDA has [0]), coinbase isn't doing anything illegal by selling it.
[0] https://www.accessdata.fda.gov/drugsatfda_docs/label/2019/01...
Until the SEC defines what sort of requirements there are to purchase crypto (like the FDA has [0]), coinbase isn't doing anything illegal by selling it.
[0] https://www.accessdata.fda.gov/drugsatfda_docs/label/2019/01...
There are well-defined processes for selling unregistered securities.
Either get them registered, or don't sell them.
Either get them registered, or don't sell them.
Bad analogy because Coinbase isn't you. Coinbase is a licensed securities dealer. So that would be more like a licensed drug distributor asking the DEA how to get a license to distribute fentanyl to hospitals. And the DEA would happily answer them.
> Coinbase is a public company on NASDAQ. They are about as registered with the SEC, as possible.
That is not even close to correct. NASDAQ itself is a publicly traded company (quote: NDAQ), that nonetheless has to register separately as a securities exchange.
That is not even close to correct. NASDAQ itself is a publicly traded company (quote: NDAQ), that nonetheless has to register separately as a securities exchange.
I actually agree with Armstrong here - the SEC has had plenty of time to assess the market for crypto products and offer clear rules...it almost feels like the indecisiveness is an intentional policy used to cow the industry.
That's one way of looking at it.
The other way of looking at it is that everyone who went to the SEC and asked them if they could do something was told absolutely not. The people who didn't ask seemed to be getting away with it. So everyone stopped asking. However that didn't change the facts of the situation.
At some point even the mightiest ostrich must get rekt.
The other way of looking at it is that everyone who went to the SEC and asked them if they could do something was told absolutely not. The people who didn't ask seemed to be getting away with it. So everyone stopped asking. However that didn't change the facts of the situation.
At some point even the mightiest ostrich must get rekt.
The sec is not a supervisory agency, they’re a regulator meaning they step in after the fact for investor protections.
The sec had plenty of open sessions where folks in the industry would ask for guidance and yet it was not gotten because they don’t tell the capital or crypto markets what should be in the markets they’re here to pull down the things that shouldn’t be.
The sec allows “junk bonds” if you disclose the risk, the credit default swap maybe shouldn’t exist but it does... and is one of the most heavily traded securities.
Heck, you can buy VIX for CDS... let’s think about that for a second... that’s a mortgage, packed into a portfolio, that has a derivative, and that derivative’s volatility is tradeable.
That’s a FAAAAAAAAAAR more speculative asset than crypto and yet it still trades at higher volume than crypto does.
The sec had plenty of open sessions where folks in the industry would ask for guidance and yet it was not gotten because they don’t tell the capital or crypto markets what should be in the markets they’re here to pull down the things that shouldn’t be.
The sec allows “junk bonds” if you disclose the risk, the credit default swap maybe shouldn’t exist but it does... and is one of the most heavily traded securities.
Heck, you can buy VIX for CDS... let’s think about that for a second... that’s a mortgage, packed into a portfolio, that has a derivative, and that derivative’s volatility is tradeable.
That’s a FAAAAAAAAAAR more speculative asset than crypto and yet it still trades at higher volume than crypto does.
> That’s a FAAAAAAAAAAR more speculative asset than crypto and yet it still trades at higher volume than crypto does.
The difference is that most volume in crypto is fake, and the price is controlled by a small cartel of exchange owners and an $82B Bahamian counterfeiting operation whose 'bank' is run by the creator of Inspector Gadget. That's the risk that's not disclosed.
The difference is that most volume in crypto is fake, and the price is controlled by a small cartel of exchange owners and an $82B Bahamian counterfeiting operation whose 'bank' is run by the creator of Inspector Gadget. That's the risk that's not disclosed.
If the price is controlled why does it drop so much?
Those in the cartel need exit liquidity sometimes. It's manipulated, not 100% controlled.
If you're the house, then you profit when you know where it's going. The bigger the move, the more profit you can make.
[deleted]
While derivatives have certainly been abused and traded recklessly, they aren't inherently bad or reckless. In fact, the first order use for most is to reduce volatility as a hedging mechanism. Selling covered call options to reduce volatility or using a CDS to guard against default risk are normal things that happen all the time, they just don't make headlines because they are common and boring transactions.
Derivatives have uses and risks just like any other financial instrument and need to be well regulated, not demonized.
Derivatives have uses and risks just like any other financial instrument and need to be well regulated, not demonized.
> Heck, you can buy VIX for CDS... let’s think about that for a second... that’s a mortgage, packed into a portfolio
Are you thinking MBS maybe? CDS is credit default swap, has nothing to do with mortgages
Are you thinking MBS maybe? CDS is credit default swap, has nothing to do with mortgages
I think he means you can buy a volatility index on the market for CDSs for MBSs, it's a derivative of a derivative essentially.
In this case you would want to be long such a product when people become suddenly concerned about default risk of MBS but you yourself don't want to be long CDSs on those MBS.
A good reason for this could be you are worried that similar to 2008 going long CDSs could leave you subject to intolerable counter-party risk while the vendor offering the derivative could perhaps be more solvent in the case your VIX contracts pay out. Or it simply offers you more leverage, "jacked to the tits" in The Big Short parlence.
Very speculative regardless but that is just how higher order derivative products in finance are.
In this case you would want to be long such a product when people become suddenly concerned about default risk of MBS but you yourself don't want to be long CDSs on those MBS.
A good reason for this could be you are worried that similar to 2008 going long CDSs could leave you subject to intolerable counter-party risk while the vendor offering the derivative could perhaps be more solvent in the case your VIX contracts pay out. Or it simply offers you more leverage, "jacked to the tits" in The Big Short parlence.
Very speculative regardless but that is just how higher order derivative products in finance are.
The way he described it, he's talking about CDS. "a mortgage, packed into a portfolio (MBS), that has a derivative (CDS), and that derivative’s volatility (VIX for CDS) is tradeable."
CDS is (usually) a derivative on MBS - it's a promise to pay out if a given MBS security defaults.
CDS is (usually) a derivative on MBS - it's a promise to pay out if a given MBS security defaults.
Coinbase has asked them many times though. The article even mentions this. They met 30 times to seek clarity on the rules.
The SEC doesn’t give out legal advice.
They ought to. Giving advice is the difference between having the government work with the people, on the same side, and having it be an adversary.
The goal should be legal compliance and productive companies.
Not clarifying what you will or will not prosecute simply creates unnecessary fear and distrust of the system. Think of all the crime that would not be committed if only the SEC said it was criminal before hand. Maybe thousands of people wouldn’t have lost money to crypto scams if there were greater clarity.
The goal should be legal compliance and productive companies.
Not clarifying what you will or will not prosecute simply creates unnecessary fear and distrust of the system. Think of all the crime that would not be committed if only the SEC said it was criminal before hand. Maybe thousands of people wouldn’t have lost money to crypto scams if there were greater clarity.
SEC doesn't give legal advice because they don't make the laws.
Want legal advice? Talk to a lawyer. But if your council tells you it's OK to push some boundaries then don't be surprised if you get slapped. And if you don't like getting slapped then you can go to court. Which is exactly what is happening. Seems like the system is working as intended.
Want legal advice? Talk to a lawyer. But if your council tells you it's OK to push some boundaries then don't be surprised if you get slapped. And if you don't like getting slapped then you can go to court. Which is exactly what is happening. Seems like the system is working as intended.
The SEC enforces the law, and it should be totally normal for them to say "this is how we plan to enforce this law". By not saying so, they create a lot of unnecessary churn.
Imagine you are outside a store, and there is a police officer outside. You ask them "If I go inside and take some bread off the shelf and walk out without paying, is that ok?". Should the officer say "talk to a lawyer" or should they say "I would arrest you on the way out"?
They aren't offering legal advice, they are just telling you how they will enforce the law. And heck, maybe you'll go to court and get it overturned. But at least you know what enforcement actions will be taken.
Imagine you are outside a store, and there is a police officer outside. You ask them "If I go inside and take some bread off the shelf and walk out without paying, is that ok?". Should the officer say "talk to a lawyer" or should they say "I would arrest you on the way out"?
They aren't offering legal advice, they are just telling you how they will enforce the law. And heck, maybe you'll go to court and get it overturned. But at least you know what enforcement actions will be taken.
You wouldn’t need to ask the SEC that hypothetical because you can see their long history of bringing cases against “bread thieves” and (correctly) infer that they would bring a similar suit against you for the same or similar conduct. To the extent you think your hypothetical situation differs enough from the case history that you and your lawyers are genuinely unsure (or, more commonly, genuinely believe they wouldn’t charge you) then you can ask them via a No Action Letter which is basically a formal way of asking them “What would you do if I did XYZ?” The risk, of course, is that they’ll tell you they would view XYZ as a violation of federal securities laws and take action accordingly. There’s also the risk that they’ll change their mind— it’s not a promise or even a permanent reprieve. It’s just one “police officer” telling one person how they would hypothetically respond to that one fact pattern at that one moment in time. The next “officer” might take an entirely different view.
First of all, not everything can be reduced to the absolute most simplistic of metaphors like you're trying to do.
Second,
> Last month, the SEC issued Coinbase with a Wells notice, which is often one of the final steps before the regulator formally issues charges. It generally lays out the framework of the regulatory argument and offers the potentially accused an opportunity to rebut the SEC’s claims.
It sounds like Coinbase has gotten the answers they were looking for, they just don't like it.
Second,
> Last month, the SEC issued Coinbase with a Wells notice, which is often one of the final steps before the regulator formally issues charges. It generally lays out the framework of the regulatory argument and offers the potentially accused an opportunity to rebut the SEC’s claims.
It sounds like Coinbase has gotten the answers they were looking for, they just don't like it.
It doesn't seem like Coinbase has received such answers, they just know that some sort of enforcement action is coming. As per the article, "[Armstrong says] the company has not got any more information on the specific issues the SEC has".
E.g. here's Gensler refusing to answer whether the SEC considers ETH a security - https://twitter.com/sassal0x/status/1648338351832064003
E.g. here's Gensler refusing to answer whether the SEC considers ETH a security - https://twitter.com/sassal0x/status/1648338351832064003
You don't need to make the laws to give advice. Are you saying the SEC can't or isn't required? Because not being required does not mean they shouldn't do it.
The vast majority of government workers (including such lowly people as the workers who check applications for food stamps) cannot give advice because humans are fallible and will get it wrong sometimes. The government doesn't want people suing them for that situation, so they just ban all advice basically.
Is that correct? If I am taking a company public, or some other activity that falls under their purview, can I not ask the SEC to provide guidance on the appropriate measures to take?
Yes, of course, a lawyer can provide that. But surely, the SEC should be able to provide advice or point to resources on how to be compliant if needed?
If not, I'm really surprised.
Yes, of course, a lawyer can provide that. But surely, the SEC should be able to provide advice or point to resources on how to be compliant if needed?
If not, I'm really surprised.
Social workers seem to give advice.
IRS also looks like it can advise you as to what you need to do to avoid further action against you.
It’s not as if no one can ever get advise from the government bodies.
It’s not as if no one can ever get advise from the government bodies.
The problem is always something like this: "I'm telling the SEC that I'm doing A, B, C. SEC says it's legal. Later, SEC finds out I'm really doing A, B, C, D, which is illegal"
The SEC isn't dumb enough to be trapped into an opinion that can be twisted around.
The SEC isn't dumb enough to be trapped into an opinion that can be twisted around.
But this is only a "problem" for those who want to ride right on the line of what's technically legal. People who strive to stay within what the law is trying to accomplish, who are with the spirit of the law rather than the letter, have no such issues.
I’m just coming at this from a consumer point of view. I want the SEC to be effective so when I invest in some new commodity or security then I know that it at least legal and I won’t lose all my money due to the government declaring it not.
That isn’t the function of the SEC. They make sure issuers have complied with disclosure requirements so investors can make their own decisions. They make sure you get full and fair disclosure and that’s about it. They’re more like the FDA’s regulation of cosmetics (here are the rules, we’ll assume you’re following them and we’ll take action if/when we suspect you’re not) rather than the FDA’s regulation of pharmaceuticals (prove to us this works and is safe before you sell it).
Nonsense. The SEC, like all regulatory agencies, provides legal guidance and interpretations in order that people may follow the law. Here is a link to them doing just that: https://www.sec.gov/rules/interp.shtml
That’s not even remotely the same as showing up at their office and asking them to apply the law to your specific scenario. That’s what lawyers do. And if your lawyers are unsure they can ask the SEC via the No Action letter process. For CoinBase to say “well we had a bunch of meetings and we asked them to explain the law to us” is disingenuous because of course they’re not going to get an answer that way. That’s not how the SEC works and that isn’t their job. Do you know why they didn’t go the No Action route? Because they knew the answer they’d get and they didn’t like it.
> they can ask the SEC via the No Action letter process
So you admit that they do give legal advice. Thank you.
So you admit that they do give legal advice. Thank you.
No. No Action Letters are absolutely not legal advice and they all specifically state as much.
[deleted]
Exactly, there here to step in when things go bad. This is regulatory overreach.
This reminds me a lot of a different Armstrong repeatedly saying that he couldn’t be doping because he was the most drug-tested athlete in history. In reality, the law is perfectly clear and hasn’t changed in decades, so what would giving clarity even mean?
If the law is perfectly clear, is ETH a security or a commodity? Gensler can't even answer that question.
https://twitter.com/sassal0x/status/1648338351832064003
https://twitter.com/sassal0x/status/1648338351832064003
Clarity can include explaining how some laws apply in situations relevant to Coinbase or crypto currencies. Sometimes dots need to be connected.
Armstrong says they did, and says they met to discuss things like this. We will see what happened in reality during the course of the court case. I don't think it is wise to trust the words of any crypto actors.
I don't agree with you. There are many actors in the crypto ecosystem and sadly the scammers and bad guys have, in general, better execution an exposure that the good ones. Personally I was involved in helping representatives in writing laws to move forward.
If there is no guidance you can build an organization that could be destroyed arbitrarily in one day. SEC had enough time...
I don't want to exaggerate but it seems like the financial establishment is really worried, and not precisely about money laundering and corruption. Those use everything as a tool, it does not matter if it is crypto or your "5 star" bank.
If there is no guidance you can build an organization that could be destroyed arbitrarily in one day. SEC had enough time...
I don't want to exaggerate but it seems like the financial establishment is really worried, and not precisely about money laundering and corruption. Those use everything as a tool, it does not matter if it is crypto or your "5 star" bank.
> bad guys have, in general, better execution an exposure that the good ones.
So much better that I take it purely on faith that there are decent people in that space. I have to take it on faith, because I haven't actually seen or heard from any of them and so have no evidence that they exist.
So much better that I take it purely on faith that there are decent people in that space. I have to take it on faith, because I haven't actually seen or heard from any of them and so have no evidence that they exist.
I consider others and my company, good actors in the space: think about the space critically and giving transparent feedback and scenarios between the skepticism and the utopia.
And you may well be -- but I don't know you or your company, so I have no way of knowing. The space is generally so tainted that it's not unreasonable to assume the people in it aren't exactly good until proven otherwise.
>The space is generally so tainted that it's not unreasonable to assume the people in it aren't exactly good until proven otherwise.
I could say the exact same about the finance, defence, and health insurance sectors.
For over 40 years, I've only ever heard bad news about those industries. Still, it would be wrong to assume every single individual actor in those spaces is a bad actor; I know that bad news is widely reported in the media, and good news rarely is.
I could say the exact same about the finance, defence, and health insurance sectors.
For over 40 years, I've only ever heard bad news about those industries. Still, it would be wrong to assume every single individual actor in those spaces is a bad actor; I know that bad news is widely reported in the media, and good news rarely is.
Logically speaking you are saying that there is no exist good people in the space. That is a really difficult assertion to probe. I am saying something simpler: there exist good people in the space.
Then, you are saying "but I don't know you or your company, so I have no way of knowing.". Well, that is not my job, do your work if you want to change your mind. If you need help I can present you to good people but I assume you can do it by yourself.
Also, again logically, saying that there is no good people in the space, we should first define good people in general. Not trying to sound pedantic but trying to show you that your assertion is about a lot of people, probably in the order or millions.
Then, you are saying "but I don't know you or your company, so I have no way of knowing.". Well, that is not my job, do your work if you want to change your mind. If you need help I can present you to good people but I assume you can do it by yourself.
Also, again logically, saying that there is no good people in the space, we should first define good people in general. Not trying to sound pedantic but trying to show you that your assertion is about a lot of people, probably in the order or millions.
> do your work if you want to change your mind
The point is that scammers are so prevalent it's not worth "doing your work." The ROI on vetting every player in a given transaction just isn't high enough to make it worth engaging. We don't have to do all this shit in the actual financial industry because of regulation and insurance. Nobody's presented a compelling reason to re-evolve those protections because blockchain.
And yes, the assertion is about a lot of people. That's why we put locks on our cars and houses instead of vetting everyone in town. You keep arguing about symptoms without addressing causes.
The point is that scammers are so prevalent it's not worth "doing your work." The ROI on vetting every player in a given transaction just isn't high enough to make it worth engaging. We don't have to do all this shit in the actual financial industry because of regulation and insurance. Nobody's presented a compelling reason to re-evolve those protections because blockchain.
And yes, the assertion is about a lot of people. That's why we put locks on our cars and houses instead of vetting everyone in town. You keep arguing about symptoms without addressing causes.
PayPal is full of scammers, it is not crypto. Even you can say that PayPal is wrongdoing in many aspects that will not resist in court. Just an example.
Another example: land in NY, buy a mobile SIM there, go to the Central Park and in less than 30 minutes someone calls me telling me that I won the lottery. I am very lucky.
Another example: land in NY, buy a mobile SIM there, go to the Central Park and in less than 30 minutes someone calls me telling me that I won the lottery. I am very lucky.
Do you have some data on the percentage likelihood of being scammed in crypto vs in the traditional financial markets?
Let's just cherry pick on DeFi. DeFi had something around 10% of its entire TVL lost last year to hacks and scams. I guarantee you that 10% of the entire 'TVL' of PayPal wasn't lost to hacks and scams.
PayPal has almost 79B in assets. Pretty sure they didn't lose 8B to hacks last year.
The fundamental character of crypto - a market where police and regulators look the other way, but money moves freely - whose biggest rocket ride to fame came from Silk Road - is perfectly suited to attract crime and criminality. Without crypto nobody would even remember ransomware because you can't send millions of dollars in Starbucks gift cards.
This is its niche, like it or not. Because if you're not trying to do crime, classical finance is faster, cheaper and safer.
Let's just cherry pick on DeFi. DeFi had something around 10% of its entire TVL lost last year to hacks and scams. I guarantee you that 10% of the entire 'TVL' of PayPal wasn't lost to hacks and scams.
PayPal has almost 79B in assets. Pretty sure they didn't lose 8B to hacks last year.
The fundamental character of crypto - a market where police and regulators look the other way, but money moves freely - whose biggest rocket ride to fame came from Silk Road - is perfectly suited to attract crime and criminality. Without crypto nobody would even remember ransomware because you can't send millions of dollars in Starbucks gift cards.
This is its niche, like it or not. Because if you're not trying to do crime, classical finance is faster, cheaper and safer.
> Logically speaking you are saying that there is no exist good people in the space. That is a really difficult assertion to probe. I am saying something simpler: there exist good people in the space.
No, that's not at all what I was saying. I actually said the opposite: I assume that there are good people in this space despite the lack of evidence for it.
> do your work if you want to change your mind
I don't think that my mind needs to be changed here. We're in fundamental agreement here anyway, so I'm not sure what you think should be different in my thinking.
I just have no way of being able to tell who the good people are. And, ultimately, it doesn't actually matter because I don't deal with cryptocurrency in my own affairs.
No, that's not at all what I was saying. I actually said the opposite: I assume that there are good people in this space despite the lack of evidence for it.
> do your work if you want to change your mind
I don't think that my mind needs to be changed here. We're in fundamental agreement here anyway, so I'm not sure what you think should be different in my thinking.
I just have no way of being able to tell who the good people are. And, ultimately, it doesn't actually matter because I don't deal with cryptocurrency in my own affairs.
Securities are legal and Coinbase is a licensed broker dealer which means they are allowed to sell securities if they are registered with the SEC. The SEC is saying that crypto is a security while simultaneously not allowing them to be registered as a security. So they are treating it like a security from an enforcement perspective, but not from a regulatory perspective. They can't have it both ways. It must either be a security, in which case the SEC can regulate it, and it can be legally sold by brokers, or it is not a security, in which case the SEC can fuck off because it isn't in their jurisdiction. They are trying to have it both ways, and that is clearly acting in bad faith.
The SEC isn't saying that crypto is a security.
It's saying that some crypto tokens are securities, and that Coinbase is trading at least one of those tokens.
It doesn't matter how much Coinbase wants a particular token to not be a security, or whether they had 30 meetings, or 300 meetings where they ask for that token to not be a security. If it passes the Howie test, it's a security.
It's saying that some crypto tokens are securities, and that Coinbase is trading at least one of those tokens.
It doesn't matter how much Coinbase wants a particular token to not be a security, or whether they had 30 meetings, or 300 meetings where they ask for that token to not be a security. If it passes the Howie test, it's a security.
[deleted]
So, you’re saying that Coinbase knowingly offered unregistered security. And acknowledged that’s not legal. The fact the SEC refuses these securities to be registered doesn’t negate the illegal offering of unregistered securities.
If you look at the recent SEC filing, they present evidence Coinbase likely knew what they were doing was illegal and coached companies wanting to list coins on the exchange on how to remove “problematic language” from their promotional material that might make it too obvious they were selling unregistered securities.
Yeah, I cannot really see how they can defend their position here. That will be an interesting case to follow, Coinbase legal team will have to be _creative_.
Where is this filing? Not sure what that would be since the SEC hasn't brought charges yet.
I don't see an issue with advising companies on what language to use, given that language can absolutely affect whether a token is in fact a security, e.g. based on the "expectation of profit" prong of the Howey test.
I don't see an issue with advising companies on what language to use, given that language can absolutely affect whether a token is in fact a security, e.g. based on the "expectation of profit" prong of the Howey test.
Advising people that you do business with to not do certain things because you think they might violate the law is not the smoking gun that you think it is.
If your coin meets the Howie test it’s a security and must be registered with the SEC. If you go to the SEC and say “hey, please register my security so I can scam some people”, and they say no, your security doesn’t stop being a security, it’s just not a registered security. Going on to cry about them then prosecuting you for operating an unregistered securities exchange is purile.
Your example is idiotic because nobody is claiming that Coinbase is a scam (if they were the FBI would handle it, not the SEC), and because they are a licensed broker dealer. If particular crypto token is a scam, then they can say "you can't register token X because it's a scam." But they aren't saying that. They are just saying you can't register any tokens at all. If they can't be registered as securities, then how can they be securities?
For what it's worth their license is inactive and they are not operating in the capacity of a broker-dealer. They acquired the license in 2018, probably as a hedge just in case, but they are not using it.
After all, they are making the case that nothing they list are securities, so if that's true, they wouldn't fall under their broker-dealer license in the first place.
Parent is correct, a broker-dealer may not facilitate the trade of unregistered securities except to accredited investors. So unless the IRS accepts the registration, they would be in violation anyways. Which is why they're pushing the argument nothing they facilitate the trade in is a security at all and therefore exempt from registration.
I didn't read the parent comment as saying that coinbase was operating a scam, but rather that just because ICO A tries to register and fails doesn't make it somehow 'not a security' but instead that it remains an unregistered security. This is true. And in that case it could only be sold (with or without coinbase) to accredited investors.
> If they can't be registered as securities, then how can they be securities?
Simple. Not all securities are suitable for registration. A security that cannot be registered remains a security, it simply cannot be sold to individuals who are not accredited investors. And selling it to the general public would be a violation of the Securities Exchange Act.
Is a car that cannot be registered because it's not street legal somehow not a car? The fact your car fails its emissions check doesn't change its fundamental character. But it does make it unlawful to put on a highway. The DMV isn't bound to accept the registration of 'anything deemed to be a car' and if they refuse, it somehow becomes something else.
Similarly, the SEC isn't bound to accept the registration of 'anything that passes the Howey test' - quite the opposite. After all that would mean any company whose initial S-1 application is rejected could claim that their shares are now somehow actually a commodity so yolo. But that's not how this works. At all.
> They are just saying you can't register any tokens at all.
Yep.
And if the DMV said I couldn't register electric tricycles as street legal vehicles, well, I can't just go ahead and start driving them around can I? No matter my personal opinion on the matter, I'm still going to get pulled over.
Like Brian.
After all, they are making the case that nothing they list are securities, so if that's true, they wouldn't fall under their broker-dealer license in the first place.
Parent is correct, a broker-dealer may not facilitate the trade of unregistered securities except to accredited investors. So unless the IRS accepts the registration, they would be in violation anyways. Which is why they're pushing the argument nothing they facilitate the trade in is a security at all and therefore exempt from registration.
I didn't read the parent comment as saying that coinbase was operating a scam, but rather that just because ICO A tries to register and fails doesn't make it somehow 'not a security' but instead that it remains an unregistered security. This is true. And in that case it could only be sold (with or without coinbase) to accredited investors.
> If they can't be registered as securities, then how can they be securities?
Simple. Not all securities are suitable for registration. A security that cannot be registered remains a security, it simply cannot be sold to individuals who are not accredited investors. And selling it to the general public would be a violation of the Securities Exchange Act.
Is a car that cannot be registered because it's not street legal somehow not a car? The fact your car fails its emissions check doesn't change its fundamental character. But it does make it unlawful to put on a highway. The DMV isn't bound to accept the registration of 'anything deemed to be a car' and if they refuse, it somehow becomes something else.
Similarly, the SEC isn't bound to accept the registration of 'anything that passes the Howey test' - quite the opposite. After all that would mean any company whose initial S-1 application is rejected could claim that their shares are now somehow actually a commodity so yolo. But that's not how this works. At all.
> They are just saying you can't register any tokens at all.
Yep.
And if the DMV said I couldn't register electric tricycles as street legal vehicles, well, I can't just go ahead and start driving them around can I? No matter my personal opinion on the matter, I'm still going to get pulled over.
Like Brian.
The SEC’s position is very clear - they could be registered as securities and are securities but the SEC is not going to register them because they would like crypto to go away.
Also a licence to operate as a broker does not permit you to operate as an exchange. They are very different things, separated in traditional finance to prevent the sort of shenanigans (like trading against your own customers) that crypto exchanges get up to.
Also a licence to operate as a broker does not permit you to operate as an exchange. They are very different things, separated in traditional finance to prevent the sort of shenanigans (like trading against your own customers) that crypto exchanges get up to.
[deleted]
Complaining about regulation 101 is that rules are "unjustified" if the regulator has foresight, or "inconsistent" if they're reactive.
It's "regulation-by-enforcement". Instead of defining clear rules, the SEC just waits and brings actions against the activities it doesn't want to happen. Sen Toomey and others have called out Gensler for doing this:
https://www.banking.senate.gov/newsroom/minority/toomey-secs...
https://www.banking.senate.gov/newsroom/minority/toomey-secs...
The problem is that you can't know what isn't good until you see evidence of bad coming out - then you rule that it shouldn't be allowed.
This is how a lot of safety regulation comes about - from a disaster or a problem that previously nobody knew or understood.
The SEC is likely operating under this sort of outlook.
This is how a lot of safety regulation comes about - from a disaster or a problem that previously nobody knew or understood.
The SEC is likely operating under this sort of outlook.
That was a reasonable argument to make in 2013 or 2017. But Gensler's administration alone has issued more than 1,500 actions. At this point, the SEC should be able to codify their interpretations and publish guidance.
One example: a decade after the white paper was published, the SEC still won't say if Ethereum is a security or not. Gensler was literally asked this in front of congress and refused to answer:
https://twitter.com/MatthewHyland_/status/164833448714565632...
This is a project that's 10 years old, has a $250B market cap, and has had tens of thousands of other projects built on it. There's no excuse for the SEC to not have a position on it.
One example: a decade after the white paper was published, the SEC still won't say if Ethereum is a security or not. Gensler was literally asked this in front of congress and refused to answer:
https://twitter.com/MatthewHyland_/status/164833448714565632...
This is a project that's 10 years old, has a $250B market cap, and has had tens of thousands of other projects built on it. There's no excuse for the SEC to not have a position on it.
[deleted]
The SEC has no power to decide that crypto shouldn't be allowed. That would require legislation from congress. Legislation that is not forthcoming. The SEC is currently doing an end run around this fact by saying that it is a security (which is explicitly legal) but that it can't be registered (which effectively means nobody can sell it). It is a naked power grab by an unelected bureaucracy.
The slowness and deliberateness of USA regulators to respond is what has enabled the worldwide crypto economy to flourish in the first place. You think they should have just banned it CCP-style?
This is more akin to "You can have your fun but don't go crazy. But as soon as we start seeing your investors getting scammed we're going to step in."
This is more akin to "You can have your fun but don't go crazy. But as soon as we start seeing your investors getting scammed we're going to step in."
Dangerous to side with crypto stuff on Hackernews...
No, it isn't.
I side with crypto all the time and I see plenty of other people do it too. I also see the same loud voices, with a lot of karma, repeat their tropes over and over again. If people believe that it is "dangerous", that is a sad way to control a narrative.
Here we are 10+ years later and crypto hasn't gone to zero. If anything, it is discussed more than ever. What HN requires is sane responses about crypto, and this is one of them.
I side with crypto all the time and I see plenty of other people do it too. I also see the same loud voices, with a lot of karma, repeat their tropes over and over again. If people believe that it is "dangerous", that is a sad way to control a narrative.
Here we are 10+ years later and crypto hasn't gone to zero. If anything, it is discussed more than ever. What HN requires is sane responses about crypto, and this is one of them.
My past experiences with saying anything positive about crypto has being:
- Being downvoted to hell - Comments attacking crypto disrergading completely my opinion
- Being downvoted to hell - Comments attacking crypto disrergading completely my opinion
You get enough karma, a few downvotes always happens and it doesn't hurt as bad. I have people who follow me around downvoting me. Who cares. =)
ProTip: HN isn't looking for personal opinion on crypto. I'm not either for that matter, in either direction. That's why it is easy to rebuke the haters. They are so engrossed with their hate that they can't see that what they are saying is just repeated and boring trope. Easy to score karma against that.
ProTip: HN isn't looking for personal opinion on crypto. I'm not either for that matter, in either direction. That's why it is easy to rebuke the haters. They are so engrossed with their hate that they can't see that what they are saying is just repeated and boring trope. Easy to score karma against that.
I don't think the SEC can do much here, honestly. It's like asking a cop "is this illegal?" For stuff like murder they can say yes. For complicated issues like picking up your kid on Feb 29 when your ex complains about custody agreements only defined for non-leap-years, "we'll arrest and charge you for it, but there's a 50% shot it gets thrown out of court."
There's enough wiggle room between what each crypto product does and the original intent of the law, that this is really asking for a court case to resolve the matter. Hopefully with something clearer than "Apply Howey to this."
The court may end up saying "purely mined currencies aren't securities as long as they don't have X capabilities, ICOs are securities, etc."[0] Which would be very helpful.
[0] I have no idea what they'd actually say, or if the example is reasonable.
There's enough wiggle room between what each crypto product does and the original intent of the law, that this is really asking for a court case to resolve the matter. Hopefully with something clearer than "Apply Howey to this."
The court may end up saying "purely mined currencies aren't securities as long as they don't have X capabilities, ICOs are securities, etc."[0] Which would be very helpful.
[0] I have no idea what they'd actually say, or if the example is reasonable.
Perhaps you're just taking Coinbase at their word? SEC's assessment appears to be that a business like Coinbase should register as a securities exchange.
In 2021, SEC served Coinbase a Wells Notice over that their "Lend" product (yield in USDC) was likely in violation of established case law, US v Howey and Reves v Ernst and Young. Coinbase discloses this on their own blog, under the hilarious title "The SEC has told us it wants to sue us over Lend. We don’t know why"[0]
[0]https://www.coinbase.com/blog/the-sec-has-told-us-it-wants-t...
In 2021, SEC served Coinbase a Wells Notice over that their "Lend" product (yield in USDC) was likely in violation of established case law, US v Howey and Reves v Ernst and Young. Coinbase discloses this on their own blog, under the hilarious title "The SEC has told us it wants to sue us over Lend. We don’t know why"[0]
[0]https://www.coinbase.com/blog/the-sec-has-told-us-it-wants-t...
They don't want to reveal that they are treating all crypto assets as securities. So they are starting with the cases that are easiest for them to win, and building case precedent for them to go after bigger cases.
With the case they are giving there is no reason they don't eventually go after Bitcoin or Ether.
With the case they are giving there is no reason they don't eventually go after Bitcoin or Ether.
> We need regulation
> Ok, you're a securities exchange and have to act like one
> NOT LIKE THAT
> Ok, you're a securities exchange and have to act like one
> NOT LIKE THAT
They have clear rules, it's not clear to me why Coinbase does not think that those rules apply to them.
How much of this is actually opaque regulation, and how much is "we don't like the rules the SEC has, so we are going to do our best to not understand them"?
Gensler has publicly said “everything other than Bitcoin” is a security.
https://cryptoslate.com/sec-chair-gensler-confirms-everythin...
I'm not saying Coinbase has to agree with that decision, but it's a little silly they're posturing to the public like they're unaware. It's not exactly a secret.
If they disagree then going to court is probably their only move.
https://cryptoslate.com/sec-chair-gensler-confirms-everythin...
I'm not saying Coinbase has to agree with that decision, but it's a little silly they're posturing to the public like they're unaware. It's not exactly a secret.
If they disagree then going to court is probably their only move.
That's not what he said. He said "Bitcoin is the only thing that is definitely not a security", everything else is undecided. Big difference.
Terrible reporting from crypto slate even when it's an opinion piece.
Terrible reporting from crypto slate even when it's an opinion piece.
Your quotation is not what he said. Here's the full paragraph from the original source:
https://nymag.com/intelligencer/2023/02/gary-gensler-on-meet...
> “Everything other than bitcoin,” Gensler told me, “you can find a website, you can find a group of entrepreneurs, they might set up their legal entities in a tax haven offshore, they might have a foundation, they might lawyer it up to try to arbitrage and make it hard jurisdictionally or so forth.” In other words, there are people behind these cryptocurrencies using a variety of complex and legally opaque mechanisms, but at the most basic level, they are trying to promote their tokens and entice investors. (Bitcoin, because of its unique history and creation story, is fundamentally different from other crypto projects in this respect.)
https://nymag.com/intelligencer/2023/02/gary-gensler-on-meet...
> “Everything other than bitcoin,” Gensler told me, “you can find a website, you can find a group of entrepreneurs, they might set up their legal entities in a tax haven offshore, they might have a foundation, they might lawyer it up to try to arbitrage and make it hard jurisdictionally or so forth.” In other words, there are people behind these cryptocurrencies using a variety of complex and legally opaque mechanisms, but at the most basic level, they are trying to promote their tokens and entice investors. (Bitcoin, because of its unique history and creation story, is fundamentally different from other crypto projects in this respect.)
Gensler's view is clearly wrong, as there are tons of coins with the same properties as bitcoin, with no premine/ICO.
All of it from what I understand. I think the gist is Coinbase are saying "our product is special and not something you regulate." The SEC is saying it is not a special product, we'll regulate it as we already do. Saying you're using Monopoly money instead of real dollars (but then actually using real dollars to determine value) doesn't magically create new regulatory worlds.
I get the strong sense of the latter. It’s not actually the SEC that decides what’s illegal or not - these charges they speak of are for the judicial branch to decide on. I don’t follow crypto much, but it sounds to me like there isn’t a legal ruling precedent yet for crypto securities (hence Coinbase’s broadcast lack of certainty), so how could the SEC even give a guidance as to what’s illegal or not when they don’t know yet? But it’s definitely their duty to find out and establish that legal precedent. Given Coinbase is thinking about moving out of the country, I suspect they actually do think it’s not going to go in their favor, and might be trying to publicly blame it on the SEC versus admit they could have an illegal business model. Even in that case, I don’t understand the complaint because they got a good run - if the SEC had been faster and clearer up front, that party may never have happened.
SEC Commissioner Hester M Peirce has written multiple times about how the SEC isn't doing their job to provide clear regulation to the industry. From what she's written, it really is that the SEC won't engage and provide regulatory clarity while publicly saying that these companies just need to talk to them to get that clarity.
This story is INCREDIBLY interesting on a lot of levels.
Here's one level: Paul Grewal, the 'head lawyer' referred to in the underlying articles, is a former United States federal (magistrate) judge. He was the judge who oversaw part of the Apple v. Samsung patent cases, some of the biggest technology cases litigated in history.
In other words, he's basically as respected in the legal community as you can possibly imagine, and he made the controversial move of exiting the judiciary to go back into private practice. And now he's clashing with an administrative agency in a public, confident, perhaps brazen way.
Coinbase essentially hired the absolute best person to challenge the government on this point. It's sort of like wanting to hire a good basketball coach and hiring Michael Jordan, or something.
It's very interesting to watch from the sidelines, because not only is the legality of crypto at stake, but this guy's amazing career feels at stake, too, like he's betting his name on this.
Here's one level: Paul Grewal, the 'head lawyer' referred to in the underlying articles, is a former United States federal (magistrate) judge. He was the judge who oversaw part of the Apple v. Samsung patent cases, some of the biggest technology cases litigated in history.
In other words, he's basically as respected in the legal community as you can possibly imagine, and he made the controversial move of exiting the judiciary to go back into private practice. And now he's clashing with an administrative agency in a public, confident, perhaps brazen way.
Coinbase essentially hired the absolute best person to challenge the government on this point. It's sort of like wanting to hire a good basketball coach and hiring Michael Jordan, or something.
It's very interesting to watch from the sidelines, because not only is the legality of crypto at stake, but this guy's amazing career feels at stake, too, like he's betting his name on this.
He's not betting his name as much as you think. It's normal for lawyers to continue having excellent careers after losing significant cases.
(Also for full clarity magistrate judge is the lowest level in the federal system. Not that that isn't impressive, though)
(Also for full clarity magistrate judge is the lowest level in the federal system. Not that that isn't impressive, though)
Technically I'd say administrative law judges are a lower rung than US Magistrates, but yes, fair enough.
To be clear, though, Grewal was a magistrate in one of the most important districts (Northern District of California) on some of the most important cases in history.
To be clear, though, Grewal was a magistrate in one of the most important districts (Northern District of California) on some of the most important cases in history.
Good points. I'm not sure if this is right but I wasn't thinking of ALJs as being in the "federal system", which I admit isn't a precise term.
In terms of distinguished prior careers I'd say that's less than plenty of current lawyers though. One example could be Neal Katyal, who has agued all kinds of shit before the supreme court.
In terms of distinguished prior careers I'd say that's less than plenty of current lawyers though. One example could be Neal Katyal, who has agued all kinds of shit before the supreme court.
Imo Katyal wouldn't meet the same stakes I'm suggesting are present for Grewal.
Katyal is famous for being an advocate at the highest level - arguing zealously for his clients in high stakes scenarios. Grewal is different: he is famous for being a neutral third party (a judge) in high stakes scenarios. Judges are respected in a different way from lawyers. They're expected to be above reproach, basically. And now one is arguing on behalf of Coinbase.
Katyal is famous for being an advocate at the highest level - arguing zealously for his clients in high stakes scenarios. Grewal is different: he is famous for being a neutral third party (a judge) in high stakes scenarios. Judges are respected in a different way from lawyers. They're expected to be above reproach, basically. And now one is arguing on behalf of Coinbase.
This an existential issue for Coinbase, so it's not surprising they would shell out for the best lawyer they could get. And it's not surprising that Grewal would quit his judgeship for a payment that's probably more than 10x his annual salary. Grewal is risking very little. He'll be set for life regardless of how this turns out.
That's the thing -- it feels risky (at least for me, a lawyer) because being a federal judge is like the most coveted position in the world, and lawyers are incredibly serious people about maintaining their reputations and impartiality etc.
And? Lawyers have argued cases for the benefit of far worse groups than Coinbase, without tainting their reputations and impartiality.
It's not the case that a lawyer argues - everyone who needs legal representation deserves to have it, it's how a lawyer argues it.
It's not the case that a lawyer argues - everyone who needs legal representation deserves to have it, it's how a lawyer argues it.
He was at Facebook before Coinbase, seems like he surely likes challenges.
> Michael Jordan
Phil Jackson, maybe
Phil Jackson, maybe
I think the situation can be summed up nicely by Matt Levine:
> "There is a traditional financial system, and crypto has built a different system, and the SEC has pretty much everywhere said “nah, you gotta follow the traditional system.” And crypto people have said “well we can’t really do that because ...” and the SEC has said “shh, shh, we don’t care.”
Barring an act of congress to change the purview of the SEC, I don't think there is much to stop them. Maybe there was a chance before the FTX debacle and fallout - but I think now the SEC sees the industry as weak enough to strangle with a pillow.
Good and bad, regulators act as white blood cells for the systems they regulate. Their obsession is always going to be to root out abnormalities and protect the host.
> "There is a traditional financial system, and crypto has built a different system, and the SEC has pretty much everywhere said “nah, you gotta follow the traditional system.” And crypto people have said “well we can’t really do that because ...” and the SEC has said “shh, shh, we don’t care.”
Barring an act of congress to change the purview of the SEC, I don't think there is much to stop them. Maybe there was a chance before the FTX debacle and fallout - but I think now the SEC sees the industry as weak enough to strangle with a pillow.
Good and bad, regulators act as white blood cells for the systems they regulate. Their obsession is always going to be to root out abnormalities and protect the host.
"Coinbase could theoretically be forced to separate the exchange and broker portions of the business."
Probably the right outcome. And of course they can choose to move overseas. I assume that will be their decision.
Probably the right outcome. And of course they can choose to move overseas. I assume that will be their decision.
Coinbase and Armstrong tried for months to get the SEC to tell them if their Earn/Staking product constituted a security, and they declined to answer.
Serving a Welles Notice makes it clear Gensler is a bad faith regulator
https://podcasts.google.com/feed/aHR0cHM6Ly91bmNoYWluZWQubGl...
https://podcasts.google.com/feed/aHR0cHM6Ly91bmNoYWluZWQubGl...
Why did sec need anything to say when it was clear the product was a security from the beginning?
If it's so clear, and people disagree, wouldn't it be common sense to just say it? Declining to comment makes no sense here.
if it was that clear, why would they refuse to confirm it?
You can't argue an answer is super evident and at the same time insist that it is impossible for you to provide it.
You can't argue an answer is super evident and at the same time insist that it is impossible for you to provide it.
Because it isn't clear the product is a security at all. Coinbase earn is an IT service where Coinbase (or a contractor representing them) interacts with a protocol on your behalf in exchange for a cut of the proceeds.
I have read this article, and to the best of my recollection it contains zero discussion of Coinbase's Earn product.
Then read also this:
https://archive.ph/KueXO
PArt of Coinbase earn is defi yield(aka lending), part of it is crypto staking.
I also suggest you to read howey yest and make your own conclusions.
PArt of Coinbase earn is defi yield(aka lending), part of it is crypto staking.
I also suggest you to read howey yest and make your own conclusions.
>PArt of Coinbase earn is defi yield(aka lending), part of it is crypto staking.
Wrong. Nothing currently implemented in Coinbase Earn could be reasonably considered "lending". The article you linked is 2 years old and about Coinbase's prospective "Lend" product — which, as I understand it, never launched, perhaps because of a Wells notice submitted in 2021. This statement is about the one they've received more recently "regarding an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet":
https://www.coinbase.com/blog/we-asked-the-sec-for-reasonabl...
Wrong. Nothing currently implemented in Coinbase Earn could be reasonably considered "lending". The article you linked is 2 years old and about Coinbase's prospective "Lend" product — which, as I understand it, never launched, perhaps because of a Wells notice submitted in 2021. This statement is about the one they've received more recently "regarding an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet":
https://www.coinbase.com/blog/we-asked-the-sec-for-reasonabl...
> regarding an unspecified portion of our listed digital assets
I believe that's the first link. Most (if not exactly 100% of them) cryptocurrencies are securities as per howey test. Tron in particular, matt levine calls out, is clearly securities, among other things. Coinbase also listed a lot of other tokens that were also clearly securities.
I don't know why this is not clear.
I believe that's the first link. Most (if not exactly 100% of them) cryptocurrencies are securities as per howey test. Tron in particular, matt levine calls out, is clearly securities, among other things. Coinbase also listed a lot of other tokens that were also clearly securities.
I don't know why this is not clear.
Whether or not Coinbase is operating a securities exchange (they obviously are, despite the fact that I don't necessarily agree that "most" cryptocurrencies they list being securities by any reasonable application of the Howey test), and whether Coinbase Earn ("the product") is a security, are two distinct questions.
Which part of howey do you think Coinbase earn(not staking, but the product offered by Coinbase themselves) doesn't satisfy and is therefore not a security?
I made it explicit between staking (you staking your own money) and doing it through Coinbase.
I made it explicit between staking (you staking your own money) and doing it through Coinbase.
> not staking, but the product offered by Coinbase themselves
But the product Coinbase offers is staking.
But the product Coinbase offers is staking.
You are missing the nuance.
You can go ahead and try staking your money yourself on the protocol. But do it through coinbase equation changes.
Also coinbase earn does defi yield (which is more clear cut securities), but i am in mexico now, and can't tell if this were the case in the US or i am seeing geofenced content.
You can go ahead and try staking your money yourself on the protocol. But do it through coinbase equation changes.
Also coinbase earn does defi yield (which is more clear cut securities), but i am in mexico now, and can't tell if this were the case in the US or i am seeing geofenced content.
It makes more sense for this to be adjudicated by the court systems rather than an individual in an agency like the SEC. That is too much power for the SEC after all and we really need those separations in the US -- it's literally the foundation of the US.
Anyway, the fault here is with the US congress (all of the so-called elected representatives) since they haven't drafted legislation to clear said uncertainties now in over 10+ years. Gary Gensler is doing his job, no matter how difficult it is at this time. Congress people yelling at Gensler for example is akin to a boss yelling at his employee for an outcome that was determined by the system the boss created.
When congress isn't aligned with people (whether to draft legislation for or against cryptocurrencies) one doesn't need to go so far to determine what that person's agenda actually is -- if it's not the people's agenda, it's wrong.
Anyway, the fault here is with the US congress (all of the so-called elected representatives) since they haven't drafted legislation to clear said uncertainties now in over 10+ years. Gary Gensler is doing his job, no matter how difficult it is at this time. Congress people yelling at Gensler for example is akin to a boss yelling at his employee for an outcome that was determined by the system the boss created.
When congress isn't aligned with people (whether to draft legislation for or against cryptocurrencies) one doesn't need to go so far to determine what that person's agenda actually is -- if it's not the people's agenda, it's wrong.
Gensler has publicly said “everything other than Bitcoin” is a security.
https://cryptoslate.com/sec-chair-gensler-confirms-everythin...
Is that not a clear enough answer? I'm not saying Coinbase has to agree - but there's no way they didn't know he said this.
https://cryptoslate.com/sec-chair-gensler-confirms-everythin...
Is that not a clear enough answer? I'm not saying Coinbase has to agree - but there's no way they didn't know he said this.
I replied to your other comment, but posting here that this article is wrong and twists his words. He said Bitcoin is not a security, everything else is undecided. Big difference. Coinbase it taking them to court to make them decide.
Gensler not able to clearly articulate an answer to a simple question presented in a multiple of ways:
https://twitter.com/sassal0x/status/1648338351832064003
https://twitter.com/sassal0x/status/1648338351832064003
Can I pay for a Starbucks Double Frap Latte with Apple stock? Probably not, Apple stock is a security, not a currency... I'm sure someone has tried. But can I use Apple Stock as an investment vehicle? Yes.
Conversely, can I pay for said surgary drink in DodgeCoin? Well no, you can't, but not for the same reasons. Starbucks doesn't have the facilities to accept DodgeCoin. Can you use it as an investment vehicle? Yes.
And that is crux the problem. Because the answer is {"No", "Yes"}, the SEC has determined that these things (crypto) are regulated as Securities. The problem is it's far more nuanced than that. Just because everyone is using them as securities instead of currencies, does that make them securities?
Conversely, can I pay for said surgary drink in DodgeCoin? Well no, you can't, but not for the same reasons. Starbucks doesn't have the facilities to accept DodgeCoin. Can you use it as an investment vehicle? Yes.
And that is crux the problem. Because the answer is {"No", "Yes"}, the SEC has determined that these things (crypto) are regulated as Securities. The problem is it's far more nuanced than that. Just because everyone is using them as securities instead of currencies, does that make them securities?
Cryptocurrencies are a currency that people are using as an investment.
> Conversely, can I pay for said surgary drink in DodgeCoin? Well no, you can't, but not for the same reasons. Starbucks doesn't have the facilities to accept DodgeCoin
I can't pay for my Starbucks in the USA using Euros, but that doesn't make the Euro not a currency.
IMO, anybody trying to call a cryptocurrency a security is arguing in bad faith. A security has to represent something of value. A stock gives you a tiny fraction of ownership of a company. Cryptocurrencies give you nothing. They have no underlying value.
> Conversely, can I pay for said surgary drink in DodgeCoin? Well no, you can't, but not for the same reasons. Starbucks doesn't have the facilities to accept DodgeCoin
I can't pay for my Starbucks in the USA using Euros, but that doesn't make the Euro not a currency.
IMO, anybody trying to call a cryptocurrency a security is arguing in bad faith. A security has to represent something of value. A stock gives you a tiny fraction of ownership of a company. Cryptocurrencies give you nothing. They have no underlying value.
This turns into a philosophical argument too quickly though. Some would argue that because of fractional reserve banking, money has no underlying value either.
I disagree with you here, I think a _vast_ majority of people actually purchasing cryptocurrency are doing it as an "investment vehicle", regardless of whether it has inherent value or not. They are treating it very much like a security.
I disagree with you here, I think a _vast_ majority of people actually purchasing cryptocurrency are doing it as an "investment vehicle", regardless of whether it has inherent value or not. They are treating it very much like a security.
That's what I get. If people are investing into crypto, would that make it securities? For example, if I exchange some EURO for some US Dollar in Europe to avoid the EURO devaluation am I investing? That's basically what you do with cryptocurrencies.
[deleted]
The definition of securities in the US is governed by the Howey test, which is over 75 years old. It's a test which is very well-established in case law, with ample precedent that can be relied on to help fine-tune aspects like how "other" someone has to be in the "derived from the efforts of others" prong of the test. This isn't some vague unknowable thing.
I'm sure Starbucks would trade you a Double Frappe Latte for Apple Stock, if they had the facilities to accept it.
> Furthermore, under current securities law, securities exchanges are not permitted to offer services directly to retail customers
I wonder who lobbied for that regulation...
I wonder who lobbied for that regulation...
> “We think the most onerous outcome could be that, if various crypto assets are deemed securities, Coinbase would therefore need to register as a securities exchange, in order to keep offering trading in those assets,” Barclays added.
All this, plus talk of leaving the country, just to avoid registering as a securities exchange?
All this, plus talk of leaving the country, just to avoid registering as a securities exchange?
Where would he move his business to? And why would it matter as his customers are still mostly in the US?
The SEC are constantly stepping out of bounds and refuse to offer clear guidance on the security vs non-security issue. There is a pretty clear reason for this...they have long had a turf war with the CFTC, and if they admit something is not a security, that instrument is no longer within their jurisdiction. The SEC chairman has even publicly admitted that he doesn't think the CFTC needs to exist, and that the SEC should handle all fin regulation. A recent example of this was when they wanted regulatory authority over forex, so they banned any brokerage that handled securities from allowing forex trading as well.
The SEC has lost four out of the last five Supreme Court cases on cryptocurrency. They are out of their depth. Regulatory authority should be handed to the CFTC. They are more than competent enough to be able to clearly state when a cryptocurrency is acting as a security, and have shown that they are the more rational side in this turf war.
The SEC has lost four out of the last five Supreme Court cases on cryptocurrency. They are out of their depth. Regulatory authority should be handed to the CFTC. They are more than competent enough to be able to clearly state when a cryptocurrency is acting as a security, and have shown that they are the more rational side in this turf war.
Good. It’s about time these things get established as law one way or the other. Court cases are necessary to see where crypto and regulations fit and what if any new legislation is needed.
Here's Matt Levine's column on this:
-------------------------------------
Coinbase Chief Legal Officer Paul Grewal wrote a blog post:
On the other hand I think that the SEC’s response is straightforward and obvious:
On the other hand Coinbase is an SEC-registered public company with an SEC-registered broker-dealer license! The approval is kind of already there! The SEC’s attitude to crypto is extremely negative, but it is only slowly getting around to doing anything about it — and in particular it is only slowly getting around to going after big respectable crypto firms like Coinbase. And in the interim, those firms have had time to get bigger and more respectable, with the SEC’s quiet acquiescence.
Here again I think the explanation is obvious but unsatisfying. I wrote last month:
It is also bad substantive regulation — bad consumer protection — to encourage crypto on the way up and crack down on after the crash. Stopping people from investing in crypto after they’ve lost all their money doesn’t do them any good! You want to stop the crash! You want to “take away the punch bowl just as the party gets going,” but that is easy to say and hard, politically, to do. When the party is over and everyone is nursing a crushing hangover, no one cares what you do with the punch bowl. “Ugh that punch bowl, get it out of here, what even was in that,” they will retch.
-------------------------------------
Coinbase Chief Legal Officer Paul Grewal wrote a blog post:
The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. Today’s Wells notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to. …
The Wells notice comes out of the investigation that we disclosed last summer. Shortly after that investigation began, the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none. …
Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only.
On the other hand I think that the SEC’s response is straightforward and obvious:
There absolutely are existing, reasonably clear rules about how you register securities.
Yes, you’re right, it’s impossible for crypto tokens to follow those rules.
Oh well! Guess that means crypto exchanges are illegal.
On the other hand Coinbase is an SEC-registered public company with an SEC-registered broker-dealer license! The approval is kind of already there! The SEC’s attitude to crypto is extremely negative, but it is only slowly getting around to doing anything about it — and in particular it is only slowly getting around to going after big respectable crypto firms like Coinbase. And in the interim, those firms have had time to get bigger and more respectable, with the SEC’s quiet acquiescence.
Here again I think the explanation is obvious but unsatisfying. I wrote last month:
I submit to you that the main fact of crypto regulation in early 2023 is that regulators feel really burned by the events of 2022, and particularly by the collapse of FTX. “We want to work with these nice smart young people who are building the financial system of the future, and I am sure that with their advice we can write smart regulations that protect consumers while still fostering innovation” was a totally normal thing for regulators (except the SEC) to think and say in 2021. But now it is not! Now too many of those smart young people are under indictment or giving interviews from undisclosed locations; too much customer money is gone. If you run a crypto exchange and you want to set up a meeting with regulators to talk about how to write regulations to prevent a repeat of the recent crypto collapses, they will not trust you, because that is what FTX was saying too. There is not much goodwill left. …
When crypto is popular and exciting and going up, if you are a regulator who says “no, we must stop this,” you look like a killjoy. Investors want to put their money into stuff that is going up, and they are mad at you for stopping them. Politicians like the stuff that is going up, and hold hearings about how you’re stifling innovation. Crypto founders are rich and popular and criticize you on Twitter and get a lot of likes and retweets. Your own regulatory employees, who have an eye on their next private-sector jobs, want to be leaders in crypto innovation rather than just banning everything.
When crypto is going down and so many projects are evaporating in fraud and bankruptcy, you can kind of say “I told you so.” There is just a lot more appetite to regulate, or I guess just to shut everything down. “You are stifling innovation,” the indicted founder of a bankrupt crypto firm can say, but nobody cares.
It is also bad substantive regulation — bad consumer protection — to encourage crypto on the way up and crack down on after the crash. Stopping people from investing in crypto after they’ve lost all their money doesn’t do them any good! You want to stop the crash! You want to “take away the punch bowl just as the party gets going,” but that is easy to say and hard, politically, to do. When the party is over and everyone is nursing a crushing hangover, no one cares what you do with the punch bowl. “Ugh that punch bowl, get it out of here, what even was in that,” they will retch.
I think from all angles this is going to be a money pit.
For once I’d like the US government to take one of these “break the law now and rewrite the laws later” companies to task.
Sounds like the free lunch is over. Maybe my view is too simplistic, but Coinbase facilitates the sale of "assets" that the buyer expects to increase in value. By definition, that's a security, right?
The Howey test requires that a security be (1) an investment of money (2) in a common enterprise (3) with the expectation of profit (4) to be derived from the efforts of others.
Cryptocurrencies very clearly meet (1) and (2). Many tokens are likely to meet (3), but it's not universal. But (4) is where you have the most room to argue.
I don't know what Coinbase offers for sale. But I'm certain that least some of the tokens it supports are going to be defined as securities under the Howey test. Hell, if Coinbase offers the ability to use your tokens for staking, I'm pretty sure that alone qualifies as a security, even if the token itself isn't necessarily a security. (Coinbase disagrees that staking constitutes a security, but their reasoning is extremely motivated and I do not find it persuasive.)
Cryptocurrencies very clearly meet (1) and (2). Many tokens are likely to meet (3), but it's not universal. But (4) is where you have the most room to argue.
I don't know what Coinbase offers for sale. But I'm certain that least some of the tokens it supports are going to be defined as securities under the Howey test. Hell, if Coinbase offers the ability to use your tokens for staking, I'm pretty sure that alone qualifies as a security, even if the token itself isn't necessarily a security. (Coinbase disagrees that staking constitutes a security, but their reasoning is extremely motivated and I do not find it persuasive.)
Coinbase offers a "staking service" where they run the node to perform validations (4) using your staked currency (1) on the Ethereum blockchain (2) and promise to give you a share of any profits (3).
> I don't know what Coinbase offers for sale.
https://www.coinbase.com/price/poocoin
https://www.coinbase.com/price/poocoin
If you want to transfer the asset to another party (the main purpose of crypto currency), that requires effort from the community of miners. Would that satisfy the condition?
This is the crux of the endless argument. People speculate on currencies via Forex, are those securities? Is oil a security? People buy into oil, gold, etc hoping to sell later for a profit. Both the CFTC and SEC have claimed they have purview over crypto and there has been absolutely no clarity from lawmakers on it.
the real answer is that the CFTC should just be abolished and folded into the SEC. the only reason crypto people want to be regulated byt he CFTC is that they are way less competent at catching fraud than the SEC.
This is absolutely the answer. The NFA/CFTC have been having a quiet turf war with the SEC for a decade now in an attempt to thwart the obvious and hopefully inevitable solution you’ve suggested.
The definition of a security is found in the application of the Howey test. The SEC has a nice long explanation of how you apply Howey to crypto. Basically every token is a security. Always has been. With the possible exception of Bitcoin due to the way it was initially distributed. [1]
[1] https://www.sec.gov/files/dlt-framework.pdf
[1] https://www.sec.gov/files/dlt-framework.pdf
How can it be proved that people are buying tokens like Eth/Solana because they expect those tokens to go up in value?
Plenty of people are buying those tokens so that they can participate in their respective ecosystems as developers.
Plenty of people are buying those tokens so that they can participate in their respective ecosystems as developers.
And some Howey-in-the-Hills investors may have just wanted to eat their oranges. First and foremost they’ll look to what was said in selling the tokens: “join a crypto community!” vs “start your crypto portfolio”.
You have a point however, I don't think anyone is buying Eth now based on the initial ICO messaging.
In that sense, it's more like gold which has investment potential, but also utility outside of its investment potential.
But if you're using gold as a productive asset, then you're modifying it and repurposing it to an extent that its value is no longer tied to its weight.
When you're using a token as a productive asset, its value is still tied to its market value. So in that sense, it's different and probably more closely related to an investment.
But if you're using gold as a productive asset, then you're modifying it and repurposing it to an extent that its value is no longer tied to its weight.
When you're using a token as a productive asset, its value is still tied to its market value. So in that sense, it's different and probably more closely related to an investment.
By this logic every isn't every kickstarter is also a security? Aren't tickets for concerts are securities too?
Ethereum was like that. You give them bitcoins, and they promised to build this distributed computer that you can run programs on. They did, and when the computer was up and running, they gave the tokens that pay for the running of programs on the computer. They also offered additional tokens to those who participated in running the computer because that was necessary for the computer to run correctly.
If you bought it, were you planning on running programs or selling to other people who want to run programs at a profit?
Should it matter? If you pre-ordered GPUs from nvidia speculating that other people would want to buy them at a higher price later, would that make the GPUs a security too? Are concert tickets a security because scalpers buy them with intention to resell at a profit? Are the GPUs securities because you expect "the efforts of others" to release driver updates for the latest games, thus contributing to the value of the video cards you hold?
Ethereum was like that. You give them bitcoins, and they promised to build this distributed computer that you can run programs on. They did, and when the computer was up and running, they gave the tokens that pay for the running of programs on the computer. They also offered additional tokens to those who participated in running the computer because that was necessary for the computer to run correctly.
If you bought it, were you planning on running programs or selling to other people who want to run programs at a profit?
Should it matter? If you pre-ordered GPUs from nvidia speculating that other people would want to buy them at a higher price later, would that make the GPUs a security too? Are concert tickets a security because scalpers buy them with intention to resell at a profit? Are the GPUs securities because you expect "the efforts of others" to release driver updates for the latest games, thus contributing to the value of the video cards you hold?
You're not backing a Kickstarter with an expectation of profit. Your expectation is, at most, an expectation of product.
Yep, exactly. If you were getting equity in the company then it would be a security. Pre-sale of the product isn't. There's no common enterprise.
What was unique about the initial distribution of Bitcoin when compared to other cryptocurrencies?
No pre-mine, no pre-sale, no original ledger. The software was written, and the 'satoshi wallet' was actually open mined.
no pre-mine I believe.
Yes and no. Gold isn’t a security, for instance. Unfortunately (for coinbase) ICOs and related grifts pretty clearly meet both the spirit and the letter of the SEC’s definition.
The other part of the definition is that it can be easily bought and sold on an exchange. I think if there were an exchange for physical gold then it would be considered a security.
> I think if there were an exchange for physical gold then it would be considered a security.
I don't think that if you were to make an exchange that made it easy to trade physical gold (rather than deriviatives) the SEC would suddenly determine that gold was a security.
I don't think that if you were to make an exchange that made it easy to trade physical gold (rather than deriviatives) the SEC would suddenly determine that gold was a security.
There's loads of trading platforms that allow you to buy and sell gold.
https://tradingplatforms.com/commodity/gold-trading/
https://tradingplatforms.com/commodity/gold-trading/
But these are all about trading gold-related stocks and ETFs, which are securities, right? It's just the actual metal that isn't.
Is the relationship pretty much ICOs or tokens are a security and older options are like gold?
ie: BTC, LTC, Monero are gold but an ERC20 token is a security and Cardano is a security because it was an ICO? I don't know off hand if Ethereum was an ICO.
I keep thinking this but I can't remember seeing anyone suggest that each coin could be categorized differently. Is it possible we ended up splitting the crypto currency market into multiple groups?
ie: BTC, LTC, Monero are gold but an ERC20 token is a security and Cardano is a security because it was an ICO? I don't know off hand if Ethereum was an ICO.
I keep thinking this but I can't remember seeing anyone suggest that each coin could be categorized differently. Is it possible we ended up splitting the crypto currency market into multiple groups?
It comes down to the Howie test. Matt Levine has written a fair bit on this: https://www.bloomberg.com/opinion/articles/2023-02-13/the-se...
> but an ERC20 token is a security
What is WETH then?
What is WETH then?
Depends on what you consider a "Security". Are "Securities" meant to be used as currencies?
Just because you claim something is a currency, doesn't make it one, especially if it doesn't even exhibit the properties of a currency.
But the question of what is a "security" has been clearly answered in 1946:
> For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.
A lot of these coins are attached to some such scheme by a 3rd party, therefore they should be considered securities. This may even apply to most NFTs.
Source: https://supreme.justia.com/cases/federal/us/328/293/
But the question of what is a "security" has been clearly answered in 1946:
> For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.
A lot of these coins are attached to some such scheme by a 3rd party, therefore they should be considered securities. This may even apply to most NFTs.
Source: https://supreme.justia.com/cases/federal/us/328/293/
A lot of people buy houses thinking they will increase in value. Good to know they've all been doing securities fraud.
You can google this stuff you know? Real estate does not fall under the securities umbrella. This is well established legal precedent, covered under Howey, the Securities Act, the Securities Exchange Act subsequent rulings.
Real estate fails the Howey test because there is no common enterprise.
https://www.compliancebuilding.com/2010/11/04/what-is-a-secu...
Real estate fails the Howey test because there is no common enterprise.
https://www.compliancebuilding.com/2010/11/04/what-is-a-secu...
Where's the common enterprise for BTC (or BCH, if you are one of those people who somehow thinks that BCH is a security but BTC isn't)?
It's covered here [1].
I believe the common enterprise exists no matter which coin, but with Bitcoin there was never an investment of money in its launch. Don't quote me on that though. I know the delta has to do with initial coin distribution.
[1] https://www.sec.gov/files/dlt-framework.pdf
I believe the common enterprise exists no matter which coin, but with Bitcoin there was never an investment of money in its launch. Don't quote me on that though. I know the delta has to do with initial coin distribution.
[1] https://www.sec.gov/files/dlt-framework.pdf
If there was a startup called Homebase that was in the business of serving as an exchange where people could trade houses, the SEC might be interested ;-)
Last time this was discussed here people were suggesting that BTC was not a security but BCH was, despite being basically the same thing, and certainly both being exchanged on Coinbase.
Real estate fails the "common enterprise" and "... derived from the efforts of others" prongs of the Howey test. If you decided to package real estate investment into something like a REIT, well, then you have a security. But if you're a homeowner buying a house (even a second or third house you intend to rent out), that's not a security.
Are virtual currencies actually being used as currencies? I've been long BTC for ~10 years, I've only made a few small novelty purchases through BTC. Based on any ads I've seen for crypto from coinbase, along with the tools they've built into their app - the primary use case for crypto appears to be as a security.
Bitcoin was originally meant to be used as a currency. Ethereum was meant to be the oil that powered the smart contract network. I guess the question is, what matters more: the intent by the creators or what the end users choose to do with it?
I have yet to see any coin be used in a manner that doesn’t devolve to a security. While there were many projects to do other things with crypto - they all still sell tokens on exchanges. I’d find the claim that crypto isn’t meant as a security more convincing if the crypto traded at 0 dollars.
i run a small retail shop that sells digital goods for btc. i bought a book with btc two months ago. more convincingly, it's widely used for remittances and as a store of value in countries with debased currencies -- this is a powerful tool for ordinary citizens in countries like venezuela, argentina etc to discipline central banks who would otherwise steal their savings.
In japan, there exist a bunch of businesses that buy your pachinko prizes and give you cash. It's a standard thing that happens pretty much anywhere with pachinko machines.
Yet it would be absurd to call those toys "A currency". A currency requires more usage than occasional barter.
Yet it would be absurd to call those toys "A currency". A currency requires more usage than occasional barter.
what threshold would you find convincing? it performs all conventionally defined functions of money, it is legally recognized as money in some jurisdictions, it is useful as a store of value and medium of exchange. japanese yen might as well be 'toy' to me since i can't pay taxes with it. at this point i feel like i'm arguing about the utility of automobiles with an equestrian in 1920.
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I pay for POAPs on Ethereum using Eth. There's no expectation of profit by owning one since anyone who actively participates in the event can get one, but they're fun collectibles.
Because of POAPs, I use Eth as a currency all the time.
Because of POAPs, I use Eth as a currency all the time.
> Coinbase facilitates the sale of "assets" that the buyer expects to increase in value. By definition, that's a security, right?
In terms of outdated US regulation based on some farm land, yes.
In terms of outdated US regulation based on some farm land, yes.
Whether or not the regulation is outdated, it is the law of the land in the US at the moment and is relevant to enforcement actions by the SEC. This definition of security will determine Coinbase's success or failure in court.
I'm surprised homes are not qualified as "securities" at this point.
Home prices must go up :D
Home prices must go up :D
"Can we do illegal stuff please?"
No
"Can you explain why we can't do illegal stuff please?"
No, that should be obvious.
Coinbase are muppets.
Coinbase are muppets.