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.
... 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.
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.
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.
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.
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.
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.
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[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.
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."
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?
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.
> 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.
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.
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.
> 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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
> 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.
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.
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.
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.
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.
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.
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:
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:
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.
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."
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.
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.
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.
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]
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.
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"?
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.
> “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.)
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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?
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.
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.
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.
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.
> “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?
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.
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.
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.
I sympathize with all of this, and I have written similar things. It is truly hard to fit the particular features of crypto into the existing US system for regulating securities, and a conscientious securities regulator with an interest in crypto regulation would sit down and write rules explaining how a project could register its crypto securities, how a crypto exchange could list crypto securities, etc. (Obviously Coinbase’s proposal to write those rules for the SEC is kind of self-interested, but sure in general regulation proceeds with industry input.)
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.
The position of Coinbase — and of the crypto industry more broadly — is “look, SEC, if you want to have a flourishing system of legally compliant, safe, trustworthy crypto assets, you will need to work with us a little bit to write new rules,” and the position of the SEC is “no, we don’t want that, we want all of you to go away forever.” If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.
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.
This is unsatisfying, first of all, from a rule-of-law perspective: The SEC used a light touch in regulating crypto on the way up, which encouraged a lot of companies (like Coinbase) to get into crypto, invest a lot of resources, hire a lot of people and build big businesses. (And which encouraged lots of people to invest in crypto, on the theory that if it was really bad the SEC would have stopped it.) If the SEC now says that was all illegal, it seems harsh and arbitrary. As Armstrong says, the SEC had plenty of opportunities to object to Coinbase in the past; it didn’t, and Coinbase relied on the SEC’s acceptance in building its business. The answer — “we would have objected in 2021, but crypto was cool then and people would have gotten mad at us for getting in the way, but now crypto is bad and we can do whatever we want” — does not feel like great regulatory procedure.
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.
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.)
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).
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]
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”.
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.
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?
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.
Exchange-traded commodity futures (including those for physical delivery of 100 troy ounces of gold) have existed for a long time and are regulated by the CFTC.
> 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.
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?
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.
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.
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.
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.
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.
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.