[jcranmer]

The definition of "security" is pretty objective (Howey test), but the answer it produces tends not to be liked by people in the crypto space, so they argue hard about why it's not a definition of security.

What quotes like these do is make it trivial to prove the mens rea (intent) requirements, and put a lie to claims that they didn't know it was a security or that their interpretation as not-a-security was reasonable.

[dontreact]

Putting this here in case it's useful. Please correct if it's wrong. What is the Howey test for whether something is a security?

""" The Howey Test asks whether a transaction constitutes an "investment contract," which is a type of security. If it is an investment contract, it must satisfy four criteria:

It is an investment of money. The investment is in a common enterprise. There is an expectation of profits from the investment. Any profit comes from the efforts of a promoter or third party.

If the answer to all these questions is "yes," the transaction is likely an investment contract and, therefore, a security. However, please note that this is a simplified explanation. The actual determination can be complex and might require a detailed analysis by legal professionals. """

To me it DEFINITELY sounds like crypto is a security, but it seems like it mostly hinges on whether people expect to make a profit by investing. Which some people do and some people don't. But most people do right?

[jcranmer]

If you're really, really motivated, you can make facially-plausible arguments against any of the four factors. (Coinbase does this, for example).

Common enterprise and expectation of profit are the two factors that are the weakest, and for a pure cryptocurrency like Bitcoin or Ethereum, there's probably not enough to meet common enterprise there. Although by the time you get to staking--especially an exchange offering to stake on your behalf--you'd probably pass the threshold of common enterprise, and you should assume your service meets the Howey test.

[mrguyorama]

Importantly, you don't have to convince yourself that you don't meet the Howey test. At the end of the day, if it comes to it, you have to convince a judge while they are being also courted by an adversarial party.

It doesn't matter what your company's interpretation is if a judge says "nah dog that isn't right".

What matters is whether you genuinely believe your interpretation is reasonable

I don't think any of these crypto companies have ever believed they could convince a judge, hence all the hemming and hawing in the public sphere in an attempt to build pressure against the SEC to either give them an out by making a very specific statement that they can work around, or by getting an administration to push the SEC to ignore all the bad stuff in crypto land.

[Ajedi32]

Interesting. I'd answer those questions as "Yes. No. Maybe. No." So definitely not a security.

1. Is cryptocurrency an investment of money? Obviously yes, at least in the sense you have to spend money to purchase or mine it.

2. Is cryptocurrency investment in a common enterprise? No. What enterprise? Common with who? Maybe if it's a token issued by a company or something and tied to their profits somehow, but that doesn't apply to any of the common cryptocurrencies like Bitcoin, Etherium, Monero, etc.

3. Is there an expectation of profits? This depends on entirely on the person buying the token and what they intend to use it for.

4. Does any profit come from the efforts of a promoter or third party? No. What promoter? What third party? If the value fluctuates you can make a profit, but there's no third party involved exerting "effort" that's involved in that process.

If you want to argue with me on 2 and 4, explain how cryptocurrency meets those criteria but not, say, gold.

[dontreact]

2: The more people buy and hold Bitcoin, the more valuable it becomes.

I asked ChatGPT about the definition of common enterprise:

The 7th and 2nd Circuits use a "horizontal commonality" test, where a common enterprise is found if the profits of the investors are interdependent - i.e., if the success of the enterprise is tied to the success of other investors. Essentially, the investors' funds are pooled and they share in the profits and losses.

3: Overwhelming majority of people who buy gold buy it as a hedge against inflation. In the past 5 years everyone I personally know who has bought cryptocurrency was expecting it to increase massively in value (expecting profit). 4: There have been a huge amount of cryptocurrency pump and dump stories where the promoters have benefitted immensely. In those cases it seems pretty clear that those are securities. In fact pretty much anything that isn't a top-2 coin at this point is subject to this sort of behavior from what I've seen.

[Ajedi32]

2 is also true of gold and any other commodity.

3 I'd quibble with you about "overwhelming majority", but yes that's a common use of gold. It's a fairly common use of cryptocurrency too though, especially in countries with high inflation.

4 Maybe in that specific situation yes. Sounds like you agree that's not all cryptocurrencies though. It's also kinda weird that something could go from not being a security to being one (and back) depending on how people happen using it at any given moment in time. E.g. If someone somehow managed to orchestrate a pump and dump scheme with silver, would it temporarily become a security for that brief moment in time and then go back to being a commodity afterwards?

[kajaktum]

Do you seriously think that cryptocurrency becomes a billion dollar industry because...people use it to do what? exactly? Pretty much 99% of the people that put money in crypto expected the price to go up and sell. I have not seen any mention of economical use except in third world countries. In which case, crypto is just a roundabout way of charity I guess?

Crypto people _say_ their technology have this and that use but all they _do_ is trade them.

[Melting_Harps]

> I have not seen any mention of economical use except in third world countries.

This is peak HN, if there ever was such a thing; you do realize that the Third World (an erroneous use of the term that relates to nations that were aligned with the Soviet Union but used to denote underdeveloped nations) comprises the most of the Human population; and if figures are correct about System D [0], it is actually the 2nd largest economy in the World and growing due currency collapses and hyper-inflation being wrought around the World.

In recent literature on the informal economy, System D is the growing share of the world's economy which makes up the underground economy, which as of 2011 has a projected GDP of $10 trillion.The informal economy is usually considered as one part of a dual economy.

Seriously, this is the most typical yet horridly-informed view on this matter and gets tossed in the echo-chamber; it's like saying that the USD (or any fiat currency) is really useless because the FOREX market (the biggest Industry in the World only after Agriculture) negates its utility because people only seem to trade it.

I'll be the first to tell you that 99% of crypto is a scam but seriously just stick to something you actually understand before posting these inept diatribes.

0: https://en.wikipedia.org/wiki/System_D

[jcranmer]

> the Third World (an erroneous use of the term that relates to nations that were aligned with the Soviet Union but used to denote underdeveloped nations)

That's not what "Third World" originally meant; Third World was used to refer to the non-aligned countries, those countries that were neither aligned with the US and NATO (the "First World") nor the Soviet Union and the Warsaw pact (the "Second World").

[Melting_Harps]

> That's not what "Third World" originally meant; Third World was used to refer to the non-aligned countries, those countries that were neither aligned with the US and NATO (the "First World") nor the Soviet Union and the Warsaw pact (the "Second World").

Well, I concede that point; but even then it was used incorrectly considering that these third world nations are also comprised of the most developed nations in the West: Switzerland/Finland etc...

Still, the post is seething with just as much arrogance as it was misinformed and my point remains.

[axus]

Maybe profit is the modern-day perception of why you'd buy crypto-currency. All I could hope for would be for the tokens to be kept secure and available for spending, that's already a high bar.

I can see the argument against proof-of-stake, doesn't your quantity of tokens increase without doing anything?

The way I see it, other crypto-currencies only have the payment-processing system component. There's no expectation that some "Bitcoin corporation" is working hard to increase the value of individual bitcoins. It's like buying Chinese currency, the promise is that you can spend it in some places more efficiently than dollars, not that China is working hard to make a yuan/renmenbi worth more than a dollar.

[CuriousCosmic]

> I can see the argument against proof-of-stake, doesn't your quantity of tokens increase without doing anything?

It depends.

With Algorand for example where staking is "fully automated" and you don't actually even have to be online to stake or have delegated to an online party? Then yes.

With Ethereum where you run a node secured with your stake? No. You have to maintain a staking node and mitigate potential threats/failure modes which would lead to downtime. It's kinda like being paid out for an SLA. If you can't maintain uptime and correct functioning, you don't get paid and potentially you owe money. Now if you outsource the operation of a staking node, it's still the same situation but you are just outsourcing to "the cloud" or someone else.

With Cardano where you have stake pool operators and delegators? Also no. If you run a stake pool, you essentially are in the same situation as with Ethereum. You have an SLA target of practically 100% and get penalised for failing to meet it. However for delegates (people who assign their stake rather than run a pool themselves), it's still no just "money go up". You are being paid for picking reliable, functional pools and voting with your stake that they should be trusted. And that is a job that doesn't just stop once you pick a pool, you still need to monitor the pool to verify that they are performing. And it's lower risk but there is no assurance that your funds would continue to increase unless you do your job and pick pools that operate correctly and reliably.

Those cover the big variants of Proof of stake that I am aware of.

[HWR_14]

You are almost correct. It doesn't matter whether most people make a profit. It just matters that they are investing believing they will make a profit. Buying my worthless stock or investing in my pyramid scheme are both securities even if I'm the only one who makes anything.

It matters that the person buying reasonably thinks it could lead to profits. Not that it necessarily does.

[jrflowers]

> Putting this here in case it's useful…

ChatGPT is a text generator. It is “useful” for writing sentences in a context where correctness and understanding are less important than syntactical uniformity and word count.

Edit: Ok, I guess people want ChatGPT responses.

Risks when using ChatGPT instead of research while discussing financial securities:

Accuracy: While AI models strive for accuracy, there can still be errors or misunderstandings. They might oversimplify complex concepts, miss nuances, or even provide incorrect information. It's always a good idea to verify information from multiple reliable sources.

Bias: AI models are trained on existing data, which might contain inherent biases. Thus, the output of AI might also reflect these biases, although it is unintentional. Lack of deep understanding: While AI models like ChatGPT can process and generate language based on patterns they learned during training, they do not possess actual understanding or intuition. They are unable to think critically or provide expert judgment.

Outdated Information: As of its last training cut-off (September 2021 for ChatGPT), the model might not have the most current information or developments in the field of financial securities. Regulation and legality: There are regulatory considerations in financial markets, and AI models may not be fully updated or able to provide guidance in line with current laws and regulations.

[itake]

who is buying crypto and not expecting to make a profit from it?

[codetrotter]

> who is buying crypto and not expecting to make a profit from it?

Me. I put my savings in Bitcoin because I dislike the tradfi system.

All I want is to be in control of my savings and to be able to freely transact with anyone anywhere in the world.

I am still affected by the exchange rates to USD and EUR. But the hope is that in the future I will be able to use BTC directly more often and not even have to touch USD or EUR.

Perhaps one day even my country will get with the times and allow me to pay my taxes in BTC directly instead of having to exchange it to government funnymoney first.

[SketchySeaBeast]

> Perhaps one day even my country will get with the times and allow me to pay my taxes in BTC directly instead of having to exchange it to government funnymoney first.

Something tells me your government cares more about their funnymoney than yours.

I can't imagine a government wanting to take on the volatility of bitcoin for a tax payment. What possible compelling argument is there for them to do that?

[mhluongo]

El Salvador is a clear counter example.

I can certainly imagine why a country with a history of poorly managing their own currency (and that for whatever reason doesn't want to be aligned to USD) might choose to use a more "neutral" fixed supply currency.

[EscapeFromNY]

Right now every state that lets you pay taxes with crypto immediately converts it into USD. So the govt is not taking on any volatility risk.

[preseinger]

there is no universe in which a (edit: financially sound) nation will accept tax payments in a denomination over which it has no influence or control

(edit: nations that peg their currency to the euro or the dollar are clearly exceptions to what i'm describing here)

this is literally money 101 type stuff, wars have been fought over this stuff, and it's insane that crypto folks don't seem to understand any of it

[KptMarchewa]

There's a lot of nations that either directly accept tax payments in foreign currency: for example, Montenegro uses Euro. Salvador, Zimbabwe, etc use US Dollar. In other forms, Danish Krone and Bulgarian Lev is pegged to Euro.

[rafaelero]

That's why Bitcoin is so powerful: they can't do anything about it and, if people choose to use it, the government has no choice other than accept it as the standard.

[preseinger]

a government that accepts tax payments in BTC would be abandoning its financial authority to the bitcoin network, over which it has no influence whatsoever

this is suicidal for any nation with even a nominal amount of financial autonomy

maybe it's something that failed states like venezuela or somolia would consider, but it's a complete non-starter for anyone else

the idea that "the people" can force countries to accept tax receipts in BTC is absolute unhinged nonsense, read a fucking book

[imtringued]

Why do you care about paying taxes in funny money? I never understood complaints about inflating money by gold bugs or cryptocurrency advocates. The presence of a mismanaged currency is your opportunity to profit so you should be cheering for its collapse. The only situation where you end up losing out is if you have a fixed income in the mismanaged currency. You want your tax bill to inflate away so the government accepting Bitcoin for taxes is not that meaningful to you.

I mean, if I follow the same logic I should advocate for collapsing the economy with tight money policies because I can then work on financial innovations that undo the government intervention.

[toast0]

People using crypto for funds transfer. Buy now, transfer immediately, with an expectation that the other end sells immediately. No desire or expectation of profit.

[civilitty]

People buying narcotics and narcotics accessories.

[tornato7]

People buy commodities like Oil to make a profit, too. The question is, what cryptos are commodities and which are securities?

[steveBK123]

Is it a future / forward / swap / put / call / etc? Security.

Is it a barrel of oil / unit of BTC? Commodity/Currency.

[MikeDelta]

Indeed. In general, security is a product. Commodity and currencies are asset classes.

BTC would fall under the crypto asset class. I don't think financial institutions see it a currency in terms of asset class.

[dagaci]

For many people inside an defintely outside the USA sphere, theres a lot of utility in holding some cash money in Crypto even as a staging point for payments.

[creato]

People paying ransoms.

[rcme]

You could be buying it to interact with a smart contract.

[vkou]

In theory, yes.

In practice, most of the interaction with smart contracts consists of locking up your money in one and expecting yield.

[EGreg]

Please tell me, how is Bitcoin a security?

Speaking to various security lawyers there were two terms that are extremely vague in the industry:

1) "Common enterprise". What does that mean? Gary Gensler openly said in a speech Bitcoin isnt a security because there is no "common enterprise." When he was saying these words he made a motion with his elbows like you've got a buddy. That's the closest I got into his mind for what "common enterprise" means. But really, if you go by the widest definitions, "common enterprise" means anything where various entities are all united in winning, e.g. miners mine, people buy and hold, it's all a common enterprise. By that definition, almost everything is a security, including Bitcoin, despite what even a hawk like Gary Gensler says.

2) "Equity securities". As opposed to non-equity securities such as debt. Let's say all tokens are securities. But are they "equity securities" meaning you have to register with the SEC as soon as you have more than 2000 holders? But what makes a security an "equity security" specifically? Is it the ability to vote? Then governance tokens are "equity securities". Is it the ability to receive dividends from some profits? Then maybe Liquidity Pool tokens on Uniswap are equity securities.

But nevermind that these terms are not well defined, even in the statutory law or case law. The vagueness is actually broader than that.

All shows like Yu Gi Oh, Pokemon, etc. have been running, technically speaking, unregistered securities offerings throughout the world and United States, yet the SEC does nothing. They are textbook cases of the Howey Test:

1) People (kids, in fact!) buy Yu Gi Oh trading cards

2) There is an investment of money (either they nag their parents, or they actually spend a non-trivial proportion of their own life savings)

3) With an expectation of profit. Witness how many of them don't actually use the cards, but keep them in mint condition (and as we have seen SEC successfully argue in the recent case SEC vs LBRY, if even a few people buy with expectation of profit, then ALL those sales are securities).

4) From the efforts of others -- namely the producers of the show, and their promotion of Yu Gi Oh trading cards. Trading! Perhaps even selling!

5) There is definitely a common enterprise, that isn't even decentralized. The Yu Gi Oh show is produced in Japan and shown in the USA, and drives the sales of the cards. Cancel the show, and the cards fall in price. Yu Gi Oh Abridged series even lampooned this, to great comedic effect.

Oh those foreign-owned Japanese companies, preying on our kids selling them investment contracts! Do they really think the kids are sophisticated investors who think things through when they keep their mint-condition cards! Who will buy the top and be holding the bag after the show is canceled?

So being a textbook definition of Howey, why did the SEC never go after Pokemon, Yu Gi Oh and any of the other "merchandising" companies? How about Marvel with their mint-condition comics? Isn't that a "common enterprise" since some people buy comics for their investment value?

But vagueness actually broader than that. According to some experts, everything is a security: https://www.linkedin.com/pulse/everything-security-chris-har...

This article was shared on HN at some point, and it shows how the SEC has at times considered even transactions outside the united states, which did not have any character you'd normally associate a security, a security transaction in the USA. So at this point it starts bordering on the absurd.

If you take Objectivism to its logical conclusion, it could seem that it's morally better to torture a man for a $100 profit, as long as you could get away with it. But then Ayn Rand throws in "as befits a rational being", as a sort of no true scotsman argument that avoids the logical conclusion.

Similarly the SEC has been using "Sufficiently Decentralized" as a way to avoid the logical conclusion that they should go after a ton of other large ecosystems. For example, Hinman famously did it with Ethereum: https://www.sec.gov/news/speech/speech-hinman-061418

But now after he left, the SEC is revisiting that: https://decrypt.co/46456/regulator-coined-term-sufficiently-...

Today, Gensler says Bitcoin is not a security. Tomorrow, it could be considered one.

But wait, it gets worse.

Let's remember that the STATES also have their own definition of a security. In fact, the states on the West Coast (from Washington to California) consider anything a security that puts capital at risk. Yes, that's right, even if it doesn't meet the Howey test, as long as you have put your capital at risk, it's a security transaction! You don't need an expectation of profit. Wow!

https://www.theselc.org/which_states_apply_the_risk_capital_...

I have asked securities lawyers and they have confirmed that MOST KICKSTARTER CAMPAIGNS ARE TECHNICALLY SECURITIES SALES according to these state laws, they just don't enforce it.

Many of you live in California, so all of you who have done kickstarter campaigns have probably violated your own state's securities laws. But it's so absurd that they haven't bothered enforcing those.

About the only things that aren't at securities transactions, by the way, are donations. That's when people simply send money with no expectation in return. Hex tried to leverage that with their "sacrifices".

Think you can just airdrop coins to people? There's no "investment of money" right? Well, using human logic that would be correct. But there have been some precedent back in the 90s when people showed up to drink beer, put their contact info and got free stock, or something like that. And the SEC said that even that was a security, presumably because the contact info was worth something, or maybe some other reason, it's not actually spelled out clearly in the case law. So now, although there has never been a single SEC case going after an airdrop, lawyers are cautious.

Yes they laws are protecting you from getting free stuff in your wallet! Who knows kind of loss you can incur by getting free stuff with no obligation!

Anyway, of course there are important scams to go after and the SEC has a job to do. I think it's an important job. But I'm just showing you how absurd the thing can get if you try to use actual definitions of words in the Howey Test and take it to their logical conclusion, and what it actually means.

This isn't limited to Securities laws. Remember the Infrastructure Bill? Well, it said that a "broker" is anyone who builds software. Now if you build a wallet, you might have to KYC all your users. Except the Treasury said they won't enforce it. How nice (what about under the next admin?) Well, the Bitcoin lobby got them to exempt Bitcoin through an amendment around proof-of-work, but that's pretty much it.

Oh and Europe is about to pass the Cyber Resilience Act that might create penalties for any open source software that doesn't pass a check by their cyber security watchdog agencies, which haven't been created yet for this bill.

I'll just finish with a couple words about FINCEN, because OFAC and FINCEN are far more serious than the SEC. (And FATCA also enforces things like the Travel Rule worldwide, and soon the Travel Rule will require everyone to track everything).

You know all of you who build marketplaces and handle money? Well, you might be a MONEY TRANSMITTER. According to the Bank Secrecy Act, you have to register and then the States will slap you with a lot of requirements, like maintaining a surety bond. But, there are exemptions, I'll let you read about them here:

https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20...

Here's the interesting thing. These are only exemptions on the FEDERAL level. The individual states might have a DIFFERENT definition of "money transmission business" and they might apply their own local laws to you. It might be that two sided marketplace you're building, it's violating money transmission laws in a dozen states. Maybe. I've asked lawyers for a list, and very few actually have them.

But here is a useful link, enjoy: https://abnk.assembly.ca.gov/sites/abnk.assembly.ca.gov/file...

Alright entrepreneurs, good luck navigating that!

[olalonde]

Some evidence that the Howey test isn't that objective and clear:

1) Gary Gensler, now SEC chairman, used to claim that 3/4 of the cryptocurrency market were not securities[0]. He has changed his tune significantly since then.

2) The SEC chairman can't answer this simple question: "is Ethereum a commodity or a security?"[1].

[0] https://twitter.com/ZK_shark/status/1650689125580668931

[1] https://youtu.be/h_oAr4wn7M4?t=1048

[JumpCrisscross]

> Gary Gensler, now SEC chairman, used to claim that 3/4 of the cryptocurrency market were not securities[0]. He has changed his tune significantly since then.

Has he? Most of the market is Bitcoin and Ethereum. To my knowledge, the SEC hasn't gone after anyone solely cashing trading those.

> 2) The SEC chairman can't answer this simple question: "is Ethereum a commodity or a security?

He also doesn't have to answer whether a taco is a sandwich. There haven't been any enforcement actions based solely on whether Ethereum is a security.

Binance launched an ICO. Zhao raised hundreds of millions of dollars from investors, and then co-mingled investors' and clients' assets with his own. Their CCO admitted, in writing, to running an "unlicensed securities exchange." The poster child for web3 and crypto folks having no place near our financial system is such protestations that the law isn't clear. It's abundantly clear in the places it's being broken.

[johndhi]

The fact that there have or haven't been enforcement actions against X or Y shouldn't be how we're supposed to determine what is or isn't illegal. There should be a speed limit (65mph) and if you drive over the speed limit, you should know you're violating the law. If the speed limit is "if the cops pull you over, you violated the law" then we have no clarity for entrepreneurs. At least some level of clarity for entrepreneurs is critical to a healthy economy.

[Tesl]

They aren't entrepreneurs, they are crooks.

[imtringued]

Most company ICOs are clearly securities. Everything else is most likely not.

[fisherjeff]

I could be wrong (not a lawyer) but I don’t believe there’s a scienter requirement for unregistered offerings. Regardless, it makes the case much tighter, and will give the SEC a ton more leverage to reach a settlement.

[johndhi]

So your position is that the US Government intends to require every creator and trader of crypto to complete registration, notification, filing requirements with SEC? They pretty obviously don't want to enforce that or ask that of our populace. So we just get them enforcing whenever they want to (probably because Zhao is Chinese, basically).

[Animats]

Creator, yes. If you're an issuer and sell to US persons, you have to register the issue as a security. The SEC brings the hammer down on about two issuers a month. They're still working through the ICO boom of 2017-2019, and just getting started on the NFT boom of 2020-2021.[1]

The SEC is basically reactive. They usually take action after people complain that their money disappeared. So they're always behind.

[1] https://www.sec.gov/spotlight/cybersecurity-enforcement-acti...

[EGreg]

It's not just not liked by crypto people, but other very popular industries could be selling securities, if you actually apply the test. Tell me the flaw in the following, and if there is no flaw, why did the SEC never go after them to make an example:

All shows like Yu Gi Oh, Pokemon, etc. have been running, technically speaking, unregistered securities offerings throughout the world and United States, yet the SEC does nothing. They are textbook cases of the Howey Test:

1) People (kids, in fact!) buy Yu Gi Oh trading cards

2) There is an investment of money (either they nag their parents, or they actually spend a non-trivial proportion of their own life savings)

3) With an expectation of profit. Witness how many of them don't actually use the cards, but keep them in mint condition (and as we have seen SEC successfully argue in the recent case SEC vs LBRY, if even a few people buy with expectation of profit, then ALL those sales are securities).

4) From the efforts of others -- namely the producers of the show, and their promotion of Yu Gi Oh trading cards. Trading! Perhaps even selling!

5) There is definitely a common enterprise, that isn't even decentralized. The Yu Gi Oh show is produced in Japan and shown in the USA, and drives the sales of the cards. Cancel the show, and the cards fall in price. Yu Gi Oh Abridged series even lampooned this, to great comedic effect.

Oh those foreign-owned Japanese companies, preying on our kids selling them investment contracts! Do they really think the kids are sophisticated investors who think things through when they keep their mint-condition cards! Who will buy the top and be holding the bag after the show is canceled?

So being a textbook definition of Howey, why did the SEC never go after Pokemon, Yu Gi Oh and any of the other "merchandising" companies? How about Marvel with their mint-condition comics? Isn't that a "common enterprise" since some people buy comics for their investment value?

[ac29]

> The definition of "security" is pretty objective (Howey test)

It should be noted the Howey test applies to one type of security: investment contracts. There are other types of securities that the Howey test doesnt apply to.

[Animats]

> The definition of "security" is pretty objective (Howey test), but the answer it produces tends not to be liked by people in the crypto space, so they argue hard about why it's not a definition of security.

This. The Howey test really is clear. If there's an issuer behind a crypto asset, it's a common enterprise for Howey Test purposes. Bitcoin has no issuer at this point. Etherium, maybe. Just about everything else in crypto has an issuer raking off the profits.