The SEC has told us it wants to sue us over Lend. We don’t know why
blog.coinbase.com
blog.coinbase.com
The rule should be applied across the industry in a standard manner, no matter which direction the SEC rules, and it is apparently not being applied consistently currently.
BlockFi's lending product has already been banned by several state regulatory agencies, but if they've been sued or warned by the SEC, I dont think thats been made public.
But when you go public you enter into a whole new level of scrutiny, because regulating public markets is why the SEC even exists.
Kraken offers staking services [3], which are technically not "lending", but are staking rewards gained from staking assets in proof of stake protocols such as Ethereum 2.0, Polkadot, Kusama, Cosmos, Cardano, Solana, etc. These staking rewards could also be earned directly from the protocols, if users wanted to stake via their own hardware, but Kraken takes a fee in this case due to reducing the hassle for users to need to do this themselves (and some proof of stake protocols have slashing which means users would lose the coins they have staked if their hardware goes down or their connection is interrupted), so there is some reduction of risk as well for the user in that case. However, this also means the staking power is more centralized at the exchange level, which is a downside, but that is a different part of the discussion.
FWIW, Coinbase has staking services as well [4], but Coinbase Lend, which hadn't even launched yet, was going to be something different. It looks like Coinbase was going to achieve that 4% interest on USDC in Lend via Compound [5] (which is a DeFi protocol they actually helped launch a few years ago [6]). Assets can already be lent directly to Compound via users, without Coinbase as an intermediary.
Anyway, my point in bringing this up is there is difference between lending assets and staking assets, and actually both lending and staking can be done directly by users, without any of these exchanges as intermediaries.
[1] https://www.gemini.com/earn
[2] https://www.coinbase.com/lend
[3] https://www.kraken.com/en-us/features/staking-coins
[4] https://www.coinbase.com/staking
[5] https://blockworks.co/coinbase-compound-labs-launch-usdc-hig...
[6] https://techcrunch.com/2018/05/16/cryptocurrency-compound-in...
https://corpgov.law.harvard.edu/2019/11/21/regulation-by-sel...
It shouldn’t be a surprise to anyone in this space.
The only other companies that will be able to offer something like that will be mega corps like the big banks, PayPal, etc. If they need to also buy large amounts of Bitcoin as collateral, that’s a win-win for their entire industry (price goes way up).
The name of the game is not user adoption. The name of the game is pump the price, because that’s marketing on its own.
I dunno, seems like an obvious interpretation but I could be totally missing it. I could care f.all about the SEC and blockchain coin stuff.
The wheels of justice turn slow but they generally don't stop when they get to ya just because there's a big line of folks behind ya.
Unless either the statute has expired or the SEC issues a written determination that you're in the clear you're not in the clear. And neither is anyone else doing the same thing.
Or you know the SEC is allowed to announce /why/ they are prosecuting. And why they are prosecuting a particular alleged transgressor first as opposed to some other having not done so until now. Seems like a reasonable thing to do to me?
Generally ".. a written determination you're in the clear" is the opposite to how law is kind of meant to work. I haven't got a written determination that I'm not infringing basically any law that I'm aware of and I do _NOT_ expect to be prosecuted for anything either. I genuinely don't understand all the laws I'm subject to in making money to put food on the table, nobody does. I do know that I'm doing things other people do and nobody is getting prosecuted for it. I have other heuristics that I use for this. And so do you, I'm guessing. The great thing is if I get prosecuted I can hire a lawyer and they don't know for sure either and will hedge every statement they make as a part of legal advice about everything while disagreeing with every other lawyer. It's an issue. I don't have a solution for it.
They are, but they don't have to since the law is spelled out.
> And why they are prosecuting a particular alleged transgressor first as opposed to some other having not done so until now.
Gotta start somewhere, and the fact someone else is breaking the law isn't a defense. If it was any two people doing the same crime couldn't ever be charged right? haha.
> I haven't got a written determination that I'm not infringing basically any law that I'm aware of and I do _NOT_ expect to be prosecuted for anything either.
Totally, but the Howey test has been the law of the land for what 70 years? It's prettttty obvious that this is in fact a security. The SEC agrees. Coinbase does not. Ergo, it's up to the judge to decide. This is about as black and white as the rule of law thing gets.
Coinbase may not have known the SEC's opinion on this before they started talking to the SEC since it seemed like the SEC was ok with it happening elsewhere.
It feels like your reaction is akin to a group of 5 cars speeding back to back, and the cop picks off the first guy to get a speeding ticket. They're all speeding. It's illegal for everyone. Enforcement resources are limited and they choose one to make an example of. If the others keep speeding they'll get caught afterwards too. Is it unfair the cop grabs the first guy? In a sense. But also so long as it slows everyone down; mission accomplished.
Your analogy isn't very good. Offering a long-term financial product isn't like a one-off instance of speeding where it only last a few minutes. It's more like group A getting ticketed every day for speeding while going with the flow of traffic, and group B never gets ticketed for doing the exact same thing, and, oh, group B makes more donations to the police.
Your reaction is akin to someone who sees that going on, and says it's okay because police don't catch every speeder. "As long there aren't accidents: mission accomplished."
Believe me, I get the concept of not catching everyone. Letting a financial product persist for one company but not another isn't that!
And:
>The SEC didn't say that everyone else could do it.
Yeah ... they did. By not prosecuting the others who have already started doing it, and been doing longer, or clarifying what's different, or at least saying "oh don't worry, they're going down too".
If I'm wrong here, it's for reasons other than not understanding the concept of not catching every violation.
I'm sorry - they know what it is. Any lawyer will tell you exactly what it is. It's the Howey test, it's been the law of the land for 70 years and the SEC issued guidance on how it applies to digital assets. [1] Literally the first page of the Securities Act of 1933 explains that lending products are securities.
Brian is feigning ignorance on twitter while acting indignant that someone told him no. His lawyers told him no. The SEC told him no. He said I'm gonna do it anyways. They said see you in court. He follows up with a late-night twitter rant, roughly "how could the SEC do this? how could a lending product possibly be a security?!"
[edit] The man literally owns an SEC registered broker-dealer lol.
[edit] Even Preston Byrne from Anderson Kill tweeted today that it was obviously a security. That's the most libertarian cypto-sympathizer attorney on the face of the earth.
> Your reaction is akin to someone who sees that going on, and says it's okay because police don't catch every speeder. "As long there aren't accidents: mission accomplished."
Regulators don't act day 1, legal proceedings take time. You're saying "because they took the usual amount of time everyone should be allowed to do whatever they want - or they should sue them all, all at the same time." Nope. That's not how this game works.
They can't stop everyone at the same time, and they can't jump them on day 1. They're not omnipotent, and they certainly don't have unlimited resources.
What Brian wants isn't to work with regulators, its for regulators to let him do whatever he wants on his terms and on his schedule. That's not the same thing.
Did you miss where I said the issue is that they're being treated differently? I spent at least two paragraphs on the concept. Even if it's "obviously" a security by the Howey test, that doesn't explain why others get a free pass, or why they can't confirm that's their reasoning, or why others aren't being treated the same, or a why they can't confirm they intend to treat others the same.
Repeating the same argument doesn't advance the conversation!
See also this comment: https://news.ycombinator.com/item?id=28459949
>Regulators don't act day 1, legal proceedings take time.
Again, I understand this concept, it's just a red herring. they're on day 180 with Gemini and day -30 with Coinbase. Saying it takes time is just an easy soundbite for you to parrot, not an actual explanation for the discrepancy, just like "we can't catch all speeders" isn't an explanation for the patterns in which you let speeders go.
>[edit] Even Preston Byrne from Anderson Kill tweeted today that it was obviously a security lol. That's the most libertarian cypto-sympathizer attorney on the face of the earth.
Which of my arguments is that relevant to?
1. Coinbase Lend is clearly a security.
2. ...because it fails the Howey test.
3. ...for reasons that are clear and self-evident.
4. ...and Coinbase, as a registered broker-dealer would know or be expected to know that in advance.
[note: for 1-4 see Anderson Kill]
5. There's a few people offering similar products.
6. They're all doing crime.
Here's where we seem to disagree.
1. Coinbase should be told by the SEC exactly why it fails the Howey test. No. It clearly fails, and the SEC isn't required to provide their opinion of why outside the court of law. It is up to the SEC and Coinbase to present their arguments to a judge. The resolution will form precedent.
2. Coinbase is being treated differently in some way, and that's bad. The first person charged for anything is obviously being treated differently, until the others are charged. That's not bad, that's bad luck. See the speeding cars anaology.
3. The first person to commit a crime has some obligation to be charged first. No, they don't. Usually police and regulators go after who they have the strongest case against in no particular order. The resolution gives them a weapon they can use against those they have a weaker case against.
4. All criminals committing the same crime should be charged together or at the same time. No, there's no expectation of that, or precedent of that. In fact its usually easier when the cases are separate.
5. This is taking a long time because some other offerings have been on the market for 6 months. The SEC just went after Bitconnect. That was in 2016. The wheels of justice turn slow.
You'll have a point if after Coinbase is convicted the SEC leaves everyone else alone. Until then its safe to assume they're being made an example of, and with that example the SEC is going to come by and knock some heads together.
No, not a point of agreement -- if the SEC is silently accepting a new exception to Howey based on market realities, then what Coinbase is doing isn't a crime. We don't know until they go on record saying what their opinion is. That happens all the time in regulation: they realize, long after the fact that something is technically violating the rules but just grandfather it in since it's become so ubiquitous and issue new clarification. But it helps to know what the case actually is!
That's the problem with stonewalling: You don't know what the other side actually objects to!
You seem to be in some kind of mentality where equality before the law doesn't matter, and if some people are persistently let of off the hook "that's just life, man". No ... that's not how rule of law or ex-3rd world regulation works. Haphazard enforcement isn't just a "fact of life", it actively disrupts the functioning of markets, and you don't look clever with the sage "it is what it is" attitude.
>Coinbase is being treated differently in some way, and that's bad. The first person charged for anything is obviously being treated differently, until the others are charged. That's not bad, that's bad luck.
Wait, really? You're saying that turning a blind eye to persistent violation is "just" "bad luck"?
Okay I just wish you had initially been clearer about your premise of rejecting equality under the law. Then again, that would have made your position more obviously wrong, and your arguments seem less clever, so I can see the tendency to avoid that!
It's probably similar to the reason why you make huge edits to your post long after the fact without noting them.
That's not what they're doing, and yes it is a crime lol. It would work just as well with murder, but you're choosing to look the other way because it's white collar.
> That's the problem with stonewalling: You don't know what the other side actually objects to!
No, that's why I re-stated my assumptions, including any potentially hidden ones, so that you could follow up and respond individually and explain where the gap is. This is a useful tool to resolve conflicts.
> Wait, really? You're saying that turning a blind eye to persistent violation is "just" "bad luck"?
No, I'm saying the wheels of justice turn slow and this shit takes time [edit] and regulators literally have to start somewhere because they have limited resources. So long as it happens within the statute of limitations its explicitly in play.
> Okay I just wish you had initially been clearer about your premise of rejecting equality under the law.
You're obviously either misreading my point or not interested in understanding. You pick one. Get a judgement. Apply that judgement. This is equal treatment.
> It's probably similar to the reason why you make huge edits to your post long after the fact without noting them.
No, I limit my edits to the first two to three minutes after I write a comment, to before anyone can reply. If someone can reply I annotate my edits. This is my workflow.
[edit] My point is it's way too soon to know if you're right or I'm right, we must wait and see a year from now, or two years from now. 180 days is nothing.
The whole point of asking the SEC is to know where they fall, since it's unclear whether they've silently accepted stuff like Gemini, or whether there's a substantively different or whether they will prosecute. Assuming that it's a crime is assuming away the core point of contention!
>>That's the problem with stonewalling: You don't know what the other side actually objects to!
>No, that's why I re-stated my assumptions, including any potentially hidden ones,
I was referring to the SEC's stonewalling there, not your tactics (though they're similarly unproductive).
>No, I'm saying the wheels of justice turn slow and this shit takes time [edit] and regulators literally have to start somewhere because they have limited resources. So long as it happens within the statute of limitations its explicitly in play.
Yes, I heard you say that, and I get that you don't see the similarity; the point was that these are substantively the same thing in that they persistently introduce an unevenness in the playing field; the fact that you can ignore that dynamic doesn't mean it's not a flaw your position or that you aren't effectively endorsing such inequality before the law.
>You're obviously either misreading my point or not interested in understanding. You pick one. Get a judgement. Apply that judgement. This is equal treatment.
And then, learn how judgment is spelled if you're going to use it so often and use confidence and intimidation as a substitute for substantiating your position.
>No, I limit my edits to the first two to three minutes after I write a comment, to before anyone can reply. If someone can reply I annotate my edits. This is my workflow.
No, I saw your comment more than 3 minutes after posting and it had significant un-noted edits, and now you're just mocking me by flooding your comment with [edit].
>My point is it's way too soon to know if you're right or I'm right, we must wait and see a year from now, or two years from now. 180 days is nothing.
No, you've definitely phrased your comments with significantly more (unjustified) confidence than that. See "yes it is a crime lol".
My dude I took your feedback lmao, if you can't assume good faith here this conversations over.
Suing Coinbase first -> "beginning their enforcement actions at Coinbase"
Which exactly fantom argument is 'the first page of the Securities Act of 1933'?
Do I know for a fact they're going to go after everyone else? No, I don't work there, time will tell.
6 months is a long time for back and forth to be had. It's not like they dropped this on Brian Armstrong's desk without notice.
Grewal was a federal (magistrate) judge in SF before he quit to go work at Facebook. Everyone I know that has appeared before him has thought that he was very good. I'd like to give him the benefit of the doubt - his entire legal career has been patents. Perhaps he truly doesn't see how this applies. But you are right, this just seems... off.
EDIT - I've read this a few times, and despite where it says that this is not an investment or note, it sure sounds similar to the unsecured demand notes that some car companies use for their captive finance operations (in day-to-day operations, they are virtually indistinguishable from an interest-bearing checking account). And those are most definitely SEC-registered securities.
See:
https://www.wsj.com/articles/car-maker-notes-attract-investo...
https://www.ford.com/finance/investor-center/ford-interest-a...
I'm confused, is patent experience particularly relevant to this case about securities law?
> A "Wells Notice" is a letter sent by a securities regulator to a prospective respondent, notifying him of the substance of charges that the regulator intends to bring against the respondent, and affording the respondent with the opportunity to submit a written statement to the ultimate decision maker.
So did they receive a notice with the charges or didn't they?
To me: "planning" is the key term.
Ref: https://en.wikipedia.org/wiki/Wells_notice
The Wiki article is short and dense. I highly recommend it!
No, in this cass (that is, the case of the article under discussion) his job is to act as a PR representative of the company in the course of action it has chosen which is leading to imminent legal conflict with the SEC.
It’s true that he also had the job you discuss, but this article isn't the output of that job; that would be found in confidential internal advisory memos to the board and other executives.
It’s not a binary: Is this legal?
It’s: Can we get away with this?
> Customers won’t be “investing” in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship.
"Give me money for a fixed period of time and I'll pay a guaranteed return on your principal. No, it's not an "investment", you're just lending it in connection with our existing relationship!"
I don't understand it nearly well enough to explain it, but the wonderful Matt Levine has given it a shot: https://www.bloomberg.com/news/newsletters/2021-08-09/money-...
The thing is that this really isn't an investment. An investment looks like this:
- You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money.
A rental looks like this:
- I need a piano for 6 months. You have several pianos. You let me have one, and every month I can either give you $50 or return the piano.
Stock borrowing works that second way, except that instead of a piano, it's a share of AAPL. There is no project involved, but the share of AAPL lives in my house instead of your house, and every month you get $0.04.
Interest is also on that second model, so in that sense it's not different from interest. But neither is the piano rental.
If I put money in your bank-like-thing, expecting to get more back at the end, it's an investment.
> I'm guessing the concept is more like stock lending fees
Those are investments too. Their technical name is "repos", short for "repurchase agreements".
That’s venture capitalism which is just one of the many different types of investing. Buying pianos in order to lend them out is another type of investing.
But the example here is renting out a piano you already have, not obtaining a piano so you can rent it out.
The rule is basically: "If you're giving someone else money in the hope of getting more money back later, it's a security UNLESS it fits into a list of exceptions, or if it meets the criteria to be added as a new exception."
So a savings account would absolutely be a security, unless it fits into one of the recognised exceptions. One of those exceptions is the existence of an "alternative regulatory regime", ie, there being some other framework, other than security laws, to protect people.
For a savings account, the fact that banks are federally regulated, and that deposits are federally insured via FDIC, means they don't count. But Coinbase's Lend program does not seem to be subject to any other regulatory regimes, so...
In fact, the very fact that they went to the SEC to tell them what they were up to and check if it was legal is a bit of a red flag. The SEC enforces security laws. The fact Coinbase couldn't go to the Federal Department of Enforcing Crypto Lending Regulations is a sign that this falls under security laws, because there is no stand alone Crypto Lending Regulations to enforce.
It sounds like you're saying the banks get a special carve-out to provide this service simply because the regulator is different.
On a fundamental level though, I still don't see the difference.
I do have to disagree with the last paragraph though. Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.
Metaphorically, Coinbase just went to the police department and explained in great detail their intention to sell hard liquor without a liquor license. Under sworn testimony, they explained... 'you see, we are just providing the same product as licensed liquor stores, so it's all good'.
FDIC is a perfect example! There are accounts I know and would expect that but there are times I'm willing to waive that for compensation. Welcome to the land of crypto where nothing is FDIC and the government isn't going to protect anything.
Public opinion matters because it can be the very conversation that gets politicians to challenge the existing laws to be changed.
Where to draw the line?
Who should draw it and by what mechanism?
The democratically elected government seems like a good place to start!
So yes, banks are one of the exemptions, because they have their own regulator (which is one way to get on the white list).
> Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.
No, the red flag is that Coinbase (correctly!) understands that the SEC is the relevant regulator. Your local credit union does not go to the SEC when they want to offer a new type of savings account because the SEC does not regulate credit unions. Which is good, because the SEC is only competent to apply securities law, and securities law doesn't allow savings accounts.
So yes, absolutely you should consult with the relevant regulator, and if the relevant regulator for you is the Office of the Comptroller of the Currency (who regulate banks), they're probably going to cheerfully sign off on your savings account idea; they like savings accounts. But for Coinbase, it's not the relevant regulator, because they're not a bank. Nor do they seem to fall into any of the other many exceptions and regulatory schemes so...
It made me understand that this is all about protecting the customers investment, and, if nobody is protecting it, then it would have to be the SEC who does it, but they can only do this if it is a security. If it isn't a security which has to be protected by the SEC -- like Coinbase is claiming -- then who is protecting it? This appears to be what the SEC wants to have answered. Coinbase instead wants the SEC to tell them what to do about it, but that they don't want to set it up as a security. Yet Coinbase would be happy with just proceeding without any protections in place.
Just like Texas abortion laws, this is not enforced against the US resident, it is against the service providers, which has allowed this framework to persist for 70 years.
"regulated as a security" itself can mean 100 different things, and its not a nuanced enough take to know if a product can be offered at all, to whom it can be offered to, what disclosures are necessary if any, and more
They are expecting Coinbase to show them who is regulating them. If they don't do it, they must be sued.
Coinbase is promising a fixed 4% earning. If they are to be taken serious, 4% does not mean the risk of losing it all, like in a casino.
The institutions that would want to operate these have the power to run massive advertising campaigns promoting them as the best place to earn money (with a bunch of quick disclaimers just like the various medical ads that people have gotten so used to now).
The people who would be preyed upon by this are not those with the education and experience to tell what's a sound investment and what's a bunch of bullshit, but precisely the opposite.
And though I know that there are many—perhaps you're among them, perhaps not—who would say "anyone who can fall for such a scheme deserves to lose their shirt", personally, I believe that we live in a society and we have a greater duty to care about each other than that.
In practice, it locks them out of scams.
It is horrendously irresponsible to enable practices that we can predict will, with very high probability, result in significantly greater ability for predatory and unscrupulous actors to take advantage of the public, especially if the purpose is merely to allow the wealthy—and it is only the wealthy who can genuinely take advantage of such things; the rest of us simply can't afford to take those risks—to try their hand at high-stakes gambling.
It is an overfitted system that has created more and more compliance in response to rare scams that occurred within the rules of their system anyway! If companies didnt find it too expensive to go public earlier nobody would be trying to have this conversation. People wouldnt be getting ripped off in massive SPAC deals because the target companies would be public already.
The whole situation smells of a turf war between regulatory agencies, which is entirely in character for the SEC. They've been doing the same shit for years with the CFTC. You're no longer allowed to trade forex using the same account that you trade stocks with...not because the SEC regulates forex, but because they want to regulate forex, and are trying to strongarm the CFTC into ceding it's jurisdiction by crippling the forex market. This is plainly another turf war play, trying to grab territory that is far more cleanly regulated by FINRA.
How?
> For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA.
Cryptocurrencies are not generally securities, though some may be. To the extent this isn’t limited to securities, it would not be regulated by FINRA.
> their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA.
FDIC doesn’t insure, and therefore regulate, cryptocurrency accounts. I’m reasonably certain Coinbase is aware of this fact. [0]
> The whole situation smells of a turf war between regulatory agencies,
Which other regulatory agency is asserting authority?
[0] https://help.coinbase.com/en/coinbase/other-topics/legal-pol....
Neither the SEC nor FINRA has stated anything public about this at the moment, but I'm willing to bet FINRA will go to bat for this.
If the SEC says no, FINRA can't say yes, because (to a first approximation) that's their boss.
And just from first principles, I'm not sure that FINRA, an organization largely dominated by traditional broker-dealers would be willing to go to bat for a weirdo newcomer. If they aren't doing the basics of building relationships with the SEC, is Coinbase building relationships with the other companies necessary to get FINRA to go to bat for them? But again, not sure about this, just a bit skeptical.
Coinbase certainly started out with the rogue "Can't touch me, it's crypto" bullshittery, but over the past 6 years they have been one of two exchanges (the other being Gemini) which have actually taken regulatory approval and collaboration seriously. Maybe the SEC's fines and handslaps have made them fear the alternative, who knows. Whether that means that they can really have any influence over FINRA is yet to be seen.
You might come to this conclusion if you think of laws as creating a fine boundary between legal and illegal. In crypto in particular, there are a ton of open legal questions that the SEC has not given explicit guidance about and certainly have no settled legal precedent in court.
The SEC has the ability to write you a get out of jail free card, actually. You write to them and ask them to give you a letter saying they OK'd the thing you're doing as a one-off and that they are not issuing a general rule that that kind of thing is ok (in case they change their minds later).
Corporate fixed-coupon bonds are corporate offerings of simple interest-bearing instruments, and are regulated as securities.
That's the impression I got from the article, but reading other comments in the thread it doesn't seem like that's an at all relevant definition of the term!
Therefore, rates in more ambiguous instruments should be higher than those in more certain ones, no?
[1] at least short-term
But I guess if you want to offer a "savings account" then you need to be a licensed bank and meet all the requirements and regulations that come with that?
I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.
But yes, DeFi seems to me mostly zero sum gambling where the risks are shifted around until nobody understands the system any more which naturally means that there is no risk any more.
Best I can tell from my research defi is being used for holder of volitile lower quality coins to exit without triggering a taxable event.
This is based on how all the pools I found had clear lopsided supply of lending and borrowing. Stable coins all had the highest rates, with btc and eth being middling, and a flood of alt coins sitting in pools earning zero returns.
This makes perfect sense. Margin loan volume is too low to explain the lending size. Likewise margin would want to borrow high volatility coins, and never stable coins. And yet stable coins are offering the highest interest precisely because stable coin borrowing is in demand.
Overall defi makes sense if it is about holders of paper gains exiting with debt to avoid taxable events. It does suggest a worrying risk profile I suspect everyone is underesitmating: many borrowers do not care about the coins they put up as collateral.
Oh, you can use "shitcoin" X as collateral for a loan in "stablecoin" Y? Can the borrower then selectively default if the X/Y exchange rate moves in their favor? In which case this is just a funny-looking option.
> holders of paper gains exiting with debt to avoid taxable events
A similar scheme was used to evade income tax in the UK with "loan forgiveness" for a while, but was ruled unlawful. I suppose the more crypto steps you put in the harder it is to trace.
They very much can. For that reason though, the loans are always over collateralized so defaulting involves leaving some money on the table. That money could be less than hypothetical tax payments though..not sure.
E.g. if I borrow $1,000 from you to bet on a roulette table, you suffer the downside if I lose and can't pay you back, but it's still in my interest to win.
"In theory", and in practice, all investments are at risk.
How anyone can look at this gimcrack investment and think it's riskless is beyond me.
If Bitcoin were to drop to 1000 - and given it has no fundamentals and offers no actual services beyond a very volatile value store, why not? - then all of these companies would collapse like a house of cards and all these savings accounts would be worthless.
> So it's more like a savings account than an investment account.
If you recall, plenty of people lost everything they had in their savings account in bank crashes before FDIC insurance existed.
Why do they think they aren't securities?
Because they obviously meet the Howey test, and while they may have “expected” that they would be regulated by another body (and which and on what basis?), they obviously haven’t done what it would take to make them (for instance) FDIC-insured depository accounts rather than SEC-regulated securities.
FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
Do you have a reference for that? Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description (and, of course, the outcome was that they were considered securities).
The Howey case actually refers to them as "investment contracts", which I presume is language from the securities act itself. This seems like better terminology than "securities", if only because it doesn't so obviously conflict with the colloquial meaning. I'm not sure how we got here from there, although the "securities act" naming probably didn't help.
The property sold in Howey was marketable and the service contract was held out to any owner, so while I agree that neither securitization nor marketability are requirements, marketability was present in the Howey arrangement.
Yes, it does.
> If it's not securitized and it's not tradable, it's not a security.
Neither securitization nor marketability are requirements for something to be a security.
> FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
No, it doesn't. The Howey test applies to commercial paper, tradability is inherent. In that sense, the Howey test isn't the only test for a definition of a security...it is a test that applies to anything that is a tradable financial instrument.
If the Howey test was the only test used to define a security, your bank account would be considered a security. But your bank account is absolutely and definitively not a security, and it is regulated by the FDIC, which has no authority over securities.
> I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
This is obviously and demonstrably false. Even if this product was a security, which it is not, the classification of something as a security does not mean that the SEC has authority.
Futures - a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Futures - a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Future Options - a security of a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Howey itself did not concern commercial paper, so if the Howey test only applied to that, it would be nonbinding dicta.
«an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.» [0]
[0] https://www.sec.gov/corpfin/framework-investment-contract-an...
Even if you are right that tradability is not a requirement of a security, and even if you are right that this meets all of the requirements of a security, I still don't see how the SEC has jurisdiction here. The Securities Exchange Act explicitly exempts bank notes with duration of less than 9 months from SEC regulation. Interest bearing bank accounts have the unique feature that they have no required investment term: you can deposit for a century, or you could deposit for a millisecond...the interest is paid for the duration of the deposit, and the duration is entirely determined by the depositor, and is not a term in the contract. The SEC admits that even short term CD's (undoubtedly an investment contract that passes the Howey Test for a security) do not meet its legal bar for jurisdiction, so why they would try to apply it to a unrestricted withdrawable account (regardless of the underlying asset class) is absurd to me.
No, it is broader than that; it is not limited to bank notes or durations less than 9 months, but to any bank-issued security; but since Coinbase is not a bank as defined in the Securities Exchange Act [0], the bank-issued securities exception is immaterial.
[0] to wit, per 15 USC § 77c(a)(2): «any national bank, or banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term “bank” has the same meaning as in the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.]»
It is not required for it to be issued by a bank for it to be exempt.
The whole point of the Howey test is to focus on what the transaction does, not it's form, because it was trying to prevent people from tap-dancing around the regulation, exactly like what Coinbase is attempting to do here.
The capital is in theory at risk. The DeFi protocol could get hacked. Coinbase could get hacked. Coinbase could steal your money. Coinbase could go bankrupt.
The fact that their marketing leads reasonable people like you to compare Lend to a savings account with no risk, even in theory, is the choking canary of the mess.
In 2008, the banks failed. They put a gun to the heads of everyone in America and said "bail us out or you lose everything". So the bankers kept all their profits and everyone else lost big.
That is just one of many central bank failures. The only difference from the many small bank system that came before is that instead of a bank here or there failing and everyone else moving on, all banks fail at the same time. Don't count on that FDIC money either. It is setup as if only one or two banks will partially fail at any given time. In massive failures, there's not enough money to secure what they promise to secure (thus the gun to your head).
The real answer is to do away with the fractional reserve lending where a bank gets $100 and then proceeds to loan out $900. That would require banks to have much smaller profit margins and maybe even become not-for-profit entities, but we certainly can't entertain that idea..
That is simply not true. It's a fiction (of sorts) told by people who feel fucked by the financial system.
I work hard and get paid $100 for what I did. I then deposit $100.
The bank loans $90 to person X.
Person X gives the money to person Y for some good or service.
Person Y deposits $90 and now there is $190 in the bank.
The bank loans $81 to person X+1.
Person X+1 gives the money to person Y+1 for some good or service.
Person Y+1 deposits $81 and now there is $271 in the bank.
The bank loans $72.90 to person X+1.
...
The last person deposits and there is now $900 in the bank when only $100 worth of actual work has been done. $900 has been printed out of nothing and the original $100 has been devalued.
I get 0.05% interest off my hard work while the bank gets 5-25% interest off of $900 in imaginary money (future earnings, whatever).
If I printed $900 and loaned it out, I'd be arrested.
Are you claiming that when person x gives $90 to person y for some good or service, no work was done?
It seems to me that there were 3 transactions totalling 271$ in goods or services rendered, and $271 put into the bank.
> If I printed $900 and loaned it out, I'd be arrested.
Yes, because you aren't subject to the various banking regulations. Oftentimes privileges come with responsibilities.
> I get 0.05% interest off my hard work while the bank
Well of course, leaving your money in a savings account is kinda dumb. You too should invest it in a more active way if you want to make a profit.
What you're describing is related to the "velocity of money" and "propensity to save" which are odd concepts but also one of the most direct ways behavior effects the economy.
>> If I printed $900 and loaned it out, I'd be arrested.
The bank didn't print one damn thing in your example. They loaned out money that people gave them as deposits.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
> This article explains how the majority of money in the modern economy is created by commercial banks making loans.
> Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
> In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
I believe the government actually made a profit on the bailouts (the TARP program), probably because they bought while prices were low. Not that there isn’t a lot to criticize about how things went down.
I wouldn’t put too rose-colored-glasses on the pre-central bank era either, we still had financial panics and bank failures and the fact that the world is more globalized/interconnected now is probably true regardless of if we have a central bank or not.
> The real answer is to do away with the fractional reserve lending
I saw an interesting thought experiment related to this a while back.
Say country A is careful about making loans, and B is less careful. Country B takes out 300% more loans, and runs into a huge bad debt problem, and has to write down 20% of the total of all lending. Say people lose 20% of their bank accounts (maybe because the currency depreciates after a bailout).
Which country was more responsible? Country A right?
But if you look at the results, after the write down, country B has 240% as much stuff (housing, infrastructure, etc). And the people there also have 240% as much savings in the bank, since that’s mostly bank credit backed by debt.
The author made the argument that country A resembled Russia and county B resembled China.
Examples like this make me feel that the most responsible way to handle debt (at least at the public policy level) is not really very clear, since even doing things that seem responsible can have huge costs in the end.
For example his video at [1] is a pretty time efficient introduction to country-level debt dynamics (and it's endorsed by some high level people like the Khan Academy guy), and he also has a free book [2] that goes into detail for bunch of historical cases.
To completely eliminate fractional reserve lending would be economic suicide. Without fractional reserves, lending gets incredibly expensive. Interest rates would have to be sky high to quickly recuperate money distributed from a loan to be able to fund further loans.
Should we raise the minimum reserve? Maybe. But the 2008 crash was caused just as much by people taking out mortgages they couldn't possibly afford. We really need to teach financial literacy and planning in our high schools to prevent people from being taken advantage of from banks that just want to sell as many loans as possible under the assumption that if a borrower defaults, they'll still come out ahead after foreclosure since real estate is assumed to nearly always appreciate.
but ir the srgument is its a savings account then theres regulatory structures for that which i doubt they are covered either.
people ultimately praise "disruption" itself when half the time its mostly breaking laws that may or may not have grown excessive redtape
Modulo any discernible path to profitability.
It's a margin loan. Which I hope I don't need to say is NOT risk-free.
I wouldn't put my money in a bank that wasn't covered by the FDIC but who am I to tell someone else they shouldn't be allowed to -- especially if interest is better.
We dealt with an identity theft issue around the same time that I was conducting some crypto transactions with Coinbase, and the difference in security was stark. My bank hides 2-factor auth behind an obscure account setting. If someone steals your account number, they can start making direct withdrawals immediately just by entering it into an ACH form that doesn't do trial deposits. The bank relies on you keeping an eye on your statements to notice this, and they won't reimburse any fraudulent charges over $1000.
Meanwhile, Coinbase defaults to 2-factor auth. They send you an e-mail if you login from a machine whose IP & browser fingerprint doesn't match one you've logged in before. They do trial deposits for ACH linking. They send you an e-mail whenever someone initiates an ACH deposit or withdrawal from your account. There's a mandatory waiting period (1 week I think) before the funds are available. I suspect they would suck just as much as my bank if you did get hacked (I've heard horror stories), but the proactive security measures give me a lot more confidence than the mainstream financial industry.
Money doesn't appear magically from nowhere. If someone is offering you return for holding your cash, it's not just sitting there. The risk is implicit in whatever they're doing to turn your N money into NM money: there is no way to absolutely guarantee that M is >0.
The exceptions make the rule.
Especially the big glaring exception for securities maturing in less than 270 days being completely exempt from the act no matter the nature of the transaction.
There is a difference between excepted practice, regulator musings, and using a plain reading of the law no matter what people think.
Protip: the regulator has no idea which part of the law you are using, and legally cant know when your lawyers have all the supporting documents. Make it more expensive for the regulator to find out, so they’ll choose to go after people without lawyers instead, who cant afford their rights. USA
This is false. Commercial paper (not any security) maturing in less than 270 days is exempt from registration. (Like shares in private companies.)
The other provisions of the Securities Act of 1933, as amended, still apply.
Sure, don't start manipulating your market or front running everyone.
But for me that's enough. Everyone can issue to everyone and everyone can trade. That's what we're going for. And if you believe that means the SEC can still police and protect gullible easily swayed people, isn't that what everyone wants? That's a perfect medium.
The act does not mention commercial paper, it is clear that the purpose of the exemption is to not disrupt the trade of rich people in the commercial paper market. Even more reason of ignoring the commercial paper assumption and corroborating musings of the regulator. People are just afraid of challenging it because so much money is involved and they don't want to to take a risk as an issuer which typically requires a relationship with the regulator, and a relationship with the investors, and a way to actually make an attractive enough return. Markets weren't fast enough for that most of the time, now it is. Its ripe for disruption and challenge.
The commercial paper registration exemption exists because the Fed regulates it under the Bank Act. If the Fed won't accept your CP at its discount window, the § 3(a)(2) registration exemption doesn't apply [1].
And that aside, I personally think the question of whether Lend is a security is a red herring thrown out by Coinbase. According to Coinbase, the SEC said "they consider Lend to involve a security." Not that it is a security.
It is much more likely that Lend crosses over into bank- or broker-dealer-like activity. This hypothesis is strengthened by the SEC warning Coinbase and not Gemini, who are regulated as a trust company by New York, or Kraken, who are regulated as a bank by Wyoming.
> act does not mention commercial paper
The Securities Exchange Act of 1934, which created the SEC, absolutely does, under the section titled "exception for certain bank activities" [2].
[1] https://media2.mofo.com/documents/faqs-commercial-paper-and-...
[2] https://www.nyse.com/publicdocs/nyse/regulation/nyse/sea34.p...
That being said, loans are not usually considered securities.
Although they are regulated by FINRA.
https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...
A bunch of machines and a factory is not a security, but you can package it into a security.
[0] Right? Counterparty risk!
Bonds are raised from a diverse set of investors. Loans, in securities parlance, are raised from (and syndicated by) regulated banks.
Similar, you can sell shares in your business to your friend or business partner, but if you want to sell to the general public, the SEC is interested.
(I have no clue whether this distinction is the important legal one here.)
A cursory search of "loan vs bond" yields many interesting results. I am sure the variance matters from market to market.
There is of course software risk in the smart contract (although I think people underestimate that in conventional finance too).
Which is why I didn't say it. One of the nice features of smart contract platforms is that any two people can quickly set up a transaction where they swap a basket of assets for another basket of assets atomically and without counterparty risk. To get similar guarantees in tradfi requires either an underwriter (that we assume can't go bust) or escrow (with a party we both completely trust).
Smart contract systems are of course infinitely flexible, and some of the most useful kinds of systems you might want to build are not overcollateralized, but those that are can liquidate automatically with no counterparty risk.
Your comment seems to treat 'defi' as just one thing. It's not. There're a huge range of products offered, with risk ranging from lower than lots of traditional products to crazy high.
Of course there is counterparty risk - the contract writer could be adversarial. People dont always audit smart contracts (or may not realistically be able to, especially if the contract writer is attempting to obfuscate a subtle bug they can use for their own advantage). Thats the point of the above comment.
If the traditional world, courts would interpret such a contract as not valid. In the DeFi world, code is law - at least until law enforcement and regulatory agencies catch up to it.
Fair enough, if you consider that to be counterparty risk. I prefer to think of that as an entirely separate kind of risk ('software risk'). This is partly because these contracts can be written by entirely separate parties having nothing to do with the counterparty (and sometimes provided as public infrastructure, since they don't cost the writer anything beyond the initial deployment cost).
I suppose to some extent it depends whether you consider the smart contract itself as a virtual counterparty that could default either through malicious coding or through bugs that allow hackers to steal assets.
I also don't see any problem with combining smart contracts and real legal contracts. If someone scams you in the DeFi world, they're scamming you in the real world too. I know that at least the UK Supreme Court has ruled that digital assets are property at common law.
Euh... https://rekt.news/
There is no such thing as overcollateralization. Higher levels of collateral are required against higher levels of risk. If one party is required to post "excess" collateral, that's because the risk is greater than whatever you think it is.
The very fact that certain DeFi projects dealing in things like stablecoins require obscene collateral is proof that there is tremendous risk...and the high levels of collateral are an attempt to mitigate some of that.
Yes...and? Are you trying to explain why, when other Howey-test factors are present, a fixed-return guarantee does not alter the determination that an offer is a security, or argue against it? Because it seems like you are trying to do the latter while actually doing the former.
No. By that standard, no bonds would qualify as securities.
Yes, there is.
There is just a cause of action if the variation happens. But, a big point of securities regulation is to protect before money is lost on illegal offerings.
> Coinbase could spend all of the money on JPEGs of my cat and they would still have to pay a 4% return to the people they borrowed the money from.
Well, they would still owe it. They’d also potentially be bankrupt and not have to pay it. Counterparty risk is real risk.
Corporate bonds can be fixed interest. Corporate bonds are definitely regulated securities, even when fixed interest. Therefore, being fixed interest does not suffice to make an investment offer a non-security.
No, they are _promising_ you a 4% return - hardly the same thing.
There is a non-zero risk that they'll go out of business. Companies go out of business all the time, sometimes with no warning at all. I worked for a company that was for a short time the largest private company in the world. Within two years, the SEC showed up one morning, and told all the traders to perform an orderly liquidation, because the company was insolvent.
If they go out of business, you might even lose some or all of your principal.
Ask yourself this: when savings rates are around 1%, why do they have to offer 4% if this is riskless?
Surely the efficient market hypothesis means that that extra 3% or so is what they perceive people will want for bearing this extra risk?
LTCM?
"an investment contract for purposes of the Securities 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."
So presumably the logic is, lend is a security because people are "investing" securities in a contract and expecting returns not through their own efforts.
Sec has additional guidance here: https://www.sec.gov/corpfin/framework-investment-contract-an...
This is like accidentally sealing a snail in a bottle of kombucha and making a blog post about how you don’t think it constitutes negligence because you haven’t read Donoghue v Stevenson but you heard it was actually about ginger beer.
No. Banks are regulated separately and more strenuously than securities firms, much less issuers. If Coinbase wants to offer Lend as an FDIC-insured deposit account, I’m sure the SEC would be fine with it. But Coinbase can’t do that because it doesn’t follow the rules banks must follow.
According to Coinbase, the SEC said "they consider Lend to involve a security." Not that it is a security. The second question is (a) more ambiguous and (b) a red herring from Coinbase.
If Coinbase is taking deposits from customers to engage in securities trading, it's acting as a bank or broker-dealer. It is registered and regulated as neither. Note that Kraken and Gemini have state banking charters. Coinbase is drawing a false equivalence. The entire enterprise stinks of bad faith, possibly fraud.
<<The notice indicates that the SEC staff has determined it may bring a civil action against a person or firm, and provides the person or firm with the opportunity to provide information as to why the enforcement action should not be brought.[2] The person or firm is generally given 30 days to file this response in the form of a legal brief considering legal and factual arguments as to why no charges should be brought against them.>>
Like all civil matters, a person can negotiate with the (allegedly) aggrieved party, in this case the SEC, and settle the matter with them before a suit is filed.
I believe you can file an action seeking a declaratory judgement, but as I understand there is generally little reason: a Wells Notice is not, as I understand it, a “we might sue you if you do X” thing but more of “our staff have determined you have done X and that we should sue you for it on basis Y, but you have an opportunity to submit a legal brief to convince us that our staff are wrong before we approve their recommendation” thing.
That's not true.
> They’re civil enforcement so they can only pursue fines and injunctions
A lot of SEC things are both civil and criminal, and while the SEC doesn't file criminal charges, it does send referrals to DOJ. So, yes, though there are more steps before it gets to jail time, disputes with the SEC do carry that risk.
Coinbase offering interest bearing assets is taking business away from the banks. Hence, the SEC will be used as guard dogs by the banks to at the very least slow them down.
Personally I've never seen the SEC consider loans as securities before, so it seems reasonable to ask for their reasoning.
I would not, for instance, get this conclusion: https://corpgov.law.harvard.edu/2020/06/14/court-holds-that-...
A lawyer never assumes what the other side’s argument is, because your rebuttal hinges on exactly how their argument is constructed. Plus you don’t want to give your “opponent” ideas, nor do you want to essentially negotiate against yourself. If you lay out a defense, without a clear thing you are arguing against, the other side could just change their planned argument and say “ok THIS is our actual argument now”. The defense responds, not initiates.
So this article makes sense to me - while Coinbase can clearly guess what the SEC might argue, the fact is the SEC hasn’t told them yet. So there’s nothing to respond to (yet).
Agree, it is PR, they know it is a security and they have been able to get away with selling unregistered securities for so long, that they do have a legit reason to question why the SEC is just now starting to do their job.
I wonder if Texas will extend the decentralized 'enforcement' nature of the abortion bill also to those selling unregistered securities?
If you do not have to be directly harmed in order to sue Coinbase for breaking the law, you didn't have to wait for the state to actually enforce the laws that is... I don't think that is good policy, but if we are going to do it with abortion, why not extend it to money transmission and securities laws?
a) "You can make a plausible legal argument for why Lend is a security."
Their frustration, rather, is that:
b) "The SEC is not doing the same thing for near-identical offerings like Gemini Earn." and
c) "The SEC won't actually tell us what basis they're appealing to or how this relevantly differs from the others."
The US Dollar isn't a security (it's a currency), but many USD lending platforms in fact offer securities. Bonds can be denominated in USD and they are securities.
My house isn't a security, but when my bank decides to package the house-backed mortgage and sell it as MBS, it's a security.
Trying to make out like Howey is some obscure precedent from decades ago which the SEC is nitpicking over. The Howey test is the test applied to determine if something is an investment contract.
Why should the decades matter?
Supreme court cases matter...
[0] https://www.history.com/this-day-in-history/congress-abolish...
[1] Emancipation Proclamation
Quoting your own link: > [a] form of argument that attempts to establish a claim by showing that the opposite scenario would lead to absurdity or contradiction.
The claim parent is attempting to establish is "how old a law is doesn't matter". The extreme example is ignoring an old law that abolishes the slave trade, and claims it is unimportant because it is decades old, which (parent is claiming) is absurd. Therefore, the original claim is absurd.
Reminds me of the Bloomberg article "Everything Everywhere is Securities Fraud" https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
The SEC doesn't get to know which one, so if they auto-disagree let them waste their budget finding out in court
This will be a decent dip to buy Coinbase stock from paper hand bootlickers
Reversing itself in the 1950s, long after religious and exclusionary states made censorship boards across the republic
It is absolutely possible to create room for introspection for old rulings
(Later in the post…)
“All we’ve done is create a thing that people can trade which we are moving towards selling to investors against specific SEC advice to the contrary, but it is definitely not a security and as a result it is completely fine even though we have not complied with SEC regulations in any way with respect to it.”
A mystery indeed…
Plain as day!
And as to experience, I was CTO of the first company to settle with the SEC for an ICO:
https://www.sec.gov/litigation/admin/2018/33-10575.pdf
Many years of experience in crypto at the highest levels, dealt with millions of dollars in attorney fees, etc. etc.
Plain as day!
And since you have so much experience dealing with the SEC, you surely understand that the specific questions they ask will typically reveal precisely their rationale for taking the (extraordinary) step of an enforcement action, just as a prosecutor’s investigatory questions reveals their legal theory of a crime.
The SEC doesn’t go around issuing Wells notices every day, and they typically don’t issue them without giving recipients the opportunity to choose a different path. We’re only hearing one side of this story, and even that one side contains so many hints of willful obtuseness that you have to be a blind partisan to take Coinbase’s “shock” at face value.
This is not that. This is preparation to make a court case to use as precedent to attack the industry.
I feel the SEC is being a bad actor - stifling innovation rather than encouraging it.
Over the last 10 years the HN chattering class has dismissed crypto endlessly. I laugh all the way to the bank and its rise has been inevitable to anyone who understands software and finance. I look forward to the court case.
Cool.
You ran an ICO that settled with the SEC. I’m not clear on what value you offered to the public, or how you justify “making bank”?
Instead of feeling ashamed, he’s proud of having settled the case out of court and “laughed all the way to the bank”.
Crypto ethics are truly well hidden.
Your crypto schemes are just boiler room scams dressed up in CS jargon.
Because it's money that counts above all else, right?
Edit: It seems like your former company has still been operating in a shady manner since your departure [1], making it that much harder for me to take anything you say in good faith.
[1] https://medium.com/@svenema/sec-powerless-against-crypto-rug...
No admission of wrongdoing is always a red flag, implying there was definite wrongdoing. It’s good that your opinion matters less than the SEC’s “opinion”. Atleast your investors got their money back, I guess…
https://medium.com/@svenema/sec-powerless-against-crypto-rug...
“My attorney will be in touch,” too, like, you want to generate billable time for yourself to effectuate a threat to threaten me? Never understood it. Cool?
It's chess, and a version that lawyers generally don't play on such a large and open stage. The fact that Coinbase has chosen to do so looks like a 'caution' flag raising the question in my mind of why they would feel the need to do this. And to some extent I'm speculating.
reddit comment thread: https://www.reddit.com/r/CryptoCurrency/comments/pk2rjl/coin...
Which points to a tweet thread from Brian Armstrong of Coinbase that is still there for now....
https://twitter.com/brian_armstrong/status/14354409980546539...
unrolled (and probably will still be there even if tweets deleted?) https://threadreaderapp.com/thread/1435440998054653959.html
blog.coinbase.com is gone but post is still up on medium. Maybe we DDOS'd it?
https://www.coindesk.com/markets/2021/03/30/us-government-su...
The SEC has told us it wants to sue us over Lend. We don’t know why.
By Paul Grewal, Chief Legal Officer
Last Wednesday, after months of effort by Coinbase to engage productively, the SEC gave us what’s called a Wells notice about our planned Coinbase Lend program. A Wells notice is the official way a regulator tells a company that it intends to sue the company in court. As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it.
Background
Coinbase has been proactively engaging with the SEC about Lend for nearly six months. We’ve been eager to hear their perspective as we explore innovative ways for our customers to gain more financial empowerment on Coinbase. Specifically for Lend, we’re seeking to allow eligible customers to earn interest on select assets on Coinbase, starting with 4% APY on USD Coin (USDC). We could have simply launched the product but we chose not to. This is far from the norm in our industry. Other crypto companies have had lending products on the market for years, and new lending products continue to launch as recently as last month. But Coinbase believes in the value of open and substantive dialogue with our regulators. So we took Lend to the SEC first.
What we’ve provided to the SEC
Coinbase’s Lend program doesn’t qualify as a security — or to use more specific legal terms, it’s not an investment contract or a note. Customers won’t be “investing” in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship. And although Lend customers will earn interest from their participation in the program, we have an obligation to pay this interest regardless of Coinbase’s broader business activities. What’s more, participating customers’ principal is secure and we’re obligated to repay their USDC on request.
We shared this view and the details of Lend with the SEC. After our initial meeting, we answered all of the SEC’s questions in writing and then again in person. But we didn’t get much of a response. The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion. Rather than get discouraged, we chose to continue taking things slowly. In June, we announced our Lend program publicly and opened a waitlist but did not set a public launch date. But once again, we got no explanation from the SEC. Instead, they opened a formal investigation. They asked for documents and written responses, and we willingly provided them. They also asked for us to provide a corporate witness to give sworn testimony about the program. As a result, one of our employees spent a full day in August providing complete and transparent testimony about Lend. They also asked for the name and contact information of every single person on our Lend waitlist. We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information. We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us.
State of play & next steps
Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem. Rather they have now told us that if we launch Lend they intend to sue. Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused. They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves. The SEC won’t share the assessment itself, only the fact that they have done it. These two cases are from 1946 and 1990. Formal guidance from the SEC about how they intend to apply Howey and Reves tests to products like Lend would be a big help to regulating our industry in a responsible way. Instead, last week’s Wells notice tells us that the SEC would rather skip those basic regulatory steps and go right to litigation. They’ve offered us the chance to submit a written defense of Lend, but that would be futile when we don’t know the reasons behind the SEC’s concerns.
The SEC has repeatedly asked our industry to “talk to us, come in.” We did that here. But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued. A healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation.
The net result of all this is that we will not be launching Lend until at least October. Coinbase continues to welcome additional regulatory clarity; mystery and ambiguity only serve to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver.
We will keep our customers informed at every step as things progress.
And Coinbase has a market cap of $70B. I'm scared of investing in a company valued at that much that facilitates trading what are essentially digital trading cards with a chief legal officer with such a poor read on the SEC.
Nobody seriously makes the argument that Howey is outdated, so why is the year being called out here? It's written to get people up in arms, and as such I wouldn't count on anything written there to represent how Grewal actually feels.
This is pure PR.
Note that there _is_ some debate within the SEC about the application of Howey (e.g. https://www.sec.gov/news/public-statement/peirce-concurrence...) but they don't seem to be making those arguments.
Next.
Real question (zero trolling): What are the rules around here (implicit or explicit) about reposting / quoting? Sometimes, I am bit nervous to repost the whole thing. I don't see it often on HN. Maybe @dang can provide some insight.
It was a PR post written to rile a user base without knowledge of the financial system or securities law.
Unfortunately, it made it into regulatory and political channels and is backfiring massively. (If the general counsel and CEO of a $70bn exchange pretend to be this clueless, there are almost certainly deeper problems at the company.)
After reading the reddit thread: It seems to work in that case at least.
> Ok - seems strange, how can lending be a security?
I mean, in general, loans can definitely be considered securities sometimes, this is a thing? As you can easily find out googling? Either this is disingenuous, or the business has really bad legal/accounting advice.
I don't think there's any confusion at all to anyone remotely familiar with finance why it would be regulated this way. Crypto likes to rebrand decades old ideas and pretend they're new to confuse people who don't know better.
As others point out, Coinbase must know the current legality of the lending offering. The likely objective of this piece is to gain support of those invested in the industry, and for them to push their legislators to reformulate laws.
This is really all too transparent and obvious. A risk-free investment with 4% APY. What-aboutism about other exchanges (which are unregulated and off-shore). Not "understanding" the problems the "SEC" has (even though they have all the money to buy even former SEC directors knowledge about SEC procceses).
Yes, I realize their are important differences here but I don't think that getting a 4% risk-free return should be seen as an "obvious" problem.
I have zero insight into that. A lot of people seem to take it foregranted that existing bank systems are infallible. I have no way to assess that beyond the test of time (which is still worth something).
Cryptocurrency lending platforms have similar types of risk: what’s the feasibility of the thing being hacked. For most of these, I can actually do a very rough assessment because the code is public, the team is usually public (and has a track record) and there are probably some security audits by groups who either are or aren’t yet reputable. I have more tools for assessing risk.
So yes, some people will judge the risk of the 0.1% system to be lower than the 4% system. Some people will judge the risk to be the reverse (more practical if you substitute Compound/Aave for the 4% system). But you can’t separate the risk of a system from the users of that system so cleanly. There’s a very large subjective component to it.
The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate.
> The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate.
Look at your wording here: "generally regarded". This is the point I'm after: risk assessment is a thing done by individual actors. Yes, they'll outsource much of this to 3rd parties, but at the end of the day, it's a subjective thing. People with political ties with the US may be more likely to view US banking as a low-risk activity; the disenfranchised or the people with weaker US ties might view it as higher risk. It can be simultaneously true that Alice's risk-adjusted return through Lend is more than her risk-adjusted return through traditional banking, while Bob's risk-adjusted return through Lend is less than through traditional banking. That's not necessarily a contradiction.
It's somehow in human nature to not share work. The bean counters will tell you how stupid it is to manufacture in the US and that you should move absolutely everything to Asia.
>Lend your crypto to earn 4% APY
>Your principal is guaranteed
This definitely seems fishy. I don't see how this is possible unless if their position isn't levered. However, if they aren't levered, then why can't they just lend USDC themselves?
Coinbase is not a bank and doesn’t have to play by these rules.
Which is why this whole thing is such bullshit.
Coinbase: Hey, SEC, we're just giving you a heads-up that we're going to start doing something that's not in your jurisdiction. It's a loan!
SEC: Oh, so you're doing banking?
Coinbase: Nope, we're not a bank, we don't have to follow banking regulations.
SEC: ...get back in here.
You might ask, why would someone want to pay huge interest on stablecoins when money is so cheap to borrow from traditional finance now? Answer: the exchanges that do most of the action are offshore and probably nearly unbankable. FTX getting 1B of Tether several times in a week is business as usual for them (happened this past week), but its almost certainly impossible for them to get any Bank to do a 1B USD transfer without paperwork they cant provide.
[1] https://blockworks.co/coinbase-compound-labs-launch-usdc-hig...
[2] https://techcrunch.com/2018/05/16/cryptocurrency-compound-in...
[3] https://www.gemini.com/cryptopedia/what-is-compound-and-how-...
[4] https://academy.binance.com/en/articles/what-is-compound-fin...
[5] https://academy.binance.com/en/articles/impermanent-loss-exp...
My uneducated view of the Howie test is an investment qualifies as a security if you invest, do nothing, and expect a return. That’s my dumbed down definition that makes sense to me, a non lawyer. I do think Coinbase has painted a target on their back, the govt sees crypto as a threat to stability, and this lawsuit is an attempt to create stability.
Nobody would argue that it's impossible to commit wire fraud with a cellphone because it's wireless. And it's similarly disingenuous to argue the Howey test is irrelevant because it's decades old.
Is the First Amendment just some dusty old law that doesn't apply anymore because the Founding Fathers didn't have TikTok?
The point is that technology very often can and does magically change the tenets of an activity. This is just a fact of legal realism. The law can say whatever it works, but if the government is no longer capable of enforcing it, because tech moves faster and is more agile, then for most intents and purposes the law has fundamentally changed.
File sharing creating an entire industry of copyright enforcement, far from whatever you’re suggesting.
Internet pornography ending obscenity laws? What in the hell are you on about? Those laws changed before the Internet and not because of technology.
Drug laws have changed for no reason other than the fact that society has become more socially liberal.
You are conflating the fact that society is changing at the same time tech is advancing (btw - both have been occurring for millennia simultaneously).
Law is not some magical words in a special book. Law is the way that the legal system shapes human society. Would any neutral third party anywhere claim with a straight face that the New York City ride share system is not a fundamentally different regime than what it was 10 years ago?
> Internet pornography ending obscenity laws? What in the hell are you on about? Those laws changed before the Internet and not because of technology
As an aside, this is straight up factually wrong. The Ashcroft DOJ tried to actively bring obscenity charges against Internet pornographers:
https://www.wired.com/2001/06/ashcrofts-hard-line-on-hardcor...
Proceeds to show zero law changes.
For someone who responds like a prick, you have surprisingly little substance.
Also, is Coinbase saying Lend isn't an investment contract? It sure sounds like one to me. Lend my crypto to Coinbase and I get a 4% return? I like the idea but it sure sounds like an investment contract to me.
I don’t see the difference at all between a USD that makes (pitiful) interest in a bank savings account and a peg to USD that makes awesome interest in a Coinbase savings account. When I invest my USD with Wells Fargo bank they are converted to Wells Fargo Bucks that are tied to how efficient and generous the bank is (they aren’t) and my interest received is tied to that common enterprise. Those Wells Fargo Bucks aren’t classified as securities. The $1 portion will always be $1.
No one invests in Tether or USD hoping their investment increases in value, that is absurd. It’s always a $1, so it is always losing value unfortunately.
- Offer it as a bank, while complying with the regulations for being a bank, OR
- Offer it as a security, while complying with the regulations for offering securities.
My read on this blog post is that Coinbase is trying to get out of the securities option by kinda pretending to be the banking option, but without actually complying with or falling under the jurisdiction of banking regulations. Is that about right?
Bank accounts count as a security. But they are regulated more tightly by bank-account rules, so they are exempt from the less stringent Security rules.
Meanwhile Coinbase is much free-er to do with your money as they like. If they play it too risky and go bankrupt, that is your money gone. To offset this risk, securities law requires they register as a security and make the required disclosures and limit speculative statements etc.
So "banks can't compete on interest" is maybe true, but not a fair comparison since banks also have to be much more careful with your money.
It's possible Brian is being dishonest in his presentation of their interaction. It's possible the SEC did give him a rationale and he just didn't like it. But if we take what he's saying at face value, the SEC's behavior here is unacceptable for a regulator, regardless of what you think of the crypto industry.
It's a Medium joint, so if you have JavaScript blocked you won't see zip.
from https://www.cryptocraft.com/news/1105897-the-sec-has-told-us...
(And it does a redirect to medium.com not an error message, perhaps the Medium app doesn't have the feature of redirection and the blog post is still there, can't curl b/c of Cloudflare)
Edit: if i click "Read more" at the end of the article, I am able to see the whole post.
They are breaching numerous securities laws with their product.
Posting on Medium or social media is no substitute for securities compliance and obtaining appropriate legal advice.
At least that's the impression I got from phrases such as "engage productively", "proactively engaging", "eager to hear", and others that seem to say that Coinbase has good intentions and is trying their best, while at the same time seeming to portray the SEC as uncooperative and antagonistic, through phrases such as "SEC still won’t explain", "wouldn’t say why or how they’d reached that conclusion", and others.
The one that hits me the most and makes me think this is more about trying to align with the public will and not the current law is the following: "They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves."
AFAIK, a decades-old Supreme Court case is still considered valid law, and such an appeal I would imagine would fall pretty flat in a court of law, but seems to work well in a public sphere.
I'm open to being off on this, I guess I just feel a bit unsure how to proceed in this internet age, when I get the impression that people are skirting the courts of law more and more.
When buying or selling crypto on Coinbase.com vs Coinbase Pro, the trading fees are for sure lower on Coinbase Pro. However, this applies to crypto exchanges in general when you don't use their "advanced" interfaces (which are basically more like brokerage accounts with market / limit / stop orders, vs just simple buy / sell interfaces). Gemini is another offender in that regard, i.e. if you don't use their ActiveTrader interface, their fees are quite a bit higher [3].
[2] https://help.coinbase.com/en/pro/trading-and-funding/trading...
I do use OSS and I want open banking.
What I do not want is that lots of people lose money due to fraud or high volatility.
That's a bit like saying you want open source without the bugs, drama, forks or the ability for people to see the code you're publishing.
Things come with tradeoffs. Open banking comes with the tradeoff that fraud and loosing your funds become easier, but it also means that it's easier for people without access to banks to have something to store value in.
99% of the time people talk about some sort of commodity (gold) or pseudo commodity (Bitcoin).
1% of the time they talk about bonds and fiat that is backed by bonds (via government or banks).
The idea of storing value in a non degrading commodity is a fallacy. Gold is special because it doesn't degrade. Yet when you sell grain to buy gold there is no guarantee that you can buy grain in the future. Why? Because unconsumed grains simply rot away. So when you decided to save for your retirement by piling up gold you simply assumed that the pile of grains is still there, hoping that someone else started farming and maintained the pile for you. There is a mismatch between the supply of gold and grains.
The debt system is slightly better. There is now an obligation to deliver a pile of grains. There is a different problem though. People are obligated to work, but you get to choose when. The problem you run into isn't whether the pile of grains is still there because that part is guaranteed, the next problem is whether there are enough workers to start farming. There is a mismatch between the supply of fiat and labor.
When you consider this, then the reason why our pension systems are unsustainable is simply because we let the "good" years of population growth take care of the problem for us. The thought of planning 50 years ahead never occurred to us.
The moral of the story is that storing value is more complex than putting your dollars somewhere. The dollars are only worth something because there is a big machine (our society) that is running the economy, yet we believe we can isolate ourselves from that machine when it is failing. Financial independence really is just a different form of dependence.
Perhaps it's worth linking them or adding a comment to that effect?
But in our current, highly artificial, manipulated, money-printing economy, I think the SEC should just go ahead and shut down all the big crypto projects. If a crypto project can be shut down easily, it should be shut down. The SEC should also try to shut down all these so called 'Decentralized Exchanges'; if a DEX can be shut down, then it means that the DEX was not decentralized enough.
There are projects in existence today which are truly decentralized and would be impossible to shut down but they are not getting any attention because these huge crypto projects are hoarding all the newly printed money which they claim to be fighting against.
Common sense makes it sound like Lend is clearly not about securities, but the SEC has generally been looking for settlements or discussion instead of straight litigation. Why the change of motus operandi? Is it because Coinbase is big and it would make an example, or maybe somewhere in Lend there’s a business model that makes the product act like a security? Who knows at this point?
More information from Coinbase would help us empathize.
https://medium.com/@coinbaseblog?p=a3a1b6507009 works however.
Brian, this is "Regulation via Litigation". They aren't capable of working through this themselves and are afraid of making mistakes in doing so. They they leave it to the lawyers. Just the people you don't want impacting the new technologies. You have to go on the offensive
The problem for Coinbase is the SEC understands it all too well. This is an investment, very much like a certificate of deposit, which happens to be regulated so that investors don’t get screwed.
https://www.nytimes.com/2021/09/05/us/politics/cryptocurrenc...
Pretty hard to believe when Conibase's raison d'etre is to be the US-regulatory-regime-compliant face of the cryptocurrency industry, and when they are presumably represented by a law firm that has had previous clients subject to Howey test enforcement actions.
The process by which they list or decline to list altcoins on their platform is more troubling.
It seems pretty clear that the SEC is not currently meeting those standards, and that needs to be fixed. Whether or not the target is one we are currently sympathetic towards.
1. The existence of an investment contract
2. The formation of a common enterprise
3. A promise of profits by the issuer
4. The use of a third party to promote the offering
Making an argument based on SEC's action or inaction assumes you have a good model of how the SEC makes decisions. I sure don't. Do you?
They may have been looking at this space for a while, and Coinbase’s size made them act to stop the proposed product where a smaller actor’s existing product wasn’t weighty enough to sue yet.
There’s a US company named Celsius in NY that already offers fixed interest for crypto and loans. Ethereum has a dozen different defi options for lending out crypto. This isn’t some new thing that the SEC has never seen before.
It seems weird that if the SEC intends to use that ruling that they haven’t yet applied it to any of the existing products on the market or at the very least released a guidance.
To be honest, as someone who follows crypto, I get the impression that the SEC simply doesn’t know what they want to do with crypto yet.
How many of them knew about the Wells Notice from the SEC before they sold, but before the news was public?
(Among the major sellers were not just the usual VC’s but also their General Counsel and their chief accountant.)
https://protos.com/coinbase-stock-250-million-in-one-month-s...
Incidentally, I do think the SEC owes people clarity in matters of legal reasoning, but am not sure Coinbase is being fully forthright with readers here based on various other observations in the thread.