Comment by ac29 | Hacker News Reader

Comment by ac29 | Hacker News Reader

Coinbase is being willfully naive here if they are pretending like they've never heard of the Howey test.

Coinbase's Lend product pools USDC from customers, and lends them out to ??? who does ??? and pays Coinbase interest for it. Presumably the ???'s are "crypto traders" and "trades crypto, possibly with leverage", respectively. Those specific details dont matter, though.

According to the SEC: "To determine whether a transaction involves an offering of 'securities,' courts employ a four-part test outlined by the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. Under that test, a transaction qualifies as an offering of 'securities' if it involves:

(1) an investment of money,

(2) in a common enterprise,

(3) with a reasonable expectation of profit,

(4) to be derived from the efforts of others" [0]

I'm not a lawyer or a securities regulator, but it seems hard to see why Coinbase Lend doesn't qualify as a security under those rules.

[0] https://sgp.fas.org/crs/misc/R45301.pdf (coincidentially this PDF is about ICOs, but isnt directly related to the current SEC action against Coinbase).

Serious question, under this test, why shouldn't an ordinary savings account be considered a security? Do banks just have a grandfathered exemption?

> Serious question, under this test, why shouldn't an ordinary savings account be considered a security? Do banks just have a grandfathered exemption?

I'd guess a savings account at least fails the "common enterprise" part of the test.

From the linked PDF:

> Lower courts have disagreed about the proper test for assessing the “common enterprise” element of the Howey test, and have adopted three basic approaches to this requirement: (1) “horizontal commonality,” (2) “broad vertical commonality,” and (3) “narrow vertical commonality.”105 Under the horizontal commonality approach, a “common enterprise” exists where investors pool assets and “share in the profits and risks of the enterprise.”106 By contrast, vertical commonality emphasizes the relationship between an investor and the promoter of an enterprise. Under the broad vertical commonality approach, a “common enterprise” exists where an investor’s fortunes are dependent on the efforts or expertise of the promoter or his agents.107 Under the narrow vertical commonality approach, a “common enterprise” exists where an investor’s fortunes are dependent not only on a promoter’s efforts or expertise, but also on a promoter’s profits.108

> (1) an investment of money,

Is usdc money?

it's a money surrogate, and like almost anything else it can be used as a medium of exchange / means of payment / barter.

"an investment of money" in the Howey test is not about literal money, it can be anything with monetary value, e.g. orange groves.

I think you mean "e.g. orange groves". "i.e." is an abbreviation for "id est" meaning "That is" (or you can remember it as being like "In essence"). If orange groves were the only thing with monetary value then i.e. would be appropriate. If orange groves are an example of a thing with monetary value then you want "e.g." (for example).

If I loan you a chicken today in exchange for two chickens tomorrow it’s a security.

Stock lending (for short selling) is not considered a security, it is considered lending. Most cryptocurrencies aren't even considered securities by the SEC...only a handful of tokens. It would be reasonable to expect a similar treatment here.

Stock lending for short selling is regulated by FINRA.

https://www.finra.org/filing-reporting/regulatory-filing-sys....

Exactly. The same goes for margin accounts. I can see both the FDIC and FINRA having a claim to regulate these crypto lending accounts...the SEC is the last that I would expect to do so. The fact that they're trying to classify something that can't even be traded as a security is mind boggling.

> I can see both the FDIC and FINRA having a claim to regulate these crypto lending accounts...the SEC is the last that I would expect to do so

FINRA is entirely subservient to the SEC.

What does that even mean? FINRA has its own turf that the SEC can't touch, and the courts have been very clear about that.

> FINR has its own turf that the SEC can't touch

You’re thinking of something else. FINRA is a non-profit self-regulating organisation. It has no power over anyone who doesn’t voluntarily submit to its rules. It is not a part of the government.

The SEC was created by the Securities Exchange Act of 1934. It regulates FINRA [1].

The regulator the SEC has constant turf battles with is the CFTC [2].

[1] https://en.m.wikipedia.org/wiki/Financial_Industry_Regulator...

[2] https://www.cftc.gov/sites/default/files/idc/groups/public/@...

> You’re thinking of something else. FINRA is a non-profit self-regulating organisation. It has no power over anyone who doesn’t voluntarily submit to its rules. It is not a part of the government.

Financial industry participants are required by the SEC to submit to its rules and regulatory authority. You literally cannot create a financial institution without being forced to submit to FINRA.

> You literally cannot create a financial institution without being forced to submit to FINRA

Yes, you can. To trade securities you have to be a member of an SRO, of which FINRA is one and the largest. (MSRB is another. Before 2007 there were non-NASD NYSE members. And if you're starting a bank or a hedge fund or a VC firm, FINRA has nothing to do with you.)

Going back to the original assertion: yes, FINRA was created by and is subservient to the SEC. If FINRA has proper jurisdiction, the SEC certainly does.

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