> 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!"
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.
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.
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...