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!
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.
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.
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.
"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.