Tether is under undisclosed SEC investigation, FOIA blocked
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>The rule in the U.S. is that an “investment contract,” meaning “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” is a security
https://www.bloomberg.com/opinion/articles/2021-09-08/lendin...
Under that definition, are stablecoins even securities? You buy it at $1 and the best you can hope for it is that the value remains at $1. There's no expectation of profits.
If you search around people do seem to think that "investment contracts" are "security" (eg. https://www.investopedia.com/terms/h/howey-test.asp) although I can't find someone saying "investment contracts iff security". If that's not the case, can you list what else counts as securities, and why do you think stablecoins meets those definitions?
(1) The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
This is incorrect. Many financial assets are not securities, tether being a particularly good example.
> The SEC has a three-part mission — to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets in between them. We focus on financial stability as well. But at our core, we’re about investor protection.
> If you want to invest in a digital, scarce, speculative store of value, that’s fine. Good-faith actors have been speculating on the value of gold and silver for thousands of years.
> Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.
>This asset class is rife with fraud, scams, and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.
>If we don’t address these issues, I worry a lot of people will be hurt.
(taken from one of Matt Levine's emails talking about the SEC and Crypto)
— Paolo Ardoino (@paoloardoino) December 30, 2020
Paolo Ardoino, Tether's chief technology officer.
It doesnt matter who is/isnt regulating you, once you are claiming to be a regulated instrument publicly to people in the US then the SEC have all the jursidiction they need.
The SEC does not have unlimited jurisdiction over things which are publicly claiming to be regulated instruments to people in the US.
The SEC regulates securities. According to the "Howey test" provided to us by the US supreme court it appears that Tether is not a security, therefore it does not fall under the jurisdiction of the SEC.
>C. Reasonable Expectation of Profits Derived from Efforts of Others
There is no expectation of profits from Tether tokens. In fact, you are guaranteed to lose money to inflation even if everything works out perfectly.
I would encourage you to reconsider your assumption that someone commenting about the Howey test needs you to explain what it is to them. It’s very thoughtful of you to offer that PDF, but offer it with less “you obviously don’t know what you’re talking about” condescension next time, please.
(I am not your lawyer, this is not legal advice, etc.)
But according to google trends nobody ever googles this, and most results appear to be automatically generated SEO spam or not discussing tether as an investment.
>indicating that general public investors may well expect a profit from their investment in it.
Whether or not such an expectation is reasonable is highly relevant. There cannot possibly be any reasonable expectation of profit as USDT will never be redeemed at above 1 USD, you can only lose money.
You seem to be suggesting that unrelated third parties could turn USDT into a security by lying that it's a great investment. I do not think that's true, I think that's simply fraud perpetrated by the third parties. Some Indian SEO spammer can't possibly be the one to decide if USDT is a security or not.
> Get Rich Quick scam pages sway the general public so easily to invest in it, and why else would these pages exist at all?
This is not actually happening. You can find automatically generated SEO spam pages saying essentially anything, but according to Googles own stats this just isn't a real thing.
> An investment with no profit potential does not attract flies, and investment is not explicitly restricted to businesses that have fiduciary need to use Tether on behalf of non-investors.
You have made zero effort to show that there are actually reasonable people investing in tether with the expectation of earning a profit. So far there's no indication that they exist, it seems extremely unlikely that such a person could exist (they wouldn't be reasonable).
> It’s certainly enough for the SEC to bring it to trial.
The SEC can sue you for any bullshit reason, does not mean that their suit won't be immediately thrown out.
>It’s very thoughtful of you to offer that PDF, but offer it with less “you obviously don’t know what you’re talking about” condescension next time, please.
I had no intention of being condescending by linking that PDF. I had forgotten that it exists, and was happy to find it again as it provides what seems to be the clearest public framework for assessing these things.
I'll admit that I'm a little frustrated to see so many commentators here seemingly using their dislike of Tether to justify the kind of weird mental gymnastics required to argue that the SEC should go after Tether. The SEC is simply not the correct regulator for this, there's no indication that they might be.
I'd get it if there was case law to support some of these crazy interpretations of "expectation of profits", but there isn't.
Despite what a crypto telegram group may suggest, the SEC does more than just run the so called 'Howey Test'.
Honestly I dont know what tether fan boys are so scared of, unless they know it is a scam - a regulator and/or court approval is what they should want, it is what everyone should want. If you believe in crypto you have to campaign for it to be properly classified, that will be they turning point.
As for the 'expectations of profits' zero coupon bonds look identical, collateralised debt obligations on zero yeilding instruments looks identical, USD deposits look identical and JC penny gift cards look identical to tether. Additionally tether can be bought and sold for profit, I personally have done it 1,000s of times.
In a Machiavellian way, I've come to realize that the Standard Operating Procedure for government/bureaus is that when faced with ambiguity about jurisdiction it's better to ask for forgiveness than permission. In practical terms, who's stopping them?
Courts? Pretty basic principle of how democratic systems are built.
https://en.wikipedia.org/wiki/Chevron_U.S.A.,_Inc._v._Natura....
Genuinely curious what has given you that impression. Regulators have been insanely slow to act on crypto (and there’s no regulatory overreach here).
In general, it’s a meme that regulators are slow to act and often without any teeth.
True, as far as I know, but this is not the case for Bitcoin. If, as has been alleged, Tether has been used to fraudulently manipulate Bitcoin prices, the question becomes one of whether Bitcoin falls under the remit of the SEC.
If thats a problem ok, but insurance companies invest their payout holdings in commercial paper as well and theres not much of a public outcry.
We have zero evidence of any of these being true other than the word of Tether executives, who have lied about their backing before, as determined in court.
(Also, this is only the latest claim in a series of gradual backtrackings on earlier, fraudulent claims about their reserves.)
Since there's no information on what it's holding, it has fueled suspicion that a lot of the holdings are in things like cryptocurrency scam-like companies, or as another theory holds, invested in Evergrande property notes. Tether hasn't released any information that would favor or disfavor these hypotheses.
(And you are severely understating what they did, as well.)
I expect future battlelines being drawn around decentralized stablecoins. Tether is private and carries SPOF risk.
Uhh, the Howey test is not a magical test to determine what a security is. For many things, Tether included, we have very simple rules based tests.
The Howey test is to determine things that might not qualify under letter-of-the-law but absolutely are investment contracts in substance.
Crypto (stable coins included) runs afoul of both types of definitions pretty much universally.
The SEC has been pretty clear on a number of things, and then Coinbase et al who don’t like the findings come back and play victim.
You are correct!
>For many things, Tether included, we have very simple rules based tests.
Then I have a very simple question for you.
Which of the following is Tether? any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Just choose one of those that would apply to Tether.
A bazillion local banks issued scraps of paper they said were exchangeable for "one dollar on demand". (This being when a "dollar" was a large disc of silver or a tiny one of gold).
At the base consumer level, there was no expectation of profit to accept them. At best, you could go over to the bank and they would give you the silver disc you actually wanted.
People settled for it because the alternative was less convenient or accessible, especially in parts of the country where government-issued metal discs didn't circulate freely. (much like in the crypto market, where people choose stablecoins because the fiat on/off-ramps are slow, expensive, or legally burdensome)
It's interesting to consider what happened next for those notes:
First, it was definitely possible to speculate, because bank fraud and failure was a well-known thing and paper notes traded at a discount to coin. A dollar note from a far-away bank that was difficult to redeem might pass at 50 cents, while the well established one down the street would pass at or near face value. Some old newspapers would have reports indicating the going discount rates. Similarly, we've seen stablecoins break peg due to a redemption problem, backing panic, or trust breakdown.
Second, the entire party stopped when the federal government began seriously issuing paper money and instituted a tax on private notes; it made the venture uneconomical overnight. Similarly, an actual central-bank digital currency hitting the exchanges would likely displace many of the use cases of stablecoins.
Third, we had "wildcat banking" -- it looks and smells like a banknote, but the "bank" was in the middle of nowhere, where the only customers are the pumas and bobcats. By putting that sort of obstacle in the way of redemption, you could get away with issuing notes backed by very little or nothing. Reminds me a lot of the stablecoins that say 'we can't directly redeem to Americans' or 'You can only redeem under specific narrow conditions that most retail consumers will never meet', which makes it possible to manage their outflow and hide their capitalization levels.
Tether is without a doubt (by their own design/admission) both a "transferable share" and a "certificate of deposit for a security" (since the majority of their "reserves" are supposedly securities).
2. it behaves more like an MMF (Money Market Fund)
3. market participants creating and redeeming large blocks of USDT are getting discount to NAV and/or exchange price.
Each of the points above can be interpreted as "With the expectation of profit" clause in the Howey test.
Additionally there are many regulations about MMFs, like breaking the USD peg by more than 5c, i.e. when NAV goes below 95c - the fund should be terminated.
But if you buy 1 USDT you do not own a share of that fund. That's the Tether Holdings fund that may or may not be used to redeem your USDT.
There's no indication that your 1USDT will be redeemed for anything less than 1USD even if the value of Tether Holdings's assets sinks below it's liabilities.
>2. it behaves more like an MMF (Money Market Fund)
How does USDT behave like an MMF? MMFs distribute excess earnings to shareholders.
In the case of USDT you aren't a shareholder and don't get anything at all. Your USDT token might be redeemed for 1 USD but certainly not more.
>Each of the points above can be interpreted as "With the expectation of profit" clause in the Howey test.
The expectation of profit needs to be reasonable. There's no chance you'll make a profit with tether, even in the best case scenario it's guaranteed to lose value to inflation.
Wouldn't mind if the SEC takes tether down a notch...they're a risk to the entire crypto ecosystem
Madoff's Ponzi was pretty obviously a Ponzi and was reported for years as a Ponzi to the SEC and nothing happened until it was finally popped by the market retreating in 2008 and redemptions causing the Ponzi to go completely cash insolvent.
Tether/crypto is going to pop when it pops, and regulators will then step in aggressively afterwards.
Or it might not. Unlike what Madoff was doing, it's perfectly possible for Tether to keep their game up in perpetuity.
Madoff kept his far more ambitious and risky operation going for decades, I think Tether can certainly last for longer if not eviscerated by lawmakers.
Right, but that doesn't mean that the named entity is either the target or even a subject of the investigation. Because the FOIA request is for all documents relating to the entity, if there is even one document related to any investigation of anything that mentions the named entity in any capacity, it is going to be withheld for that reason.
You can see the full letter here: https://twitter.com/CryptoWhale/status/1429819156052983816
In the case of literally any law enforcement activity, information is collected before law enforcement can come to any conclusion whether or not a law was broken.
The claim made is "under undisclosed SEC investigation", not "has already been convicted".
A FOIA response of this nature indicates there's some level of investigation occurring, or they couldn't use that reason and would have to find another reason to deny it.
How is that possible when it says "the Commission does not disclose the existence or non-existence of an investigation"?
FOIA would be abused like crazy to unearth classified information if this method of questioning worked
Denials for outright false reasons are the norm, responses routinely take 10x longer than legally allowed. Just go browse muckrock for a while to see what a mess it is.
For example, look at some of these requests pending (since 2019) with various agencies: https://www.muckrock.com/foi/multirequest/foia-outliers-queu...
Most of the replies are clownish at best.
What squeeze could there possibly be? No one is forced to deliver anything here so there is absolutely nothing to be squeezed.
now you may get some people willing to buy tether at 10 cents on the dollar but that would only continue to force down the price of tether as you exhaust the very small amount of tether buyers.
Who do you see being squeezed here?
I’d like to know who you think would be buying Tether if it was collapsing, you can’t sell if there’s no bid!
What do you mean by "tether went belly up"? Even when it's "belly up" it still has value to trade for BTC?
For example, the $449 strike SPY call expiring in 27 minutes has a bid of 0.00 and an ask of 0.02, meaning nobody will buy if you try to sell the call, but a market maker will sell you one for 0.02. If tether was worthless, the same situation would happen, people would be willing to buy for 0.00 and sell for a bit more than 0.00
Right now, everyone who has an account at Coinbase believes that if they liquidated their Bitcoin tomorrow, they would eventually get genuine US Dollars equal to the amount of money in their account. Under normal operating conditions, this is true. But if Tether's USDT goes down in price significantly, all bets are off.
Under normal operating conditions, when a client sells Bitcoin in their Coinbase account, Coinbase trades Bitcoin for Tether's USDT, the USDT sits in the user's account for a while, and eventually the user get US Dollars.
Where do the US Dollars come from?
Tether has a reserve of some US Dollars, and other non-crypto assets that can be quickly traded for US Dollars. Let's just consider this whole bucket as US Dollar reserves in order to simplify this discussion. The important thing to remember is that Tether's US Dollar reserves are only a small fraction of all outstanding Tethers.
Also, Tether is constantly gathering more US Dollars. On an average day, Tether receives more US Dollars than go out.
If for some reason, everyone decided at the same time that a USDT was worth less that one US Dollar and the price continued to drop over time, everything would change. In this dropping USDT price scenario, anyone who held USDT would go to Tether at the same time and ask for their US Dollars back.
Tether would have a few options at this point, but one option they would not have is giving everyone their US Dollars back. Remember that Tether has limited US Dollar reserves. Assuming they kept trying to refund every request with a full US Dollar, they would blow through their reserve and hang up a closed sign on their window. Tether doesn't have any bankruptcy insurance, and there isn't a government that is likely to bail Tether out. They're not too big to fail.
Oh, Tether would try some tricks to slow down the process. But they may not be able to stop the run on the bank/exchange.
So now, let's assume Tether is worth zero. What happens to Coinbase and it's clients?
Buying Bitcoin would not be a huge problem. Coinbase might have to change their procedures, but they could still find people willing to accept US Dollars in return for Bitcoin.
The trouble would be selling Bitcoin. On a normal day, they just trade Bitcoin for USDT, and if necessary, go to Tether and trade the USDT for US Dollars. But if the normal system doesn't work because a USDT is worth zero, Coinbase would have trouble selling Bitcoin in a timely manner.
People would flood Twitter complaining that they can't get their money out of Bitcoin through Coinbase, and this might trigger a second run. All Coinbase customers might lose confidence at the same time, and try to sell their Bitcoin in their Coinbase accounts at the same time. The price of Bitcoin would crash. Perhaps people would not trust exchanges such as Coinbase for a long time after, and prices might stay low for a long time.
This is all just a wild guess. What do I know?