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Comment by gruez | Hacker News Reader

"tether is a fraud/ponzi" claims aside, does SEC even have jurisdiction here? The SEC isn't out to protect all investors, only to protect them from securities fraud. I'm skeptical whether a stablecoin could even count as a security. From bloomberg:

>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.

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Reminder: #Tether is registered and regulated under FinCEN as all the centralised competitors. Strict KYC/AML is applied to all Tether direct users, as the other main issuers are doing. Less regulated is just FUD. Ask yourself who benefits from spreading such misinformation?

— 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.

>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.

Please indicate your interpretation of the Howey test so that we’re able to consider and respond to your assertion; without knowing why you feel it doesn’t pass them, it’s not really possible for us to consider your comment.

The SEC has provided us with a handy framework to help analyze whether or not a digital asset is likely to meet the Howey Test, you can try it out at https://www.sec.gov/files/dlt-framework.pdf

>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.

There are thousands of search results for “Why should I invest in Tether?”, indicating that general public investors may well expect a profit from their investment in it. After all, if there was no general expectation of profit, how else would Get Rich Quick scam pages sway the general public so easily to invest in it, and why else would these pages exist at all? 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. It’s certainly enough for the SEC to bring it to trial.

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.)

>There are thousands of search results for “Why should I invest in Tether?”

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.

In addition to the Securities Exchange Act of 1934, which created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes–Oxley Act of 2002, and other statutes.

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.

My understanding is that, in the US at least, "securities" is a broad category that applies to any financial asset or product that isn't regulated under other rules. However, this is pretty uncharted territory, and until there's some judicial precedent, it's impossible to be completely sure.

> My understanding is that, in the US at least, "securities" is a broad category that applies to any financial asset or product that isn't regulated under other rules

This is incorrect. Many financial assets are not securities, tether being a particularly good example.

1. USDT is not a DAR (Digital Asset Receipt) like other so called "stablecoins" (i.e. it's not backed 1:1 by physical USD). Instead it's a pooled investment fund claiming to keep NAV (Net Asset Value) around 1 USD.

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.

>1. USDT is not a DAR (Digital Asset Receipt) like other so called "stablecoins" (i.e. it's not backed 1:1 by physical USD). Instead it's a pooled investment fund claiming to keep NAV (Net Asset Value) around 1 USD.

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.

You're absolutely right. Gensler has cited the Howey test inconsistently. Well, under that definition, stablecoins are not securities. There's no expectation of profits.

I expect future battlelines being drawn around decentralized stablecoins. Tether is private and carries SPOF risk.

[1] https://www.investopedia.com/terms/h/howey-test.asp

> You're absolutely right. Gensler has cited the Howey test inconsistently. Well, under that definition, stablecoins are not securities. There's no expectation of profits.

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.

For sure without regulatory clarity very simple and magical rules based tests apply pretty much universally. I hear the SEC is short staffed.

What clarity is lacking?

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.

>the Howey test is not a magical test to determine what a security is

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.

Honestly, I'd consider it comparable to the banknotes in the pre-Civil War banking ecosystem.

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.

Depending on a number of factors, Tether falls under a few of these designations (which are overlapping and not mutually exclusive by design).

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).

Your link only says that a "investment contract" is a security, not that all securities are "investment contracts".

>not that all securities are "investment contracts".

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?

I am far from an expert however following https://www.investopedia.com/terms/s/seact1934.asp the SEC can over see over the counter securieties (https://www.investopedia.com/terms/o/otc.asp) that seems to cover financial contracts that derive their value from an underlying asset. As far as I understand Tether is backing its value with dollars and has already been in trouble over lending the money it officially used to back its cryptocurrency away without disclosing that to its users.

But that argument only applies if the underlying asset is a security, right? Is cash a security?

Securities are defined under 15 USC 77b(a)(1)

(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.

Gary Gensler thinks crypto is part of their remit:

> 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)

>"does SEC even have jurisdiction here?"

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?

> In practical terms, who's stopping them?

Courts? Pretty basic principle of how democratic systems are built.

Not so, at least in the U.S. and Canada. As per "Chevron deference" the courts are bound to defer to regulatory agencies over how to interpret ambiguous areas of the law:

https://en.wikipedia.org/wiki/Chevron_U.S.A.,_Inc._v._Natura....

> when faced with ambiguity about jurisdiction it's better to ask for forgiveness than permission

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.

Tether is similar to a money market fund and could be regulated as such.

Well, the other half of Securities & Exchange is exchange. Tether is owned and controlled by Bitfinex, who does claim to be a cryptocurrency exchange.

> 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.

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.

This rumor has been debunked. We had a glance at tether financials when the whole bitfinex IOU swap happened. Tether is backed 1:1 but they have reserves in investments, claimed to be mainly A2. Thats what people had a problem with.

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.

Tether claims to be backed 1:1, but claims to have reserves in investments, which are, yes, claimed to be mainly A2.

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.)

Their financials were shown to the new york attorney generals office who then reached a conclusion and settlement which you can read. What they did wrong was issue an IOU to bitfinex which was hacked. Not run up a 10:1 reserve market pumping scheme like tin foil hat wearers claim. Theres lots to say about tether thats bad, but thats not it.

It is worth pointing out that the conclusion and the settlement covers a time before Tether did a massive 10× growth in total circulating currency, and the reserves accounting of the latter phases are not well-established. By Tether's own (very sparse, compared to standards in the financial industry) reporting, ~75% of its reserves are "commercial paper," without any further identification of what commercial paper its holding. And if true, this would make it one of the largest holders of commercial paper, and yet no one has come forward to corroborate transacting commercial paper with Tether.

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 lied about it. That part is pretty important.

(And you are severely understating what they did, as well.)

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