Hacker News Reader

Comment by Animats | Hacker News Reader

Basically, the Investment Act of 1934 says:

1. You have to file a prospectus (an S-1) before collecting money.

2. You have to disclose a lot of stuff, like who's really behind this, where the money goes, what the risks are, what's happened so far, and what the business plan is.

3. Lying in an S-1 is a crime.

Crypto schemes tend to violate 1), because 2) would show that their scheme is a scam, and if they tried to cover that up, 3) would put them in jail.

There's grumbling about "paperwork", but that's just an excuse. It's the part about having to disclose all that stuff under penalty of perjury that scammers hate.

View on HN

Is BlockFi a scam though? Fraud is not what they are getting fined for, and it sounds like they can continue to operate if they meet these reporting requirements, and that the company intends to do that.

They misrepresented how their assets were collateralized, creating a false impression of safety. That's fraud.

Check out the interest rates on their crypto accounts: https://blockfi.com/rates/

A guaranteed 9.25% APY on crypto deposits when US dollar savings accounts at FDIC banks do 0.50% is odd. Where is the extra money coming from?

According to them they lend the money out to institutions and traders. Margin rates can be pretty high.

That's how banks make money too. However, banks must also consider the risk of their debtors defaulting on their loans. They pass those risks on to you in the form of very low interests rates on money deposited, while keeping your deposit "safe". It seems like BlockFi was passing the risk on in the form of an undisclosed risk of losing all your money. That's the part the SEC seems to have a problem with:

> The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity.

The point is there's no free lunch. If you're making 9+% on your deposit don't be surprised if your account is wiped out when BlockFi's debtors fail to pay.

And that is why S-1 filings exist - to provide the answer to such questions. Somewhere, for this to work, there must be people paying more than 9.25% to borrow money. Who are they? What collateral are they putting up? Whatever the borrowers are doing must be high risk, or they wouldn't be paying interest that high.

In effect, this is a junk bond they're selling - high interest, with a high chance of losing the principal. Those are semi-legitimate financial products (but see Michael Milliken). However, if you invest in junk bonds, you have to evaluate them, and you don't own just one. You own a broad portfolio of them, collateralized by different things, expecting some of them to fail and some to succeed. This is why there are junk bond funds. Some of which fail, because too many of the risks were correlated.

If someone in the DeFi sector is selling this, the funds are probably being used to finance some other crypto-related scheme. Not building a factory or an apartment building, which you could probably finance at 3-4% right now. So you're probably buying into a speculation that some crypto product goes up. You're buying with a capped upside, an uncapped downside, and no visibility into the risks.

Well, the downside is capped at "you lose all the money you invested". I think. Did I miss something?

In general, yeah, you're capped at everything you invested basically ceasing to exist. Unless you bought on margin. Then, you can end up owing money, even if the asset is worthless.

Not crypto related, but one of the things that made the financial collapse of 2008 so much worse were the number of institutions that were over leveraged at the time and couldn't make the margin calls when assets started tanking. The fund I worked for at the time was leveraged as high as 40:1 at one point around that period. We exited the crisis leveraged closer to 10:1.

The problem with firms being overleveraged is when the margin call comes, it starts a snowball effect. To make the margin call, you have to liquidate assets, most likely at a loss, which further drives asset prices in the market down, increasing margin requirements in a vicious feedback loop. It's not uncommon for a firm hit with a big margin call like this to end up having to sell everything for pennies on the dollar.

I won't name names, but I worked a few high profile blowups during my tenure in finance, one of which was the very high profile bankruptcy of one of the banks that was allowed to fail in the US another was a boutique hedge fund that doubled down on a bad energy bet. Neither was pretty. But, in both cases, the root cause was the same: failure to properly understand the risk of the investments they were making either in part or in whole. Data quality in the risk system at the large bank was especially atrocious, BTW.

Another thing that made 2008 worse was bank regulators napping for a few years. Those ratings on mortgage debt stunk and nobody cared.

Heh, yeah. I think that falls under "lose everything you invested". If you invested more than you have, well, you lose more than you have. ¯\_(ツ)_/¯

That is a much worse risk than basically any other investment!

If you buy gold, the price will fluctuate, but it won't be lost. If you bought the Dow at the peak in 1929 and held it all the way to the bottom then you lost 89% of your money, but it didn't actually go to zero. When Ponzi schemes evaporate, the money disappears. You can sign on to whatever class action lawsuit comes out of it, but the lawyers are going to eat most of the proceeds.

It's more options trading than "investing", and Robinhood's profits demonstrate that most people lose money on options.

Blockfi's yields remind me of money market funds in 2008. They looked like bank accounts, and paid out mostly sane yields, but the fine print said "not a bank account, may evaporate". Well, when it threatened to evaporate, everyone freaked out: https://www.investopedia.com/articles/economics/09/money-mar...

When the NFT staking people are advertising yields of 132%, https://twitter.com/Route2FI/status/1492940519965605890 that's a huge blinking red sign that says SCAM SCAM SCAM, but 9.25% isn't as big of a warning as it should be. The moral hazard of every market bubble is sophisticated actors chasing yield on the way up, then claiming you were swindled, bamboozled, and had no idea what you were getting into, and urgently need a bailout when the bubble pops.

It's unlikely that every single borrower would default just like it's unlikely every stock in an index fund would go to zero. I wouldn't really compare it to options trading, junk bonds are a much better comparison. Lower potential return but also much less likely you would lose money than with options.

Obviously the devil is in the details, it's not clear if/how these loans are secured.

There’s no reason at all to think that a complete and total default is unlikely.

It’s far from certain but it’s certainly plausible that the value of nearly all cryptocurrency’s will collapse to nothing at all.

The more likely failure mode is that you've lent to something that's leveraged. That can go to zero on a partial drop of the underlying asset. Which is what happened in 2008.

If you check DeFi rates, 9.25% is fairly low currently.

Luckily they can run the whole scheme from Elbonia, and people are more than happy to send over cryptos from the US.

That's almost exactly how Tether (USDT) works. Except instead of Elbonia we have the Caymans

Note that Tether moving to the Caymans inspired the UK finregs to investigate the UK accounting company that’s now running Tether’s books, so I wouldn’t consider the Caymans to be a successful escape yet: https://www.ft.com/content/e86f8d72-918c-4a80-a4bf-de3110316...

Well, there is Nexo which is basically the same but headquartered in Bulgaria.

Please clearly articulate how Blockfi is a scheme or a scam.

> BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity.

As the order linked above indicates, BlockFi knowingly deceived investors. In the financial/investing context of this discussion, “to scheme” is to plan and execute deception, with intent of personal gain. Thus, my attempt to reword using your provided language rather than the order’s:

> BlockFi’s scheming led investors to believe that BlockFi was a lower-risk investment than it was in reality.

Note that any errors in translation from SEC wording to your provided terminology are my own, and that I’m making a good-faith effort to help build a verbal bridge from your confusion to an example of specific language in the order that addresses it. If my verbal bridge is insufficient, then please accept my apologies and I hope you’re able to find the answers you seek from others, or in the order itself.

(I am not your lawyer, this is not legal advice.)

It's in the article:

> The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity.

Just because a scam hasn't imploded yet, doesn't mean it's not a scam.

Conflating anything related to crypto as a scam is just lazy and anti-intellectual. This is one of HN's weakest traits IMO. I find great value in following topics and threads on HN, but it's unrelenting hate for crypto and crypto adjacent topics is unfounded.

In general I agree, but there's just so much damn smoke.

How much smoke billows off Wall Street though? Didn't that particular garbage fire get re-lit surprisingly soon after the GFC?

I'm somewhat pro-crypto for it's anti-establishment roots (which are barely visible these days) and so I find it interesting that the standard it's held to is much higher than that for existing 'finance' - for which the bar is incredibly low, seemingly for the only reason that society has developed a callous against all that (g)rubbing.

"finance is corrupt" doesn't work in favor of crypto because insofar as crypto addresses the issue, it only allows finance to be even _more_ corrupt

I genuinely think cryptocurrency makes transparent what 'finance' (and the powers attached to it) would prefer remain opaque.

The only thing that will be transparent with zero knowledge blockchains are the buggy contracts

> I find it interesting that the standard it's held to is much higher than that for existing 'finance'

It isn't though. It's has all the worst aspects of Wall Street, more wolves and a few unique problems, without the redeeming feature of it facilitating massive amounts of real world activity, and you'll still find more people on here defending even crypto's most blatant scams than you'll find arguing that securitising subprime mortgages is the future of homebuying but just had a few teething problems.

you're right but what I find even more jarring in crypto-threads is that usually the only argument (or at least the most prolific one) from the pro-crypto side is that the argument of the anti-crypto side is off-based. But that is not an argument pro-crypto that's at most an argument that's crypto-neutral. But maybe that's enough for the pro-crypto crowd because neutrality means that the show goes on. Nevertheless, it's seldom good enough for great discussions.

Being pro-crypto is like being pro-internet or pro-money. It doesn't make sense to say that. If I use Bitcoin to buy something legally online is that a scam? Am I getting scammed? Is the other person getting scammed? I just don't understand why people ignore the fact that crypto is a utility. Sure, you can hate a company that scams users into thinking their crypto token has some intrinsic value and then rug pulls a month later. I'm unsure how that's an indictment of the crypto as a technology. That's like hating email because people use it to execute phishing scams.

Genuinely curious, if you're based in the US, why do you choose to spend your BTC as money? Why not spend your USD instead (for the computer parts that you mentioned in another comment)?

> it's unrelenting hate for crypto and crypto adjacent topics is unfounded.

How is it unfounded? The carbon and ewaste problems are well documented. Any fixes for that (eg Proof of Stake) have either compromised Bitcoin's original focus on decentralization, continually delayed release, or both. Over a decade after Bitcoin's launch few use cases have emerged and none of them have proven durable. The ICO craze came and went. DeFi is still muddling along with ever more convoluted cryptoshadows of regulated fiat finance. NFTs are all the rage but currently about as intellectually stimulating as baseball cards. Hacks and scams abound far beyond any other industry.

Both "sides" of the crypto debate are welcome to share their opinions on HN. The constant stream of blockchain links on HN makes me think there are plenty of at least crypto-curious folks around. I'm not sure why the pro side feels so attacked. Share your thoughts. Share your use cases. Advance the field. Prove us on the other side wrong.

> How is it unfounded? The carbon and ewaste problems are well documented.

Without a benchmark this means nothing. Just because a new technology contributes to ewaste we should just ignore it and bury it? No use in trying to fix it right? Just kill the technology because it contributes to ewaste. That doesn't make any sense. Not to mention the majority of the uproar around Crypto being a danger to the environment is completely overblown https://www.cnbc.com/2021/07/20/bitcoin-mining-environmental...

> Over a decade after Bitcoin's launch few use cases have emerged and none of them have proven durable

Durable in what sense? I can take some Bitcoin right now and purchase almost anything I want. Seems like that money use case is pretty durable to me.

> The ICO craze came and went. DeFi is still muddling along with ever more convoluted cryptoshadows of regulated fiat finance. NFTs are all the rage but currently about as intellectually stimulating as baseball cards. Hacks and scams abound far beyond any other industry.

You're just conflating scams with crypto as a technology. If you can't find merit in cryptocurrency while at the same time thinking NFTs are mostly a scam you lack imagination.

I'll be the first one to admit I think the following are all mostly scams, useless, or only serve to create bag holders:

- NFTs

- DAOs

- ICOs (not really a thing anymore)

That doesn't deter me one bit from thinking that Bitcoin, ETH, and a handful of layer 1s are genuinely useful in creating technology to digitize money and decentralize finance. How long is it going to take? Idk. 10 years seems like not enough time. Idk why people are complaining about the lack of use cases. Something as ground breaking as disrupting the banking system is going to be a multi-decade long endeavour. Scams will come and go. That seems like a natural progression.

That article you link is out of date.

Global BTC energy consumption is now double[1] what it was in July, meaning the claim that it's somehow getting better spurious. The article also acknowledges that the energy consumption criticism is a valid issue (even despite the stats being out of date).

[1] https://ccaf.io/cbeci/index

I think it is worth it to separate money from State. Now we just need the militaries to cut their defense-of-fiat-money forces in half.

I can respect this view on cryptocurrency. I don't agree with it (I <3 representative democracy), but I can absolutely respect it. Giving up centralization and trust is expensive from an efficiency standpoint. If you look at Bitcoin for every day transactions it lags fiat in almost every functional dimension: latency, user experience, power usage, scalability, etc.

But! Bitcoin does have one completely novel trick! It can operate without State backing. No authorities. No trust between parties (whether miner<->miner, node<->miner, or node<->node). Centralization seems somewhat questionable these days, but I think "decentralized enough" is a fair assessment.

None of this is something I look for in a currency, but I can appreciate how cryptocurrencies fill that niche for those who do.

I disagree on the former. Destroying the environment just to get a shitty, inefficient, non-competitive payment system because you don't like the U.S. Federal Reserve isn't a good trade.

ICOs (not really a thing anymore)

Right. This is why.[1] That's the SEC's list of "cyber enforcement actions". They have been bringing the hammer down on about two ICOs a month since 2018. Last August, they started in on DeFi.[2] “The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Here, the labeling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that DeFi Money Market was immediately shut down and that investors were paid back."

[1] https://www.sec.gov/spotlight/cybersecurity-enforcement-acti...

[2] https://www.sec.gov/news/press-release/2021-145

It's interesting that you see "disrupting the banking system" as "ground-breaking" and obviously positive, while at the same time being uncertain as to how any new system that replaces it will actually take shape.

Why do you assume that the replacement will be net-positive?

Likewise, you reference "decentralizing finance" as a positive thing that's occuring. However, to-date, this has been nothing but a mirage--as illusory as fractional-penny transaction fees and other promises.

We're not even on a path to decentralization, and it's not a temporary aberation to be sorted out. It's actually the design, despite the ruse that tries to focus us on the idea that anyone could operate a node. Crypto is at least as centralized as traditional currency/finance. It only seeks to displace the incumbent financial class with a new one.

Boy are we going to look stupid when a non-scam crypto use comes out! Total egg on our collective faces! One of these days! I mean obviously not today, but soon, right?

How is me taking some bitcoin and purchasing something online instantly with near zero fees a scam? Please explain with precise language how that is a scam. That's a use case. Now tell me how it's a scam.

Even the most blatant scams, literal pyramids called MLMs often have some useful product to muddy the waters. I mean you can after all but that toothpaste and shampoo from Amway and use it!

Yes. The PC parts on bought on Newegg.com with Bitcoin sure are contributing to a crypto scam. How could I have not seen this?

They do because you give legitimacy to the scheme most people will lose money in once it collapses.

Tell me what you're buying.

My most recent PC build was created entirely from parts bought on Newegg.com. Newegg accepts bitcoin as payment. We're not in 2009 anymore where people only buy drugs with Bitcoin.

Does Newegg do anything with the Bitcoins or are they immediately converting them into Dollars?

IIRC Newegg is using Bitpay, which costs ~1% and settles to USD daily. It also means no refunds allowed (even in USD) to the customer using it, only store credit.

Which is an entirely pointless way to transact commerce for 99% of the population. I get my paycheck in USD and then buy goods and services with it. If it converts to BTC and then BTC back to USD then whats the point? It's just paying with a credit card with extra steps.

What's the use case here?

Oh I'm not defending it. It's a garbage way to pay considering the competitive alternatives they allow.

It's marketing to a specific niche of tech bro, which is probably a large enough segment of Newegg's customers to justify it.

I love having to file taxes documents for every transaction I make. Great currency

If you’re using bitcoin you aren’t purchasing anything instantly. Transaction confirmation is currently taking ~7 minutes.

Rule of thumb is you have to wait ~20 minutes (two blocks) for the verification.

That's a long time to hold up the line at the grocery check out.

Not much of a use case unless you want to move large amounts.

https://ycharts.com/indicators/bitcoin_average_transaction_f... - and current $1.76 is considered low compared to $50 per transaction craziness. So you have to go offchain

Again, I paid BTC for a laptop 9 years ago and it made sense for me then since it was mined BTC from 11 years ago.

In order to use BTC you need to obtain BTC and transaction fees kill any normal day to day use case.

This leaves BTC for less than legal uses where you do not care about fees.

So BTC itself might not qualify as a scam but as a mega enabler of scams and illegal activity.

EDIT: that $1.76 is just a on-chain fee for the network, most stores will charge you extra to use BTC since they do not care about BTC they want to cash out immediately so they use a 3rd party.

So unless you get paid in BTC you have very little reason to use BTC for payments.

Setting aside other ways crypto can and is being used, the most interesting thing about DeFi IMO is its compositional (and decompositional) nature. This mostly results in reinventing things that already existed in Wall St and other areas of the finance world, but are now available for anyone to use.

Can you give specific examples of these 'things' though?

Becoming a market maker, liquidity pools, yield farming, flash loans (short term borrowing of lots of money)

Becoming "your own" domain registrar without having to deal with ICANN was another interesting one to me (after checking into how all those .eth domains popped up).

It was exciting when I first looked at it and then I realized that this was actually not "democratizing" anything so much as ensuring a new class of folks would be able to create new centralized "everythings" in a new environment outside of the current system - without the benefit of the years of testing, regulation, and (sure) cruft that our current systems have because they're subject to political forces (which is actually a feature).

Maybe starting the wild west over again is a good thing? My money's on "not really" at the moment.

We are literally discussing a company being found by the SEC to have sold an investment asset without appropriate disclosure and that asset being closed to American investors. This is not the example to make your case with.

Why not? I could find countless SEC violations that are far worse than this from banking institutions that I guarantee you use on a weekly or monthly basis. Are those scams?

Yes, yes they often are. But I think you'll be hard-pressed to find many examples of legitimate banks having their primary customer offering being declared illegal and forced to stop operation immediately.

Erm, from recent memory: Wells Fargo (3rd largest US bank) had a nice 185 million fine for checking account fraud… https://en.m.wikipedia.org/wiki/Wells_Fargo_account_fraud_sc...

Not saying this justifies BlockFi’s behavior but the incentives for any bank is there!

Yes, that was a fraud. I was personally a victim of it. I will never do business with Wells Fargo again in my lifetime. That doesn't mean I think all banks are fraudulent. In particular I appreciate that there was a regulatory mechanism in place to protect consumers from that fraud.

FWIW, no. After the savings and loan crisis a lot of that went away.

Especially not typically fraudulent are the APY yield savings accounts whose deposits are insured.

Also I doubt you could find countless violations outside of (maybe?) insider trading based on MNPI at these institutions, but if you know of them you should report them - whistleblowers can make a lot of money!!

https://youtu.be/YQ_xWvX1n9g

A rant over two hours long about the endless grift and unfettered scamming that is crypto.

Two hours, and it doesn’t even cover all of it.

Reply on news.ycombinator.com