Comment by Animats | Hacker News Reader

Comment by Animats | Hacker News Reader

The crypto industry lobbying effort has been trying to have the CFTC regulate crypto, and escape SEC regulation.[1] Now we know why.

The CFTC is mostly concerned about how things are traded. Not what the things are. Commodities are things like wheat and oil, which already exist. Not newly created things. There's nothing like an IPO in commodities. (The CFTC does regulate derivatives, which complicates this.) So the CFTC has no regulations which apply when someone issues a new crypto coin, NFT series, or whatever. The crypto issuers like that.

The SEC has two main areas of regulation - securities issued by companies, and markets. Most of the SEC's efforts are on the issuer side. The definition of a security is very broad. If you raise money by offering the potential for future profit, it's probably a security. See Howey Test.

There was litigation over whether the SEC had broad authority to regulate crypto issuers. So the SEC has been holding back on things that were not blatant fraud. On November 8, 2022, SEC vs LBRY was decided, which pretty much says crypto issues are securities, period.

Current thinking on the SEC side is that Bitcoin is probably a commodity, because the issuer is long gone and not profiting from it, but everything in crypto with a live issuer behind it is probably a security.

[1] https://www.reuters.com/markets/us/us-senators-unveil-bill-r...

Your last isn’t accurate (Bitcoin is a commodity bc of…)

Source - follow Gensler’s speeches and MIT classes, Hester Peirce’s speeches, and the SEC GitHub.

Basically, Bitcoin is likely not a sec because of how it works as a system, ethereum likely is not a sec but it gets opaque, clones of ethereum/EVM have similar treatments. From there, the ICO coins and similar tokens since then likely are secs, bunch of them are hazy as we veer into L1 and L2 and ….

The SEC has advocated for a “regulation beach” or whatever they call it to get companies to build a token within this beach, work with the SEC, and figure out the security vs commodity question. I don’t know if this has gotten traction though. There’s a SEC speech and GitHub repo somewhere for it.

Ethereum is almost definitely a security. It had an unfair issuance and is controlled and influenced by a small group. I mean it has a roadmap by vitalik!

Even more so now that they've migrated to proof of stake.

Unlike proof of work bitcoin, the control authority of the entity that is the Ethereum network is now entirely in the hands of the top stake owners, just like control authority of a company is entirely in the hands of top shareholders.

Vitalik’s roadmap is an overall view of all the work happening in parallel and some nice to haves; it’s not an official roadmap for Ethereum.

At the end of the day, the specs are defined by the community and implemented by the 10 independent client teams, compared to 1 with Bitcoin.

Besides, node operators still have the choice to update or not update their nodes, similar to Bitcoin.

Ethereum is not a security

In all reality vitalik’s roadmap is the official roadmap. It’s clearly being followed.

There is not much difference between a traditional tech company and Ethereum.

Meanwhile Bitcoin has been code complete since the whitepaper was released. There is no roadmap.

Ethereum is a security, Bitcoin is a commodity.

Gensler (SEC chair) prepared remarks, 2022[1]:

The Supreme Court’s 1946 Howey Test, which was about orange groves, says that 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.

My predecessor Jay Clayton said it, and I will reiterate it: Without prejudging any one token, most crypto tokens are investment contracts under the Howey Test. Even before the Howey test, in the first several years of our federal securities laws, some entrepreneurs were notified that they had to register their offerings of chinchillas, whiskey warehouse receipts, oyster beds, and live silver foxes as securities offerings, as “the purported sale of the…property was merely camouflage and not the substance of the transaction.”

Today, many entrepreneurs are raising money from the public by selling crypto tokens, with the expectation that the managers will build an ecosystem where the token is useful and which will draw more users to the project.

Thus, it is important that we work to get crypto tokens that are securities to be registered with the SEC. Issuers of crypto tokens that are securities must register their offers and sales of these assets with the SEC and comply with our disclosure requirements, or meet an exemption. Issuers of all kinds across a variety of markets successfully register and provide disclosures every day. If there are, in fact, forms or disclosure with which crypto assets truly cannot comply, our staff is here to discuss and evaluate those concerns. Any token that is a security must play by the same market integrity rulebook as other securities under our laws.

That's pretty clear. If there's an issuer raising money with it, it's a security. Note the line “the purported sale of the…property was merely camouflage and not the substance of the transaction.” That covers much of the NFT market.

[1] https://www.sec.gov/news/speech/gensler-remarks-crypto-marke...

Ya, I’ve been following the Howey Test and SECs read on it since ‘17 when it really started to surface with ICOs.

You copy/pasted the types of speeches I’m referring to.

“everything in crypto with a live issuer behind it is probably a security.”… This claim is still a massive overstatement from a regulation-informed perspective. Everything in crypto extends beyond “much of the NFT” market.

In ‘18, SEC chairman says ETH and BTC aren’t securities. Pre-merge, eth wasn’t a security to Gensler. Post-merge, it was. So then what about the many ETH-clones that didn’t do PoS and stuck with PoW/not-a-security ETH design. Also, “eth might be a security” came up in Sept ‘22. SEC and the chairman have changed minds in significant ways within that time period many times over since ‘09 and the whitepaper.

It’s nowhere near cut and dry as you’re making it to be, but I won’t devolve into an argument about it and instead say there’s more info to this than your views indicate you’ve researched.

Maybe not "everything". The crypto people have desperately tried to invent things they can claim are not securities. Post-FTX, and post SEC vs LBRY, that's not going to work.

The original theory behind NFTs was that they were "collectable art". But then they started looking a lot like securities, with collections, series, "floor prices", fractional ownership, secondary markets, and such. See [1] The US test for whether something is a security is use, not form. If there's a billion dollar market in trading buttons, it becomes a security.

There are NFTs representing land in virtual worlds. Most of the sellers sold land before actually getting the virtual world working. That's a clearly a speculative investment which depends upon on the promoters finishing the project. This is exactly like selling real land in a not yet built subdivision, which is a security offering in the US. See "Swampland in Florida" in Wikipedia. (Although China allows this; there are people stuck paying mortgages on unbuilt buildings, which is not going well.)

There's the DAO concept, where the token holders own the thing and can vote on running it. That looks a lot like a stock IPO in the early stages. In the later stages, when all tokens have been sold, there's an unexpected kicker. Owners of the DAO may be personally liable for its losses.[2] Not just for the amount they paid. A DAO is a partnership or unincorporated association, and debts pass through to the members.

[1] https://www.pymnts.com/nfts/2022/pymnts-nft-series-can-nfts-...

[2] https://www.jdsupra.com/legalnews/voter-beware-personal-liab...

Whether or not certain coins are securities is a separate issue that has nothing directly to do with exchanges cheating customers and losing their money, which is what happened in the case of FTX. They traded with customer funds (and apparently massively lost) and SBF even used some of that money to bribe politicians. Look at all the political donations he's made: https://fortune.com/2022/11/10/sam-bankman-fried-ftx-joe-bid...

So here's a private company that acts like a bank and like a commodity/securities exchange, but it's completely unregulated. Or else how can they simply lose 9 billion dollars without anyone noticing for months until a run on withdrawals makes it apparent that they're insolvent. In the past there were multiple other cases of such companies "losing" user funds or "getting hacked", as they often put it. And the guy running the biggest fraud of them all, SBF is all over Washington meeting with regulators and telling them crypto needs more regulation!

It's an absurd situation. They're going after decentralized finance apps and the EU wants to regulate wallets, all of which are on chain and transparent, while people like SBF have for years been allowed to run these exchanges with no oversight whatsoever. The worst part is most people do not understand any of it and will think this comes down to cryptocurrency being shady, while the actual use of blockchains fixes exactly this problem. It's the shady off-chain deals where the money disappeared and none of the users could have known what was going on, because SBF, FTX and Alameda (which are essentially all the same entity) lied about it. Regulation of financial institutions is a joke.

Reply on news.ycombinator.com