Coinbase issued Wells notice by SEC
reuters.com
reuters.com
The “mean” approach to securities enforcement is what we as a society need…there are far too many scams and people who run them, and those scams seem especially concentrated within the crypto world.
After the blitz of NFT’s last year, I hope the SEC is grumpy as hell.
It’s not that crypto doesn’t fit within an established legal framework…it _does_. People have been trying to find their way around securities laws forever, but most of those laws because someone got ripped off.
CryptoExpert: "We want guidance. We want regulation."
SEC: "Your product/service is a security."
CryptoExpert: "No it's not!"
Damodoran called cryptocurrency "currency made by the paranoid for the paranoid." [paraphrase] Let's be honest, cooperating with the government is not high on the crypto nerd's list of priorities. The "cryptocurrency" concept seems to be based on a mistrust of government-issued currency and a mistrust of government more generally.
"The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so"
- https://www.coinbase.com/blog/we-asked-the-sec-for-reasonabl...
Coinbase seems to be trying their best to comply with regulation, but getting nowhere
Coinbase’s lawyers are paid to come up with a paradigm where the tokens on their platform can continue to be sold to retail with the implied benefits of a security (“buy token X and the awesome work of our team will make you money!”) while hopefully skirting the regulations. The SEC’s lawyers’ job is not to help them craft that.
It’s not like you can go to the police to repeatedly ask if your scheme to avoid the law is going to work this time. The IRS doesn’t offer that kind of tax avoidance planning feedback service either. If that’s what your business needs to operate, you’ll just have to trust your own lawyer about their interpretation of the law and why it doesn’t apply to you.
(I don't own any crypto and haven't ever; generally anti-crypto.)
[1] https://www.irs.gov/publications
[2] https://www.irs.gov/businesses/small-businesses-self-employe...
According to Coinbase…
https://fortune.com/crypto/2023/03/08/stablecoins-ether-comm...
The CFTC has been regulating cryptocurrencies just like the SEC. Which part of the government has been breaking the law? HN legal experts will figure it out with snark.
Clarity is coming.
It certainly was. Some coins like monero still are all about that. Most of the cryptocurrency space turned into stocks though. They even reinvented banks.
Coinbase claims there is "no path to registration". But that is not the SEC's problem. If Coinbase runs its operation in a way that precludes it from being able to comply with securities laws, then that is a problem with Coinbase's operation, not the SEC.
Ultimately whether or not something is a security is determined by the courts, not the SEC. The statute states that a security can be an investment contract. However "investment contract" is not defined. The definition is left to the courts.
That's why the test for a security is based on a definition used in a 1946 decision, SEC v W.J. Howey.
The SEC can state they believe crypto is a security. "Crypto experts" can state they believe crypto is not a security. But only a court can decide what actually is a security. The SEC cannot tell Coinbase if their products are securities, only a court can do that. The SEC can tell Coinbase that it thinks their products are securities. The SEC can decide to enforce the securities laws at its own discretion.^1 With the Wells notice Coinbase knows unequivocally that the SEC thinks its products could be securities.
The ball is in Coinbase's court.
The question is, then, if the SEC suggests that crypto is a security, or even that it ever might be one, what is the best course of action for a "crypto entrepreneur".
(a) stop
(b) continue
(c) comply
Coinbase and others are choosing (b). That is their decision to make. Maybe they think they can win against the SEC in court.
One of the most well-known treatise authors on the subject of securities regulation, along with Louis Loss and Joel Seligman, is Thomas Lee Hazen at UNC Chapel Hill.
He has weighed in on crypto. For example, see
Hazen, T. L. (2018). Virtual or Crypto Currencies and the Securities Laws. SSRN Electronic Journal. doi:10.2139/ssrn.3257449
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3257449
"Although some have argued that virtual or crypto currencies are not securities,36 The better view is that virtual or crypto currency transactions often, if not always, are subject to the securities laws.37"
Personally I cannot read Hazen's article and conclude that it's prudent to assume crypto is not subject to securities laws. But then I am not being paid to argue in crypto's favour.
IMO, much if not all of what we read in defense of crypto is written by folks who stand to gain from its popularity. That is not just limited to people who have spent money on it.
1. It does not need the CFTC's permission. For example, it served Paxos Trust with a Wells notice and Paxos stopped minting BUSD. CFTC might think BUSD is a commodity but that did not stop the SEC from acting to protect the public.
This is the classic notion of cryptocurrency, but the field has grown and changed a lot. People don't mint NFT collections and dabble in metaverse tokens as a middle-finger to the state. The VC-funded cryptocurrencies of the last cycle are obviously centralized and are far removed from any cypherpunk notion.
Maybe?
It's pretty hard to tell, though, because 90% of the cryptocurrency advocates I hear are from the "government is evil" crowd.
Given the history of cryptocurrencies, that was indeed the base - Bitcoin really took off once Silk Road crossed the threshold from "only drug nerds know about this" to "everyone and their dog buys research chemicals on SR". Unfortunately, the best days of Silk Road were something like an Eternal September event, as people then discovered that Bitcoin might also be used for speculation...
https://twitter.com/brian_armstrong/status/16386740838178856...
BA appears to be taking this head-on to go on the offensive.
ASEA Brown Boveri ABB Settles SEC Charges That It Engaged in Bribery Scheme in South Africa
Of course, this different interpretation if the law can mean that one side is ik clear violation of existing, and well understood, laws and regulations.
If you buy it you get full property rights. You can hide it, show it, sell images of it, or burn it. It's yours in an absolute sense, and you can do whatever you like with it.
NFTs sell the right to speculate. The works themselves are not rare or unusual, and NFT owners don't own the work itself. They can't sell copy/use rights in the way a stock photo or clipart library does.
All they have is a bet their NFT can be sold to someone else at a profit.
So while real art is often used for tax dodges, money laundering, and speculation, the artworks are not usually created for those ends. Nor are other collectibles.
NFTs are created solely for speculation. They have no other purpose. The art itself is a thin and not very convincing cover story.
On the end of the artist, real art and NFT art are sold for the same reason: someone wants to buy an idea. The tangibility of the art isn't a clear point for utility, because valuable art comes with complex considerations for its preservation and delivery, and in some cases stays vaulted and traded with certificates, which provides a definite negative utility - nobody sees it, yet you have a whole institution around trading it.
Arguments against NFT trade ultimately come from positioning the trade network beneath the state and its regulated mechanisms for speculation, when its existence clearly expresses the opposite: the state exists at the network's convenience. Every prison economy knows this dynamic - horses are traded, abuses are not total.
Sums up the case quite well.
[edit] I should say, Coinbase has been preparing for this forever. They acquired a broker-dealer license years ago, back in 2018. [1]
Besides being the first, there aren’t really any structural differences for the functionality or the development and marketing of BTC than other coins.
The only sufficient argument I see is the naivety around the distribution method which implies a metric of decentralization. To me that implies other coins should not be considered securities if they pass some decentralized metric threshold.
Now I’m also of the radical opinion that securities are actually a type of token (tokens being a general class of financial instruments like coins, securities, currency, or any asset) - not the other way around, and the law needs to be rewritten to accommodate this.
Bitcoin struggled for years to get a change adopted that most of the community thought was a good one, because nobody, not even Satoshi if they are still around, could change it.
On what legal basis do you insist that the differentiation must be by inclusion of a “mechanism”?
The way we tend to judge whether things fit into legal categories is by the criteria specified in the controlling law (including relevant statutes, administrative regulations, and case law.)
While cryptocurrency enthusiasts are fond of an approach where the mechanism is all that is relevant, mechanisms may be all, part, or none of what is relevant in law. While only tangentially relevant here, an amusing example in securities law is what something is commonly called can be relevant, even decisive, because the definition of a ‘security’ in statute includes (but is not limited to) ‘any interest or instrument commonly known as a “security”’. 15 U.S. Code § 77b(a)(1)
The presale.
Edit: the context of this is the question of whether Ethereum is a security. The SEC has already ruled that it is, and the ruling came down to the fact that it had a presale (via the Howey test).
Some argue otherwise. That will need to be determined in the courts or congress, not by a regulatory bully.
The SEC was set up by congress, the Securities Act of 1933 and the Securities Exchange Act of 1934 and several others [1]. The Howey test was made by the courts and at least finalized by the supreme court [2].
[1] https://www.sec.gov/about/about-securities-laws
[2] https://caselaw.findlaw.com/us-supreme-court/328/293.html
You argued that "courts or congress" should determine whether Ethereum meets the bar for being a security. My links point out that the the courts and congress has already put a process in place, as you seem to be requesting in your your comment:
> That will need to be determined in the courts or congress...
It sounds like you have additional complaints/issues about the SEC outside of those you put in your comment. My reply was not to address SEC as a whole, only that the "courts or congress" are the wellspring for the procedures and processes currently in place like you seemed to request.
Difficulty bombs. https://twitter.com/level39/status/1554174864600227843
The point is that the community/network/whatever that formed around bitcoin isn't centralized, so even for relatively "tame" changes like taproot, nobody could agree and it took years to merge regardless of technical merit. For better or worse and for a wide number of reasons I can speculate about, the equivalent social structure around Ethereum is far more centralized around the will of Vitalik and a handful of others, and they've demonstrated repeatedly (except around the ETC debacle which has mostly fizzled) that they can get the whole network to adopt even fairly complex and risky changes. Monero regularly forks, and even though it doesn't have a formalized leadership structure, is able to get changes rolled out. Same with ZEC and the electric coin company. Be it a single person, a pseudonym, an organization, or whatever, everything but bitcoin has forked repeatedly, which indicates a degree of central control (and thus central benefit, from the POV of regulators). In most cases outside of bitcoin, the founders have also enriched themselves enormously by remaining in control.
Contrast with the attempted forks of bitcoin: BCH was a huge mess and has been slowly fizzling out for years. BSV is a joke. Yes you could create a new fork today, but the whole point is that the difference isn't technical, it's a network. The network is partially technical (there are still lots of miners that won't mine your new fork) but is also cultural, and bitcoin users/miners/exchanges don't look up to the "dev team" as an authority. That's the key difference IMO. If you just focused on the technical you'd still be arguing that betamax was a better format.
I don't agree with the thrust of the argument either, but I think it's a genuine assertion and not begging the question.
> Now I’m also of the radical opinion that securities are actually a type of token (tokens being a general class of financial instruments like coins, securities, currency, or any asset) - not the other way around, and the law needs to be rewritten to accommodate this.
I broadly agree with this view! However, I think the law is better suited to get out of the way and gracefully allow the inevitable separation of token and state.
[1]: https://cryptoslate.com/sec-chair-gensler-confirms-everythin...
1. Bitcoin was classified as “currency” by Clayton.
2. It’s the closest to being decentralized so no “organization will benefit from the work of others”.
3. Growth of Bitcoin wasn’t initially speculative but as a use of currency, which is different from whatever token you fork as its goal would be for speculative trading, failing the Howey test.
https://www.coindesk.com/markets/2019/03/12/sec-chair-clayto...
This creates a regulatory risk, and is one reason for owning BTC instead of ETH. Note I own a few ETH and 0 BTC, and ETH has dropped 10% compared against BTC recently (normally they seem to be highly correlated (even long-term) which implies to me that the market is somewhat driven by generic crypto sector investing).
Edit: Coinbase’s argument that their staking service is not a security: https://www.coinbase.com/blog/coinbases-staking-services-are...
I doubt this claim with extreme prejudice.
https://blog.ethereum.org/2014/07/22/launching-the-ether-sal...
Staking and maybe EIP-1559 could change things?
It's sad since it seems like Coinbase is now directly collaborating with Ethereum developers https://eips.ethereum.org/EIPS/eip-3651
> The COINBASE address shall be warm at the start of transaction execution, in accordance with the actual cost of reading that account. > The COINBASE address should also be always be loaded because it receives the block reward and the transaction fees.
Looks like Coinbase currently makes up 10% of Eth staking. Would this give special privileges to Coinbase over other exchanges?
No.
I'm not sure if ETH was completely in the clear even with this approach. Vitalik and other founders seemed to have created expectations of profit in their ICO presentations to US investors in a few 2014 videos.
I mean you can say whatever you want but if it quacks like a duck it’s still a security, if you don’t mind my mixed metaphor lol
Dogecoin is arguably in the same category as Bitcoin. So forks don't have to be securities. They do have to be actually decentralized, as in one entity does not decide which fork is the true fork (like with Ethereum, Bitcoin Satoshi Vision, etc).
>Why is Bitcoin not a security but if I fork Bitcoin it is a security?
You are right. Gensler was either misquoted or mispoke.
If somebody forks Bitcoin, distributes the majority of coins for free and renounces control; then random people (not connected to the founder) start voluntarily improving and giving it value, it probably wouldnt be a security.
a product can simultaneously be a security, and many organizations in the collectibles market go out of their way to avoid that, organizations that sell physical goods with perceived scarcity and a vibrant aftermarket. within the crypto space, creators of digital assets go out of their way to avoid it too, and in this regard, I've never been surprised at any specific SEC enforcement action against any crypto team. The ones that behave one way, so far have not been sanctioned, the ones that behave another way have been. Its not arbitrary, but it does still leave uncertainty.
but where we are now, where the SEC pretends like "every digital asset is a security and we just haven't gotten to it yet", what we're left with are the behavior of the purchasers of digital assets. they buy tokens with the expectation of profit and rely on the issuing team to realize that. theoretically that logic could make anything a security, are sneakerheads trading nike-themed securities just because they're getting into it to make a profit?
at this point, I would be inclined to agree only if nike has to register their artificial scarcity shoe lines as securities and can only sell them to accredited investors. otherwise, the logic fails and a different capital markets structure needs to be considered.
“We called it something different so it’s not a security.”
SEC: “Yes it is.”
Coinbase: “The SEC won’t engage with us and tell us what aspects of our business is a security.”
SEC: “1) that’s not how securities law works, you’re the one that has to hire lawyers 2) we already told you you were offering a security”
Coinbase: “We’re being persecuted!”
Not really. The law has been exactly the same since the 1940s. Apparently though Coinbase has decided to go all in on SBF's strategy of pretending to be too dumb to understand the law.
Coinbase arguing that they should be allowed to sell illegal unregistered securities because the SEC said they could sell securities is like CVS arguing that should be allowed to sell cocaine because the government told them they could be a drug store.
Unfortunately the CFTC has another view and they both can’t be right so which part of the federal governance applies here?
https://www.cftc.gov/digitalassets/index.htm
This ambiguity is why clarity is needed. In the famous words of Matt Levine everything is securities fraud.
It seems obvious that some legal clarity is actually required here.
Of course they can. Whether something is a commodity has absolutely nothing to do with whether something is a security. They are completely orthogonal concepts.
What is a commodity then?
Coinbase taking money from depositors, loaning it out, and giving the depositors interest from the loan, is a security product. Page 1 of the Securities Exchange Act of 1934: https://www.govinfo.gov/content/pkg/COMPS-1885/pdf/COMPS-188...
It… really doesn’t seem complicated. The SEC told Coinbase they’d be in violation of security laws if they expanded these products, last summer. And did so publicly.
I don’t understand how this could not be more clear. The first page of the securities act and the remaining of the paragraph that goes the page 2 describes exactly what they’re doing, and defines it as a security. The SEC has told them this is a security.
I’m genuinely baffled how people are still amplifying this “well they won’t tell us what part is a security!” They’ve been explicitly clear. The law is not hard to understand - just read the above link for 2 pages. I feel like I’m taking crazy pills here.
But apparently that nomenclature bypasses this very clear and explicit definition
“The term ‘‘exchange’’ means any organization, associa- tion, or group of persons, whether incorporated or unincor- porated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securi- ties the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.”
You could reply to my comment instead of obliquely referencing it here.
>this very clear and explicit definition
This is a definition of an exchange (specifically a securities exchange), but nobody is contesting that Coinbase has an exchange product, just whether the assets for which they operate the exchange are securities or not.
Coinbase Earn is not "bringing together purchasers and sellers", because people staking their crypto are doing neither. Putting up some collateral in exchange for the privilege to validate blocks and collect a reward for doing so cannot possibly fall under a reasonable function "commonly performed by a stock exchange".
Don't regular banks turn your deposits into investments (securities) that provide returns which become your interest?
Is the idea here that Coinbase is doing nothing but passing your crypto to the 'investment banks' to trade with and earn your return, then just depositing that 'interest' back?
Yes. While blockchains like Ethereum are open protocols and staking is permissionless, it isn't exactly easy if you aren't savvy and/or somewhat well off already. The value add here is an IT service.
>Do they take a cut?
Yes, between 15 and 35 percent.
>What is Coinbase doing with the staked crypto?
Nothing, staking involves "locking" your crypto in exchange for the privilege of running a validator. This is equivalent to "mining" in a proof-of-work protocol, and comes with similar rewards from the protocol in exchange for securing the network (with the risk that if you deviate from consensus, your staked crypto could be "slashed"). Coinbase operates the validator on your behalf.
>Don't regular banks turn your deposits into investments (securities) that provide returns which become your interest?
I'm not sure every investment is a security (some of them are just loans), but more or less.
>Is the idea here that Coinbase is doing nothing but passing your crypto to the 'investment banks' to trade with and earn your return, then just depositing that 'interest' back?
Lol no.
Using your analogy, if I send money to a Bitcoin mining company, they use the money to buy/run miners, and then send me a percentage of their profit, isn't that an investment in a common pool? Isn't the item they use to validate my share a security?
Bitcoin may not be a security but the middleman is a securitizing a service that involves bitcoin, right?
What Coinbase product does this? I was under the impression all of "Coinbase earn" was just staking-as-a-service.
We operate staking nodes on certain blockchain networks utilizing customers’ crypto assets and pass through the rewards received to those customers, less a service fee. In other cases, upon customers’ instructions, we may delegate our customers’ assets to third-party service providers that are unaffiliated with us. Some networks may further require customer assets to be transferred into smart contracts on the underlying blockchain networks not under our or anyone’s control.
...probably moot if these "third party service providers" are just doing the busywork of interacting with the protocol, on behalf of Coinbase, on behalf of the user. I grant that this involves a kind of custody management you don't see in other non-securitized IT services, but as long as everything is spelled out clearly (which it seems to be in the excerpt you posted) I maintain my position.
That it's not a loan or it's not a security? Or both?
I guess my final question is: do you think there is any risk to a user of those third party service providers going under and not returning capital (either due to slashing risk or normal business risk)?
Of course, but it's more like an email provider going under and you losing your inbox than a bad mortgage (which isn't to say that it's exactly the same, because blockchain assets are practically treated as currency, but clearly doesn't map onto the traditional understanding of securitization).
Coinbase lawyers understand it perfectly well, Coinbase PR understands that their fans aren’t able too.
Where this gets messy is with things like Eth when they stake amounts less then 32 Eth from a customer, which inherently means they are providing a pooling operation on top of what the protocol expects. Does that pooling make their activites a security?
But the SEC is not providing any kind of clear lines on any of this to identify where there is a line when "IT services" becomes a security.
Sure, I could write multiple mortgages and roll them up into an MBS myself too, isn't the bank just doing the technical work there too?
Do you not know the mechanics of staking?
If so: https://solana.com/staking
The bank is quite literally writing multiple loans and selling a security. I fail to see how providing tools for customers to more easily put up their tokens as collateral for the privilege of writing new chunks of data to a blockchain (and reaping the rewards) is at all equivalent to either activity.
I admit that the name "Coinbase Earn" and the marketing material could be construed as misleading (but not that misleading).
And Coinbase is doing the work of abstracting that process into a single instrument (Coinbase earn)? Because that’s securitization.
This is not a specific enough definition. I don't think my checking account is a security, despite the fact that I am loaning my bank money which they eventually give back.
I defined a loan. because you said:
>The bank is quite literally writing multiple loans.
I was establishing that Coinbase is also making loans.
Then, I said
>Coinbase is doing the work of abstracting that process into a single instrument (Coinbase earn)? Because that’s securitization.
Because that (pooling multiple loans and sharing the proceeds of those multiple loans with lenders) is securitization.
As far as I understand, you are incorrect. Coinbase is not making loans, at least not in the context of Coinbase Earn. Happy to be corrected here.
It's like if the bank gave my currency (USD), to a different business owner (who needs it to run their business), who then puts it at risk (e.g., bankruptcy risk), to earn a return (i.e. profits).
I really don't see what the line is here. Could you explain?
>It's like if the bank gave my currency (USD), to a different business owner (who needs it to run their business), who then puts it at risk (e.g., bankruptcy risk), to earn a return (i.e. profits).
Who is the "different business owner" in this case? Coinbase isn't giving my coins (rhetorically, I do not use Coinbase Earn or own any significant amount of blockchain assets) to anyone, they're interacting with a decentralized protocol on my behalf.
The risk profile also isn't exactly comparable, as in your example the bankruptcy and the potential profits are directly linked, while slashing is a punitive measure imposed by the protocol to punish bad behavior. The risk is that Coinbase mismanages their validators, but that's an error in service not in investment. More like a package getting lost in the mail than a business going bankrupt.
This is an incorrect assumption that is true of ETH, but not the majority of coins that Coinbase Earn ingests.
From the 10-k:
We operate staking nodes on certain blockchain networks utilizing customers’ crypto assets and pass through the rewards received to those customers, less a service fee. In other cases, upon customers’ instructions, we may delegate our customers’ assets to third-party service providers that are unaffiliated with us. Some networks may further require customer assets to be transferred into smart contracts on the underlying blockchain networks not under our or anyone’s control.
>The risk profile also isn't exactly comparable, as in your example the bankruptcy and the potential profits are directly linked, while slashing is a punitive measure imposed by the protocol to punish bad behavior.
What? Do a good job, make money. Do a bad job lose money.
Interesting — an aside, I did not realize just how many protocols are supported on Coinbase Earn, otherwise I would have simply gone through each to see — but probably moot if these "third party service providers" are just doing the busywork of interacting with the protocol, on behalf of Coinbase, on behalf of the user. I grant that this involves a kind of custody management you don't see in other non-securitized IT services, but as long as everything is spelled out clearly (which it seems to be in the excerpt you posted) I maintain my position.
>What? Do a good job, make money. Do a bad job lose money.
This is more accurately phrased as "Do nothing out of the ordinary, make money. Do a bad job lose money." Nobody can "stake better" and expect more rewards out of it.
I'm sorry, you can't just use the word protocol to change the first principles of the interaction. A bank is just doing the busywork of interacting with a borrower on behalf of me.
>Nobody can "stake better" and expect more rewards out of it.
This is such an interesting logical fallacy. The implication is that the default state is success and the 'other' state is failure. You can definitely stake better than others - that's the point of slashing.
Staking isn't nothing, it's an activity that requires skill, otherwise, why does it even exist? Shouldn't a centralized computer just do all the staking/validating if that's the case?
Like I thought crypto maximalism was about how incentives and competition solve problems that exist in trad finance?
Unless Coinbase Earn is fraudulent — maybe it is, I don't know — I would argue you can and should. In the case of Ethereum, Coinbase is providing an IT service. In the case of [other protocol], Coinbase is hiring a contractor to provide an IT service on their behalf. For any reasonable understanding of what financial lending is, there is no "borrowing" here.
>Staking isn't nothing, it's an activity that requires skill, otherwise, why does it even exist? Shouldn't a centralized computer just do all the staking/validating if that's the case?
These claims demonstrate a profound, ignorance of how these protocols work — something I'm calling into attention not to berate you personally, but so that people who stumble across this thread later appropriately discount your claims.
Please enlighten me then? I’d love to understand why they call it “rewards” and “penalties” if you can’t be good or bad at it.
Like from[0]:
The key concept is the following:
Rewards are given for actions that help the network reach consensus.
Minor penalties are given for inadvertant actions (or inactions) that hinder consensus.
And major penalities—or slashings—are given for malicious actions.
How can you read the above and make the point that everyone gets the same expected benefit from staking? Were you unaware of the minor penalties point?
[0]https://launchpad.ethereum.org/en/faq
And to be clear, since I think you're way missing my point here - consensus requires the potential for diversity, otherwise, if validation is deterministic (as you imply), then there is absolutely no need to decentralize it.
p.s. I won't criticize you personally, but I will remind you that when one feels like someone really doesn't understand something, there's a decent possibility they themselves don't.
Also, to lighten the mood - isn't it funny that ETH spells things wrong on its website so often? If only there was decentralized spell-check!
It isn’t clear to me how this is different from a savings account, which are not even in the legal jurisdiction of the SEC.
This honestly smells of the usual turf war bullshit between the CFTC and SEC, just like the one that cause forex brokerages to completely separate from securities brokerages. The SEC wanted control over forex but they couldn’t have it, so they regulated the shit out of securities brokerages in order to twist the CFTCs arms.
Notably, the one crypto that the SEC guidance has said is not a security, i.e., Bitcoin, is missing from the list of coins available for Coinbase Earn.
Customer lends coins to CB, which then stakes those coins for them in crypto where staking is a thing. It does not matter if they don't "technically" lend the coins, what matters is that they what they have done has the legal effect of lending the coins to CB.
In this case, CB is in a worse position than I originally stated, since essentially all staked crypto is regarded as a security by the SEC. In which case, it's irrelevant that the SEC didn't say which particular crypto is a security; by its guidance all of the coins in CB Earn are.
The SEC should have a more collaborative spirit and share so that Coinbase can follow regulations or make their case. If the SEC is actually withholding this information they are acting in bad faith and operating more like a mob shaking someone down.
Instead it’s the usual crypto playbook of “move fast and break things” and then play dumb.
PonziCOIN (Symbol: PONZI) - Down 98.8% from high - https://www.coinbase.com/price/ponzicoin
I will poop it NFT (Symbol: SHIT) - Down 98.5% from high - https://www.coinbase.com/price/i-will-poop-it-nft
Coinbase lists 17,028 "assets", as it calls them, but only allows trading of 254. While some of the meme coins like the above only have a market cap of $703, the smallest asset Coinbase currently lets you trade has a market cap of $3M.
Coinbase and Brian Armstrong is defrauding the public.
I have to imagine the SEC and Coinbase are in fact talking directly on a more off the record basis here as well... but who knows.
I think the equivalent here is the IRS saying "look, these numbers look wrong to us. Please check them. We are not in the job of doing taxes for you".
Coinbase has plenty of lawyers and legal budget and would happily do an analysis if sufficient guidance actually existed to complete an analysis.
Trying to play games to make them not securities is where crypto's lawyers are going wrong
Crypto is looking for a hack that can make their stuff not securities, and the SEC isn't playing along
“For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.”
There are three components:
1. expectation of profits 2. a common enterprise 3. depends “solely” for its success on the efforts of others.
So hyperbole above is false, real estate, in the simple sense, isn't regulated by the SEC.
It’s more like the guy running the FAA is a former Boeing exec and refuses to grant airspace authorization to rocketry startups.
But to issue a Wells notice shouldn’t they have already performed this research? Seems like both parties benefit by saying something like:
Products with X, Y or Z characteristics as defined by Laws 1, 2 & 3 are securities, including but not limited to products A, B and C, etc.
The IRS doesn't usually do that, though.
If they suspect something might be fishy, they'll audit you and make you justify your reported return.
If they can see that you're a terrible accountant, there's a good chance they'll just send a correction, usually in the form of an estimated bill, but sometimes in the form of an unexpected check.
The dirty secret of American taxes is that unless you move a lot of money under the table, the IRS does already know how much you owe. But there are jobs that need protecting in the tax prep sector.
The SEC told them already several times that their products are securities, it's just that Coinbase ignored it completely.
As for the reason why usually the SEC (although I'm no expert here) don't provide a specific definition, I suppose it's similar to regulating financial markets - especially in trading.
There are concepts like "spoofing", for which there is no exact definition provided by the regulator - for the simple reason that if they do provide it, the rational actors will push it to the limits, or try to find loopholes.
Everybody knows what they can or cannot do - it's just common sense.
In some states I can use my money to hire hookers, or buy drugs.
But if I want to buy crypto, all of a sudden that is a problem and the government needs to come in and "protect" me from it. Why is that, I wonder?
The opposite is true (think of USDC). Eventually politicians will get it.
> In some states I can use my money to hire hookers, or buy drugs.
> But if I want to buy crypto, all of a sudden that is a problem and the government needs to come in and "protect" me from it. Why is that, I wonder?
If the casinos advertised slot machines as an investment, would you still wonder?
Taken the GNT token, used in the Golem network, for example:
https://assets.website-files.com/62446d07873fde065cbcb8d5/62...
This is a token sale. It never called itself an "ICO".
The whitepaper never once claimed the token is expected to profit its owners, and repeatedly warns of the risk of loss. It explicitly says the paper is not an investment prospectus as well.
>>What do you think the median person buying into that ICO was expecting? "I'm going to spend a few thousands dollars on this token that might have utility in this project in a few years"?? Come on.
If it turned out that the median person buying Pokemon cards were doing it for the purpose of deriving a profit, that wouldn't turn Pokemon cards into securities.
Saying "this is not a security" in a disclaimer does not stop your ICO/token/shitcoin from being a security.
It is pretty stupid. Good for me, it means I don't have to compete against people with money, but it does showcase how crazy the policies are. It is, in some senses, as bad as the Chinese capital controls.
Bitcoin has outperformed a number of investments so far and has proven more reliable than, eg, some bonds by Credit Suisse. If people want to put money there it is passing tests of legitimacy right now. Outperforming the Swiss is a reasonable bar.
Also, I know of a bridge that is up for sale. A Nigerian prince told my late uncle who used to work there in the oil and gas sector. But don't tell the Americans, no need to waste such a great investment opportunity.
https://en.wikipedia.org/wiki/Metonymy
The fact that you are equating this major Swiss bank to bridge salesmen and Nigerian princes kind of proves OP’s point.
And Credit Suisse wasn't the most stable bank to begin with, despite being the second largest in Switzerland. So of course their bonds have been riskier than others. On the other hand, hadn't Credit Suisse failed those bond returns would have been higher as well. No idea why people just don't get the link between risk and returns
But let us not get distracted from the main point, the US regulations in the area are the stuff of laughter. They're literally being forbidden from raking in easy money by their own government for no good reason.
Also, investing in shares, competing for shares, my friend I don't think you understand all this mumbo jumbo you wrote
I don’t think, to reverse the example, that US companies can offer investments to Australians without an AFSL or without oversight by ASIC or APRA.
But nowadays crypto is being pitched as an investment to the layperson who doesn’t understand the risks and isn’t being told those risks by the exchanges. It’s those folks the SEC is trying to protect.
That and prevention of larger market issues that can arise from unregulated financial services, ie FTX
No they absolutely do not.
Investing in crypto is also easy to understand. It’s speculation and the price might drop to 0.
It’s the psychology of both that are harder to deal with.
It would be a better world if we had regulation forcing such disclosure but it doesn't mean that if we still don't have it for gambling we shouldn't have it for things advertised as investments.
Crypto advertises with FOMO on a new world. It's "everybody is doing it, don't be a sucker but a winner in the future", and not "this is a risky asset where you might lose everything".
Securities are regulated even more tightly because it's *really* easy to commit fraud and fleece people of their money by lying about investments. Capitalism works because most people trust that they can make investments without being defrauded.
With hookers, non-profit donations, political donations, drugs, overpriced art, etc., the consumer knows more or less what they're getting. Lots of crypto coins are scams, and it's reasonable for the government to regulate them
That said, as Coinbase complains, the SEC is doing a really bad job of regulating crypto securities in a usable way.
What if I buy some sneakers thinking I'm going to flip them and then I lose money?
The SEC regulates the market for investment contracts (securities). The CFTC regulates the market for commodities. The legal point is that the SEC says Coinbase is a securities market, but haven't made a specific accusation, and Coinbase disagrees. But if some digital assets are securities, then the SEC definitely has jurisdiction.
Nobody regulates the pokemon card market or sneaker market. I suppose congress could decide that it's super important to regulate sneakers, and set up the Sneakers and Exchange Comission. But they haven't yet
And your argument begs the question of why any restrictions should be placed on people buying/selling financial products to regiment how they do it.
As a matter of law though, the case for being a security is no stronger cryptocurrencies than for Pokemon cards.
Person A: spends $1k per year on lottery tickets and doesn't win anything.
Person B: puts $1k into BTC at the years high and sells at the bottom getting back $200.
Both people had the goal of making a double percentage return. One had an arguably significantly higher chance of doing that.
One person was able to buy their lottery tickets at the corner store in cash, no questions asked.
The other had to file a ream of identity documents, sign an investment statement and keep constant watch on "regulations", tax obligations and even in some cases the base legality.
And then Person C comes along, and over the course of the same year sinks $1k into a bunch of clothes they never wear and eventually throws away and nobody bats an eye.
When it comes to "finance", whose money is it, really?
As for taxes, you owe them on lottery winnings as well. And for any non trivial amount, you will pay them.
Or have you "made up" there's just one and its yours?
That's all this is. Ensuring people know what they're buying. And it's for good reason, generally it's difficult to even get experts in crypto to agree on the properties of a particular product, so misunderstanding what crypto does it a very valid concern.
What part of the SEC siphoning millions of dollars of customer-created profits out of crypto companies, and then letting them continue on doing business almost exactly the same as before has anything to do with educating people about anything?
What has NY's extensive restrictions on crypto business versus other states have to do with educating people about what crypto is?
And when someone buys a lottery ticket, or gambles at a casino, I can guarantee you they almost certainly have zero idea what they're buying - or they would't buy it. How's this "education" working out there?
There may well be laws around counterfeit clothes, but are there laws around selling two identical sweaters, possibly even made in the same factory in China, but one costs 100x the other one because one was "designed" by a particular brand?
Where's education and regulation on that one? People are being duped in their millions into paying hand over fist for disgustingly overpriced clothes and I don't see anyone "protecting" them.
IMHO the correct reaction to this should be to make regulation requirements accessible and manageable so that the overhead is not prohibitive to smaller entrepreneurs. No regulations will create lemon markets and lemon markets don't self correct because the people who turn in it into lemon markets can just walk away rich.
Here are comments from the Coinbase legal https://mobile.twitter.com/iampaulgrewal/status/163866003232...
Here is some commentary on Bloomberg https://archive.ph/tXiOm
Here are some earlier comments from Mr Gensler: “Come in and talk to us” https://cointelegraph.com/news/sec-chair-doubles-down-tells-...
Coinbase has repeatedly asked for clear regulation. If anything your issue should be with the regulators for not regulating, not Coinbase for trying to operate a business responsibly as possible without clear regulation.
> Deal with it like a grown businessperson rather than whining.
Ah yes, they should just "deal with it" by bribing politicians and hiring an "army of lawyers". Why would anyone whine about that.
I very explicitly _do not want_ lawmakers to move at the speed of start-ups. Start-ups are there to move fast and break things. Laws are more rigid, and thus NEEDS to take it slow to get a full picture of the risk/reward before legislating.
Coinbase, as a start-up, was a pioneer in the shaky legal ground that is cryptocurrencies. They ran the risk of running afoul of a few laws, but made heavy profits in their earlier years (including a huge public market listing) because they took that risk. Now that the risk has materialized, they are crying because they do not want to take ownership of the risks of their operation. Rather, they would like to socialize the losses that they will take by having to finally abide by the regulation. How is that sensible at all?
The fat cats behind these "innovators" are increasingly forgetting the fact that every investment ever sits somewhere in the risk/reward curve. They would rather remake the wheel into "government bad/reward" curve, where any risk and losses is covered or subsidized by the government and all the profits flows into private coffers. I would rather they work for their keep, for once in our collective lifetimes.
Just because you don't like crypto tech companies doesn't mean the SEC can just not do its job.
No, no, no, no. That clear regulation exists, today. It's just Coinbase choosing to not comply with it and saying "it can't apply to us, we're different", then asking for special rules that make it easier for them. Coinbase is the one choosing the operate outside the law.
More than that, the conversation I assume is something like the following:
Coinbase: your security laws don't apply to us! We are different! SEC: You really think so? See you in court. Coinbase: Why won't SEC work with us to clarify their rules!
Like, I've seen a lot of cases of fake cryptobro tears but this might be near the top. If you think you're exempt from the law, be ready to defend your position in the court. Don't ask others to do your job of due diligence for you.
https://www.coindesk.com/business/2023/02/23/cathie-woods-ar...
and then yesterday... so convenient...
https://www.businessinsider.in/stock-market/news/cathie-wood...
Down 8.16% today...
The claim is she knew about this information based off the timing of the trade. It’s not evidence but it’s certainly suspicious.
It does not follow that she would necessarily know enough other information to perform well. That’s a much higher bar, especially when tech has been pretty deep in the red.
Also, just because she might have had insider info in this instance, doesn't mean she always has it. The fact Coinbase was able to release a blog post so soon after the announcement would suggest there was some knowledge that this was coming.
Oh, it’s 1.6% of her stake, too. Basic portfolio management.
"Cathie Wood of ARKK sold 160,887 shares of Coinbase, COIN, today."
https://twitter.com/unusual_whales/status/163833492762331136...
https://cointelegraph.com/news/cathie-wood-s-ark-sells-coinb...
What's the difference between Coinbase and Kraken?
Most companies in crypto want to be regulated but haven’t been able to reach a shared plateau of understanding with the SEC.
One way or another, we’re going to end up with regulation soon.
In 1946, SEC v W.J. Howey Co. (328 U.S. 293) ruled the meaning of “security” as used in the provision of § 2(1) of the Securities Act of 1933 defining “security” as : “For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.”
There are three components:
1. expectation of profits
2. a common enterprise
3. depends “solely” for its success on the efforts of others.
- Criteria #2 is debatable
- They don't meet criteria #3
- Or they don't meet criteria #4
Coinbase believes that all of the tokens they list are securities. The SEC will need to tell Coinbase specifically what it believes they are doing wrong. At the very least, if they eventually file suit they will need to make a specific accusation.
It feels like a lot of people have knee-jerk crypto=bad reactions. But read their press release - it really sounds like Coinbase is trying their best to comply with U.S. regulation, and the regulators aren't doing their jobs.
And last - For digital assets that do look like securities, the SEC provides no way to register them, and thus vaguely implies that Americans can't own digital securities. That's not their decision to make - they either have to do their job and regulate crypto securities, or get congress to ban them.
Do you really believe that any given token does not qualify as a common enterprise? Crypto tokens seem to pretty clearly meet that definition.
Additionally, if I were to buy any given token and then it gains or loses value without any effort on my part, that would pretty clearly satisfy #3. Not sure what #4 is that you’re referencing
Some tokens qualify as common enterprise and some don't. And lots and lots of tokens are sold on the expectation of profit, almost all of them.
Because the aspect that the SEC is going after is not any crypto asset it lists- it's Coinbase Earn. Staking-as-a-service products are securities according to the SEC [1]
> The SEC will need to tell Coinbase specifically what it believes they are doing wrong
That's not the purpose of a Wells notice
> For digital assets that do look like securities, the SEC provides no way to register them
This is just completely false. There are digital securities currently registered with the SEC. You can register digital securities with Form 10. Most notably, I'm sure you've heard about those ICO's that were previously punished by the SEC for being an unregistered security... they were just fined and forced to register- they now exist as registered securities. [2]
[1] https://www.pymnts.com/cryptocurrency/2022/secs-gensler-says...
[2] https://www.sec.gov/news/public-statement/digital-asset-secu...
"Commodity linked securities are investment instruments or securities that are linked to one or more commodity prices. Unlike commodities, which provide no income to the owner, commodity linked securities usually give some payout to holders."[1]
[1] https://corporatefinanceinstitute.com/resources/commodities/...
Coinbase answer ? "Coinbase does not list securities. End of story"
Here is their own answer from a year ago: https://www.coinbase.com/blog/coinbase-does-not-list-securit...
They can cry all their want - it's all PR trying to get public support. Kind of like VCs did with SVB deposits insurance..
We asked the SEC for reasonable crypto rules for Americans - https://news.ycombinator.com/item?id=35269659
It's like as if it was not bad enough already, things just keep getting worse. Silvergate, First Republic, Signature, and so on.
BTC breaking $29k, which was the long-standing support, in June 2022 was the first domino to fall. After that, things just kept going downhill. Many firms, individuals had leveraged positions that were dependent on $29k support holding. When it broke, all hell broke loose. 3AC was the first to fall. Then others followed, like FTX.
Why bother grasping at straws from a week ago or 9 months ago as if its a precursor to anything. All these unrelated things that you retroactively combine.
Just let things shake out. The SEC's actions have nothing to do with the Fed's, mismanaged banks, the White House report or anything.
> so aren’t able to clearly articulate a case.
Coinbase's staking programs are likely in violation of securities acts of 1933 and 1934. And they most certainly strike all boxes of the Howey test.
The other side of that is, securities law is bullshit. Whether something is a security or not depends on how it's packaged. If you tell people what a security is clearly, they'll make sure to legalese the technicalities and not sell "securities." The whole concept needs to be rethought, not because of crypto, the problem has always been there, it's just becoming more obvious.
As far as them falling asleep at the wheel, they've always done that. Survivorship bias aside, the SEC almost never catches actual fraudulent violations in the wild before disaster. Now, the SEC doesn't prosecute fraud, it sues for civil violations, but it's stated reason for existence is to protect the public. They've successfully done very little of that.
What I think is going to happen is it's all going to blow up in their face. Theyre selectively enforcing so as to establish precedent in court favorable to their broadest interpretation of their regulatory authority, as is their prerogative. But I think theyre going to go through a cascade of failed lawsuits due to their public image as a failure and being unwilling to clarify, some of which will set precedent that neuters them in the crypto space. And that's where the securities markets are going, infrastructure wise. Theyre fucking up, and it's going to take a non polarized congress to regulate any of this stuff effectively.
Personally, I had about $50 on coinbase at one point. As I felt that I wasn't "getting" cryptocurrency. Once I was satisfied that it wasn't useful to me I moved almost all of it out, although I still have some "dust" which seems too small to spend.
Coinbase seems designed to look like a trading platform, they feature graphs that show historical gains (and IIRC tweak the timelines of those graphs so they are always looking like the trend is up... super scammy...). I've only purchased one thing with coinbase, mostly because I thought that was a good way to move funds out. So personally, I didn't get value and I'm not going to lose money if Coinbase/cryptocurrencies tank.
The securities question appears to boil down to three questions:
1. expectation of profits
2. a common enterprise
3. depends “solely” for its success on the efforts of others.
For #1, coinbase appears to actively hype that with their "graph goes up" design. Their "learning" tool asserts that many tokens also have utility, but that seems only aspirational. Shouldn't coinbase track which tokens they feature actually have utility, avoid listing any that don't yet have usage, and delist any tokens when it's clear they have no utility? They have the data to assess that.
For #2, I'm honestly not familiar with the term.
For #3, this seems tied up in #1. If the token has utility, then the coinbase user could "use it" and engage in the market for non-speculative reasons, which should make it go up in value. If there is no utility, then there's nothing the user can personally do to increase the value.
But all this seems like a distraction to me. Coinbase seems deceptive to me in how they promote tokens to users. It's clearly a gambling platform that is trying to sprinkle on just enough "utility" to skirt the rules. The law and guidelines will eventually get updated, I don't think coinbase is entitled to SEC clarifications faster than the SEC is ready to share them. SEC is not their personal lawyer. A company trying to skirt the law with careful positioning should understand they are operating a risky business.
For me the key word here is `volunteer`. I'm no 'crypto bro' by any means, but can someone tell me why this is against SEC rules ? Or if it explicitly even is ?
Securities are legally binding agreements protected by the legal system.
If a bank does something that regulators don’t much like then they’ll shut it down rather than trying to save it. (As happened with the crypto-friendly banks.)
If their goal is to make anyone considering investing NOT do it, then this is the way: just create fear, uncertainty, and doubt. Don't lay down any clear rules anyone can follow. Just communicate: "We hate you."