> "We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so."
Sums up the case quite well.
Sums up the case quite well.
“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.
[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.
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.