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When it comes to the staking side of things - Coinbase's position is that they are simply providing a technical service to their customers to do something that their customer's could do themselves. There isn't a borrower that Coinbase is lending the coins to. It is a protocol that locks them up.

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.

>- Coinbase's position is that they are simply providing a technical service to their customers to do something that their customer's could do themselves.

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?

When it comes to staking, who is being lent to? It doesn't seem like a loan to me at all.

Validators. It's being lent to validators.

Do you not know the mechanics of staking?

If so: https://solana.com/staking

> 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

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).

Wait, temporarily giving someone currency that they eventually give back to you is more or less the definition of a loan, no?

And Coinbase is doing the work of abstracting that process into a single instrument (Coinbase earn)? Because that’s securitization.

>temporarily giving someone currency that they eventually give back to you is more or less the definition of a loan... 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.

Wait, don't play fast and loose here.

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.

>I was establishing that Coinbase is also making loans.

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.

I'm unclear how taking one person's currency (let's say Solana) and giving it to a different person/validator (who needs it to fulfill the requirements of a validator on that blockchain), who then puts it at risk (e.g., slashing risk), to earn a return (i.e. rewards) is at all different from a loan.

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?

For the record, I'm most familiar with Ethereum and am reasoning from there, Solana may be different.

>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.

>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.

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.

>we may delegate our customers’ assets to third-party service providers

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.

>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'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?

>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

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.

> 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!

Isn't it quite simple? Apply the Howey test. Very obviously yes. Both pooling and non-pooling are securities

>Coinbase taking money from depositors, loaning it out, and giving the depositors interest from the loan, is a security product.

What Coinbase product does this? I was under the impression all of "Coinbase earn" was just staking-as-a-service.

They enabled that pretty recently for me. A few weeks ago?

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.

For posterity's sake, if you insist on replying to me in two seperate threads, here is an excerpt from my reply there:

...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.

You maintain your position of what?

That it's not a loan or it's not a security? Or both?

There are no loans directly involved in the functionality of the Coinbase Earn product, and staking-as-a-service is just that: an IT service, not a security.

We’ll time and this argument are a flat circle then.

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)?

>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).

This Wells notice is not about Coinbase lending out money but rather about staked assets. Coinbase is not doing any lending.

Didn't they just offer ~$3Bil to Circle recently?

If that were the whole definition of a security, then interest-bearing savings accounts would be considered a SEC-regulated security. But they aren’t, for a very simple reason also outlined in securities law: They have no term nor maturity. Money can be withdrawn at will. There is no obligation to keep your money deposited in order to get paid for the time it has already been deposited.

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.

Right. How could "Coinbase Earn" not be a security?

Based on comments here, because they called it “staking as a service”.

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.”

>Based on comments here, because they called it “staking as a service”.

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".

Does Coinbase stake on the user's behalf? Do they take a cut? What is Coinbase doing with the staked crypto?

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?

>Does Coinbase stake on the user's behalf?

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.

>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.

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?

The analogy wasn't great, but I'm struggling to think of an accurate one — investing or giving a loan to a company is obviously different than having a company interact with a protocol on your behalf. Maybe it's more like email providers?

It’s really hard to convince a Bitcoin stan that labeling something as “crypto” doesn’t bypass all laws.

Coinbase lawyers understand it perfectly well, Coinbase PR understands that their fans aren’t able too.

Counterpoint: the anti-crypto crowd frequently condescends about these topics yet fails to provide rigorous explanations of how various laws apply when pressed.

The issue is not that Coinbase is "taking money" and loaning the money out; it is that Coinbase is taking things that the SEC has decided are securities and loaning those out.

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.

Coinbase Earn is a staking service for people who don't know how or don't want to interact with the blockchain of the particular coin they're staking. Coinbase stakes the coins for them and takes a cut of the staking rewards. They're not lending assets. Bitcoin isn't included because Bitcoin uses proof of work, not proof of stake

Ah, it appears I have it backwards.

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.