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Comment by brasic | Hacker News Reader

It’s not the SEC’s definition, it’s the supreme court’s:

If:

  - It is an investment of money
  - There is an expectation of profits from the investment
  - The investment of money is in a common enterprise
  - Any profit comes from the efforts of a promoter or third party

Then it’s a security.

https://en.m.wikipedia.org/wiki/SEC_v._W._J._Howey_Co.

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Coinbase claims that none of the crypto assets it lists meet that test. For the coins Coinbase lists:

  - Criteria #2 is debatable
  - They don't meet criteria #3
  - Or they don't meet criteria #4

Lots of coins look like commodities. They represent a digital asset, not ownership in a common enterprise or a loan. CFTC officials have said as much, as Coinbase quoted: "the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets." - Then-CFTC Commissioner Quintenz

Coinbase believes that all of the tokens they list are securities. The SEC needs to tell Coinbase specifically what it believes they are doing wrong - it will have to eventually, if it files suit.

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.

Edit: arcticbull pointed out that many digital assets do seem like securities (ICOs). Updated this comment with Coinbase's claim that they don't list any tokens that resemble securities

Sure they do. Explanation here. [1]

> Crypto folks: We want regulatory clarity.

> SEC: Check out 'Framework for “Investment Contract” Analysis of Digital Assets' [1]

> Crypto folks: NOT LIKE THAT.

The regulators have been super clear, the crypto folks just don't like what they're seeing. They saw people who didn't ask make money, and people who did ask get shut down. So they didn't ask. But the noble ostrich is only able to keep their head in the sand for so long.

[1] https://www.sec.gov/corpfin/framework-investment-contract-an...

That guidance is about ICOs that are investment contracts. Lots of tokens appear to meet the definition of an investment contract, but not everything called an ICO is an investment contract. The whole point of that guidance is to help people issuing an ICO to determine what's an investment contract.

But Coinbase doesn't host any ICOs, and they reject ICO tokens that look like securities! Here is Coinbase's guidance to its users on that point:

https://help.coinbase.com/en/coinbase/getting-started/crypto...

They say as much in their press release, if anyone would read it:

"Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange... This process includes an analysis of whether the asset could be considered to be a security, and also considers regulatory compliance and information security aspects of the asset. 90%+ of assets that we review are not ultimately listed on Coinbase because they do not meet these standards."

Coinbase says they don't list digital assets that could be considered securities! Everyone's hand-waving that Coinbase has obviously done something wrong, but no-one can point out specifically what. There's a disagreement on fact here - either the SEC tells Coinbase what it's doing wrong, and they can comply, or they don't and it gets settled by a court.

Edit: Updated the comment since articbull rightly pointed out that Coinbase does list some tokens that were originally issued in ICOs.

> But Coinbase doesn't host any ICOs! And they reject ICO tokens!

Sorting Coinbase token pairs alphabetically I only had to get as far as AAVE.

> The firm, originally named ETHLend, raised $16.2 million in an initial coin offering (ICO) in 2017, during which time it sold 1 billion units of its AAVE cryptocurrency - originally named LEND. [1]

Coinbase doesn't publish their standards or approaches, and frankly, it's very much in their interests not to declare something a security. I suspect their process is less than rigorous.

> Coinbase doesn't list digital assets that could be considered securities! Someone needs to actually point to what they're doing wrong.

I believe I linked to the document above :) maybe their lawyers would like to give 'er a skim?

[1] https://www.kraken.com/learn/what-is-aave-lend

Coinbase's position is that that ICO was not an investment contract. Not everything called an ICO is an invetment contract - the point of that SEC page is to provide guidance on when an ICO is an investment contract. Coinbase's lawyers have certainly given that document a skim, they reference it here where they talk about securities law:

https://help.coinbase.com/en/coinbase/privacy-and-security/o...

There is a disagreement of fact - Coinbase says they don't list any securities, and the SEC claims they do and are violating securities law, without providing any specifics. Assuming the SEC goes forward, a court will have to decide.

> Criteria #2 is debatable

They don't call themselves a gambling site.

> They don't meet criteria #3

"an enterprise in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those offering or selling the investment or of third parties."

Every coin meets #3, because without exchanges, you can't make profit.

> Or they don't meet criteria #4

Coins are speculative in nature. Without promotion, you can't find new investors. If you don't have new investors, the price can't go up.

Cryptocurrency is money, you can send them no questions asked, without begging fiat gatekeepers to let the transaction through mining the hell out of your personal information, your clothes, your boots and your motorcycle.

This isn't about coins, it's about staking.

It's about coins having no use except for staking.

> without begging fiat gatekeepers

To purchase the coins you need to use an exchange. To sell the coins you need an exchange. Cryptocurrency isn't usable without fiat, and it's value is based on fiat.

Unless you're using very specific coins (which aren't allowed on most exchanges), your transaction history is public to the world, which is worse from a privacy perspective than fiat. If you really used coins as your primary currency, it would be pretty trivial to obtain your identity from your transaction history.

>Cryptocurrency isn't usable without fiat

You mean it's not convertible to fiat when fiat fails? That's what I mean too: fiat fails.

So, I am not saying the crypto community (or Coinbase) is right or wrong here. But it's not as clear-cut as OP makes it out.

While Howey's test is well-known, each crypto asset can be argued to pass or fail for different reasons:

1. The biggest issue is what constitutes a "common enterprise"? Most federal courts (but not all) have defined it as a horizontal structure where assets are pooled. (https://core.ac.uk/download/pdf/159597203.pdf) Coinbase can argue that a straight purchase of a crypto token has no "common enterprise" because there is no pooling of assets.

2. It's not trivial to prove that profit for a given crypto token comes from the "efforts of the promoter or third party." Who even is the promoter of a distributed token? What identifiable third party's efforts is the profit in the crypto sale even dependent on?

3. Finally, is there always an expectation of profit? How is buying a vanity NFT different from purchasing a vanity domain that I do not use? What about a vanity NFT avatar I want to show off on Twitter / Reddit / Telegram?

It's a complex case with lots of nuances. Whichever way courts rule - it will set new precedents.

What we have here is different from the allegations that the SEC has made against other crypto entities, which were mostly about mixing consumers' assets, insider trading, improper disclosures during promotions or even straight-up money laundering.

Those cases were not going to set new case law. This case will.

Crypto is a group buying and selling fractional ownership of the "diamond ring" - or rather - this perspective could pass Howey (NAL)

Staking is a pooling of assets. A coin is a commodity, a stake in a currency is a security. An iPhone is a commodity, a stake in Apple (shares of their stock, corporate bonds, etc.) is a security.

I think you forgot a prong in the Howey test. "With the expectation of profit from the effort of others."

There are various forms of staking, if it requires running your own validator the expectation of profit is derived from your own effort. Therefore not a security.

Coinbase's staking service is Coinbase running the validator for you, and giving you a share of any profits.

Yes, but the statement you make above is in general for staking. Not staking as offered by Coinbase. My comment above clarifies that the specific details of how the staking is implemented matter, at least with respect to Security's law.

My non-lawyer interpretation is that, indeed, centralized staking offerings like Coinbase seem to fit the Howey test criteria and are at risk of being deemed a security offering. But not all staking is.

Not disputing this, but does that mean buying forex is a security, and if not, what stops it being?

My guess is that foreign governments aren’t counted as 3rd parties / promoters?

Forex is not a security because it’s not an investment in an enterprise but an exchange of like for like of legal tender. Otherwise the money changers at airports would be regulated by the SEC and they would have to register their currency exchange, and any international transaction would have to be disclosed and regulated by the sec in literally every single case. Plus the SEC has no authority either of the treasury of the US nor any other governments treasury.

so having another country declare a crypto as legal tender makes it no longer a security in the US?

Feels like the answer to these questions is just gonna be “maybe such a case in the future will make it to the courts, and the courts will have to come up with an interpretation here.” We can make guesses about what the courts will decide but how confident are we in our guesses?

its already the case with el salvador and bitcoin. bitcoin wasn't really under question though for being a security so would need someone to make a smaller token legal tender

A currency being legal tender presumably has little bearing on whether the U.S. would consider it a currency. Some countries don‘t even have the concept of legal tender, while others recognize currencies they don’t issue themselves.

Being issued by a sovereign state would probably be a better test.

> Being issued by a sovereign state would probably be a better test.

Aha, so they just need another layer of indirection.

Acting on the imprimatur of the country's central bank, programmatically issue a sovereign CBDC upon the deposit of BTC. Keep cryptographic proof of 100% BTC reserves at all times to provide ultimate credibility for your (potentially parallel) currency (so you can keep using dollars or pesos or whatever in your real economy). Allow intra-CBDC transfers for 0.1% fee and programmatic redemptions for BTC for 0.2%. Profit.

`ping -i1 www.bcr.gob.sv`...

The economic definition of "legal tender" is sometimes obscured in casual conversation.

It isn't "issued by a sovereign state" - that's "fiat" but rather "used for paying taxes." And sometimes, like in the US, debts ("all debts foreign and domestic").

Certainly it has to vary among countries of which I am ignorant, but generally in the Anglosphere it is debts, not payments, that trigger the definition of "legal tender."

an argument like that couldn't hurt, but if North Korea declared Apple stock to be legal tender, it wouldn't make Apple stock not a security.

> Not disputing this, but does that mean buying forex is a security, and if not, what stops it being?.

I’m not sure the rationale (or if it is just an explicit designation), but forex (and some related derivatives) is commodity trading regulated by the CFTC rather than security trading regulated by the SEC. (I think a regulatory problem with cryptocurrency is that it is generally clearly one or the other, but not always clear which, and while the market would like crypto to be one category it is probably a messy split between the two, absent legislation defining it and assigning it as a category.)

Seems like a fairly clear line can be drawn unambiguously.

If it’s, like Bitcoin, just a number in a ledger, it’s a commodity.

As soon as you attach any specific data to it, like a smart contract or tieing it to a single, tangible object like a painting, or paying rewards to people who bought before a specified time, it’s no longer fungible. It isn’t a commodity.

Confidently wrong. Par for the course in HN.

Such a detailed rebuttal.

There is nothing to rebut. Your argument has nothing to do with Security's laws or the legal jurisprudence around it. It can be substituted by "if it starts with B like Bitcoin, it's not a Security" which contains exactly the same amount of argumentative power.

It takes significantly more time to construct a rebuttal than to produce a gish gallop of senseless arguments like the one above. So I will simply refer you to this link: https://isethereumasecurity.com/

If you just exchange usd for euro that’s not an expectation of profit per se. And no one is taxed for this action.

If you’re a day trader of forex usually at the end of the day you would settle back into your default currency. Your gains from this is taxed. But usually when doing this you’re buying derivative products that are explicitly securities with maturity dates.

If you are buying euros as a hedge against USD inflation then you are expecting a potential of profit, or at least lowering losses.

Same with precious metals, or Bitcoin.

I agree if it’s part of your investment portfolio. The profit part comes when you cash it back into your default currency in order to use it or to realize the gains.

If you bought btc, used it to buy goods, and never cashed it back to usd then I think it is a currency.

You realize gains when you use another currency to buy something. So if you exchange USD for Euro and then the price of Euro goes up by 5% then when you buy a sandwhich with that money you have to pay taxes on 5% of the price of that sandwhich. Unless you convert your USD to Euro at the time of the transaction buying things with euro can turn into a tax nightmare since you have to keep track of the exact time you purchase something to know the exact exchange rate.

If this wasn't the case you could just avoid capital gains by buying something with eulos and reselling it for usd with no profit.

In the US the taxable event generally occurs when one currency is converted back to USD, not when a non-USD currency is spent. Real-time conversions do occur and you are absolutely correct it can turn into a tax nightmare when traveling :(

That is not accurate. If a US citizen buys, for example, an extra $1000 in euros that are not spent, and the exchange rate changes, it is a taxable event.

The specific line item is on Form 8949, to report gains from foreign currency exchange transactions, Part I and it absolutely applies to vacation travelers, not just FOREX investors.

There is a broad array of explicit exemptions from the Securities Act of 1932. Municipal bonds, for example, are not regulated by the SEC because they are explicitly exempted.

Interest bearing bank acceptances or commercial paper with maturities less than 180 days or 270 days respectively are also explicitly exempt. Since coinbase’s offering has no maturity date, and money can be withdrawn at will, my guess is that they are trying to argue that this is an exempt security. TBF, I don’t see much difference between this and a foreign-denominated interest bearing bank account.

There’s a lot of crypto==bad posting going on, and I generally agree with the crypto==bad crowd, but this is hardly a clear matter and likely needs to be taken to court to resolve. The SEC has a long history of turf wars with other regulatory agencies and regulatory overreach beyond their congressional authorization. They have lost 4 out of their last 5 Supreme Court cases related to cryptocurrency. I wouldn’t be surprised if their refusal to clarify is because they know they wouldn’t prevail in court and are trying to get away with setting precedent in the court of public opinion. It certainly looks like it’s working, judging by the opinions in this thread.

Current SEC's position seems to be mostly political posturing by Gary Gensler, and not necessarily based on technical or regulatory merits. There is strong dissent within the SEC with its most recent actions. Most notably by Hester Peirce, one of the 5 SEC commissioners. Something smells afoul at the top of the SEC.

You can watch a very interesting recent interview with her here: https://www.youtube.com/watch?v=kvsJM0regpw

Or read some of her recent dissents: https://www.sec.gov/news/statement/peirce-statement-kraken-0...

So — housing?

- Any profit comes from the efforts of a promoter or third party

Couldn't that apply to just about anything the moment anyone anywhere says "Buying X is a good investment!" so long as it's possible that the promotion resulted in X selling at a higher price?

A broker?

If a Real Estate Investment Truest (REIT), then yes.

Housing isn’t an investment in a common enterprise.

False. If your local governing agency (whether private or public) fails to maintain the local parks, schools, and roads, the value of your house will fall. Houses are securities according to the Howey test.

No they aren’t.

“The respondent companies are offering something more than fee simple interests in land…they are offering an opportunity to contribute money and to share in the profits of a large citrus fruit enterprise.”

https://recaldelaw.com/do-security-regulations-cover-real-es...

Yes, the courts don’t support the SEC interpretation of the Howey test, and the SEC has repeatedly lost in court. Your point is?

My point was 3 words. Which one do you not understand?

Something can both pass the Howey test and be considered a security by the SEC, but simultaneously fail to be a security in court.

By not passing the Howey test. Which they don’t, according to the only people whose opinion matters.

The SEC doesn’t get a vote.

Yes, so the SEC guidance is irrelevant, and is just fear mongering to get people to pay fines they don’t actually need to pay.

That is correct.

My HOA would argue otherwise. It exists specifically to prevent housing prices from falling due to certain local factors.

> There is an expectation of profits from the investment

Not everyone cares to 1) sell their house 2) at a profit. Some people just want to live in it and even die in it.

Not everyone cares to 1) sell their Bitcoin 2) at a profit. Some people just want to live long enough until there are no other forms of money left.

But their kids probably will. Is a generational investment not a security? I’m not even trying to be cute. Everyone is competing with corporations for single family housing for a reason now.

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