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Comment by VWWHFSfQ | Hacker News Reader

Sounds like the free lunch is over. Maybe my view is too simplistic, but Coinbase facilitates the sale of "assets" that the buyer expects to increase in value. By definition, that's a security, right?

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The Howey test requires that a security be (1) an investment of money (2) in a common enterprise (3) with the expectation of profit (4) to be derived from the efforts of others.

Cryptocurrencies very clearly meet (1) and (2). Many tokens are likely to meet (3), but it's not universal. But (4) is where you have the most room to argue.

I don't know what Coinbase offers for sale. But I'm certain that least some of the tokens it supports are going to be defined as securities under the Howey test. Hell, if Coinbase offers the ability to use your tokens for staking, I'm pretty sure that alone qualifies as a security, even if the token itself isn't necessarily a security. (Coinbase disagrees that staking constitutes a security, but their reasoning is extremely motivated and I do not find it persuasive.)

> I don't know what Coinbase offers for sale.

https://www.coinbase.com/price/poocoin

If you want to transfer the asset to another party (the main purpose of crypto currency), that requires effort from the community of miners. Would that satisfy the condition?

Coinbase offers a "staking service" where they run the node to perform validations (4) using your staked currency (1) on the Ethereum blockchain (2) and promise to give you a share of any profits (3).

This is the crux of the endless argument. People speculate on currencies via Forex, are those securities? Is oil a security? People buy into oil, gold, etc hoping to sell later for a profit. Both the CFTC and SEC have claimed they have purview over crypto and there has been absolutely no clarity from lawmakers on it.

the real answer is that the CFTC should just be abolished and folded into the SEC. the only reason crypto people want to be regulated byt he CFTC is that they are way less competent at catching fraud than the SEC.

This is absolutely the answer. The NFA/CFTC have been having a quiet turf war with the SEC for a decade now in an attempt to thwart the obvious and hopefully inevitable solution you’ve suggested.

The definition of a security is found in the application of the Howey test. The SEC has a nice long explanation of how you apply Howey to crypto. Basically every token is a security. Always has been. With the possible exception of Bitcoin due to the way it was initially distributed. [1]

[1] https://www.sec.gov/files/dlt-framework.pdf

What was unique about the initial distribution of Bitcoin when compared to other cryptocurrencies?

No pre-mine, no pre-sale, no original ledger. The software was written, and the 'satoshi wallet' was actually open mined.

no pre-mine I believe.

How can it be proved that people are buying tokens like Eth/Solana because they expect those tokens to go up in value?

Plenty of people are buying those tokens so that they can participate in their respective ecosystems as developers.

And some Howey-in-the-Hills investors may have just wanted to eat their oranges. First and foremost they’ll look to what was said in selling the tokens: “join a crypto community!” vs “start your crypto portfolio”.

You have a point however, I don't think anyone is buying Eth now based on the initial ICO messaging.

In that sense, it's more like gold which has investment potential, but also utility outside of its investment potential.

But if you're using gold as a productive asset, then you're modifying it and repurposing it to an extent that its value is no longer tied to its weight.

When you're using a token as a productive asset, its value is still tied to its market value. So in that sense, it's different and probably more closely related to an investment.

By this logic every isn't every kickstarter is also a security? Aren't tickets for concerts are securities too?

Ethereum was like that. You give them bitcoins, and they promised to build this distributed computer that you can run programs on. They did, and when the computer was up and running, they gave the tokens that pay for the running of programs on the computer. They also offered additional tokens to those who participated in running the computer because that was necessary for the computer to run correctly.

If you bought it, were you planning on running programs or selling to other people who want to run programs at a profit?

Should it matter? If you pre-ordered GPUs from nvidia speculating that other people would want to buy them at a higher price later, would that make the GPUs a security too? Are concert tickets a security because scalpers buy them with intention to resell at a profit? Are the GPUs securities because you expect "the efforts of others" to release driver updates for the latest games, thus contributing to the value of the video cards you hold?

You're not backing a Kickstarter with an expectation of profit. Your expectation is, at most, an expectation of product.

Yep, exactly. If you were getting equity in the company then it would be a security. Pre-sale of the product isn't. There's no common enterprise.

Yes and no. Gold isn’t a security, for instance. Unfortunately (for coinbase) ICOs and related grifts pretty clearly meet both the spirit and the letter of the SEC’s definition.

The other part of the definition is that it can be easily bought and sold on an exchange. I think if there were an exchange for physical gold then it would be considered a security.

> I think if there were an exchange for physical gold then it would be considered a security.

I don't think that if you were to make an exchange that made it easy to trade physical gold (rather than deriviatives) the SEC would suddenly determine that gold was a security.

Exchange-traded commodity futures (including those for physical delivery of 100 troy ounces of gold) have existed for a long time and are regulated by the CFTC.

Right, and those are securities, but gold itself is not a security because it's relatively difficult to trade.

There's loads of trading platforms that allow you to buy and sell gold.

https://tradingplatforms.com/commodity/gold-trading/

But these are all about trading gold-related stocks and ETFs, which are securities, right? It's just the actual metal that isn't.

Is the relationship pretty much ICOs or tokens are a security and older options are like gold?

ie: BTC, LTC, Monero are gold but an ERC20 token is a security and Cardano is a security because it was an ICO? I don't know off hand if Ethereum was an ICO.

I keep thinking this but I can't remember seeing anyone suggest that each coin could be categorized differently. Is it possible we ended up splitting the crypto currency market into multiple groups?

> but an ERC20 token is a security

What is WETH then?

It comes down to the Howie test. Matt Levine has written a fair bit on this: https://www.bloomberg.com/opinion/articles/2023-02-13/the-se...

Depends on what you consider a "Security". Are "Securities" meant to be used as currencies?

Are virtual currencies actually being used as currencies? I've been long BTC for ~10 years, I've only made a few small novelty purchases through BTC. Based on any ads I've seen for crypto from coinbase, along with the tools they've built into their app - the primary use case for crypto appears to be as a security.

Bitcoin was originally meant to be used as a currency. Ethereum was meant to be the oil that powered the smart contract network. I guess the question is, what matters more: the intent by the creators or what the end users choose to do with it?

I have yet to see any coin be used in a manner that doesn’t devolve to a security. While there were many projects to do other things with crypto - they all still sell tokens on exchanges. I’d find the claim that crypto isn’t meant as a security more convincing if the crypto traded at 0 dollars.

i run a small retail shop that sells digital goods for btc. i bought a book with btc two months ago. more convincingly, it's widely used for remittances and as a store of value in countries with debased currencies -- this is a powerful tool for ordinary citizens in countries like venezuela, argentina etc to discipline central banks who would otherwise steal their savings.

In japan, there exist a bunch of businesses that buy your pachinko prizes and give you cash. It's a standard thing that happens pretty much anywhere with pachinko machines.

Yet it would be absurd to call those toys "A currency". A currency requires more usage than occasional barter.

what threshold would you find convincing? it performs all conventionally defined functions of money, it is legally recognized as money in some jurisdictions, it is useful as a store of value and medium of exchange. japanese yen might as well be 'toy' to me since i can't pay taxes with it. at this point i feel like i'm arguing about the utility of automobiles with an equestrian in 1920.

I pay for POAPs on Ethereum using Eth. There's no expectation of profit by owning one since anyone who actively participates in the event can get one, but they're fun collectibles.

Because of POAPs, I use Eth as a currency all the time.

Just because you claim something is a currency, doesn't make it one, especially if it doesn't even exhibit the properties of a currency.

But the question of what is a "security" has been clearly answered in 1946:

> 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.

A lot of these coins are attached to some such scheme by a 3rd party, therefore they should be considered securities. This may even apply to most NFTs.

Source: https://supreme.justia.com/cases/federal/us/328/293/

A lot of people buy houses thinking they will increase in value. Good to know they've all been doing securities fraud.

If there was a startup called Homebase that was in the business of serving as an exchange where people could trade houses, the SEC might be interested ;-)

Last time this was discussed here people were suggesting that BTC was not a security but BCH was, despite being basically the same thing, and certainly both being exchanged on Coinbase.

You can google this stuff you know? Real estate does not fall under the securities umbrella. This is well established legal precedent, covered under Howey, the Securities Act, the Securities Exchange Act subsequent rulings.

Real estate fails the Howey test because there is no common enterprise.

https://www.compliancebuilding.com/2010/11/04/what-is-a-secu...

Where's the common enterprise for BTC (or BCH, if you are one of those people who somehow thinks that BCH is a security but BTC isn't)?

It's covered here [1].

I believe the common enterprise exists no matter which coin, but with Bitcoin there was never an investment of money in its launch. Don't quote me on that though. I know the delta has to do with initial coin distribution.

[1] https://www.sec.gov/files/dlt-framework.pdf

Real estate fails the "common enterprise" and "... derived from the efforts of others" prongs of the Howey test. If you decided to package real estate investment into something like a REIT, well, then you have a security. But if you're a homeowner buying a house (even a second or third house you intend to rent out), that's not a security.

> Coinbase facilitates the sale of "assets" that the buyer expects to increase in value. By definition, that's a security, right?

In terms of outdated US regulation based on some farm land, yes.

Whether or not the regulation is outdated, it is the law of the land in the US at the moment and is relevant to enforcement actions by the SEC. This definition of security will determine Coinbase's success or failure in court.

I'm surprised homes are not qualified as "securities" at this point.

Home prices must go up :D

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