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Comment by jcranmer | Hacker News Reader

SEC isn't suing Coinbase over Bitcoin. They're suing under two things:

1. Unregistered exchange for several tokens the SEC believes are securities:

> This includes, but is not limited to, the units of each of the crypto asset securities further described below—with trading symbols SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO—(the “Crypto Asset Securities”).

2. Unregistered sale of securities related to the staking program for XTZ, ETH, ATOM, ADA, SOL. This in particular has a full, point-by-point rationale for why they are defined as securities under the Howey test (in short, you deposit money, and the terms make clear that it's Coinbase's money at that point, not your money, so definitely an investment; staking involves a common enterprise; and it's clearly advertised as making you money based on Coinbase doing stuff with your investment).

Maybe Coinbase should have listened to its own advisors on how to tailor a prospectus to not meet the Howey test definition of a security... or maybe their advisors didn't do a good job in the first place!

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Very good points. People often go a long way to argue against the Howey test. The best example is Howey Co case. If someone is a lawyer dealing in securities and acting as an advisor I would have expected them to be familiar with the law. Coinbase issuing public statements to SEC “tell us what is a security” were basically a ploy or the lawyers involved were extremely inexperienced.

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

It is not obvious a priori how regulators will treat tokens or which ones will be permissible.

It was obvious to a lot of people who were wondering what was taking regulators so long.

Interesting, maybe you should let Gensler know that the law is much more obvious than he appears to realize [0]

[0]: https://youtu.be/VhA1dZXeao0?t=58

Under the Howey test, the rules are clear.

"The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value."

I think it is plausible that all pure staking initiatives will go. I don’t think you have much of an argument here but I could be wrong. It will definitely be an interesting case to watch.

> investment of money in a common enterprise with profits to come solely from the efforts of others

This is where I see the "staking makes a cryptocurrency a security" fall apart. There are a handful of definitions for "staking" and some of them definitely meet the criteria of "a common enterprise with profits to come solely from the efforts of others" however many do not.

1. Ethereum's staking at a protocol level requires you to run a staking node and you are paid for what is basically an SLA between you and the network and you only get paid if your node maintains a certain uptime, is kept up to date, and operates correctly. That I don't believe meets the criteria as it requires direct, sustained effort from you the operator (even if it's generally low effort).

2. Cardano's (or Tezos') staking is similar. Stake pool operators are effectively the same as Ethereum's stake node operators. But even delegators (who aren't required to stay online) still provide a service in that they are picking the stake pools who then fill the SLAs. If they pick pools that can't meet the requirements then the delegators don't get paid until they can find one that does.

3. Meanwhile you have networks like Algorand where participation in consensus does not effect staking rewards and you never have to perform a service to get paid out by the network. Those would meet the criteria by my understanding.

4. And then you have all the DeFi "staking" which is better described as lending or liquidity pooling. You aren't doing anything proof of stake related but are just lending out capital as an investment.

I can't speak on other networks but generally I found that networks fell into one of those 4 categories. The first two only pay people who provide a service back to the network while with those like the third, even if you can provide a service back to the network, you aren't required to to be able to get paid. And then the fourth category is just a security outright.

Edit (because I forgot to mention it): With regards to Coinbase's staking program, it's in a weird spot. With those you aren't directly staking but you are outsourcing the responsibility to a 3rd part (coinbase) to stake for you. I wouldn't be opposed to considering this type of custodial staking as meeting the criteria to be a security but I don't think proof of stake at a protocol level constitutes "a common enterprise with profits to come solely from the efforts of others" as they require work on behalf of the participants to get paid out.

You’re ignoring all the ICOs which are almost certainly unregistered security offerings.

Ethereum was funded as a public ICO.

That doesn't even seem to be the issue here.

Which is weird. In my humble layman's opinion, an ICO looks an awful lot like a security offering, while a staking protocol doesn't.

Compare the simplified statements "Buy my token! It's going to be great in the future!" with "Let's pool our money and execute an agreed-upon protocol where those who have the most get more". Why is the SEC wasting time by going after all the weird ones before the easy pickings?

It was however an ICO does not make it inherently a security. Per the SEC:

    ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.

And I think it's ultimately up to the courts (unless the SEC eventually gives a definitive answer) to determine what specific qualities make an token offered via ICO into a security, especially because what qualifies as an ICO really kinda varies and how they are structured also really widely varies.

https://www.sec.gov/securities-topics/ICO

Yes, I think a reasonable position would be that if you perform staking by self-hosting then you're providing a service. An example is getting paid for running a machine on the Ethereum network.

If you pay money in now and get more money out later, and someone else runs the machines, then it's just a loan.

Then there's a question of where to draw the line with cloud hosting, and I have no opinion about that. Someone will sell a service that's barely on the right side of that line, wherever it is.

Crypto people constantly point to this video as some kind of evidence that the SEC is clueless. Maybe it just doesn't make sense for them to give clear answers in that kind of hearings,or answers related to specific crypto token. Just normal for government officials to cover their own asses primarily and giving specific guidance related to a specific issue at a hearing doesn't just serve them well.

I don't own any crypto [outside of very small curiosity amounts when I was playing with it to figure out how it works years ago] nor do I consider myself a 'crypto person' (only, perhaps, compared to the backdrop of extreme HN negativity around the topic). I just think that people saying 'regulations are perfectly clear' on this issue have not spent that much time dealing with regulators in emerging technology.

> Just normal for government officials to cover their own asses primarily

I agree - I just disagree with people suggesting that the same logic doesn't apply to regulators and their actions.

They want to keep it unclear precisely so they have the ability to maneuver in the future and regulate if they want. That is the exact opposite of the 'super clear' regulations & guidance that GP was suggesting currently exists.

> people saying 'regulations are perfectly clear' on this issue have not spent that much time dealing with regulators in emerging technology

I work in a regulated industry. I have my criticisms of Gensler. And I’ve (separately) profited off crypto.

The regulations for non-Bitcoin exchanges were clear from the start. Nobody liked that clarity. And the regulators spent a few years navel gazing. But the legal advice I got at the start has remained consistent: the operators are putting themselves in jeopardy.

One way to look at it is a generation of boiler room operators moved their pump'n-dump schemes from central securities clearinghouse to crypto ledgers, because they realized what a loophole the Bitcoin exception was. And they brought in enough politicians and celebrities to slow walk promises of updated regulations, and regulators cautiously warned and waited, and here we are, with some bowtied man criticizing the SEC for doing its job precisely in the manner politicians demanded.

Not that they are clueless, that they are corrupt.

Is it really surprising that the chair of the SEC cannot just dispense SEC positions without consulting with lawyers?

Has Gensler never consulted lawyers on the status of ethereum prior to this hearing?

It should be easy yes or no from the lawyers, I'm hearing that the law is incredibly clear and not really prone to misinterpretation so it shouldn't be an issue. Or maybe Gensler's lawyers are "extremely inexperienced" if they couldn't figure out such an obvious issue?

You're not answering the question. Why do you think Gensler in official capacity should just dispense one-off soundbite determinations at the request of some clown grilling him?

> It should be easy yes or no from the lawyers...

When has that ever been the case, and why should it be the case now?

[edit] The law is not just what's written but the entirely of case law. The SEC has provided a framework for analysis of securities in the context of crypto. It's here. [1] And it builds on the DAO report, here. [2]

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

[2] https://www.sec.gov/litigation/investreport/34-81207.pdf

It is not at all surprising to me that he would refuse to answer the question, but the precise reason he is doing that is so that the SEC has freedom of movement to regulate without being pinned down by public statements he has made in front of congress. But that entire notion belies the idea that the regulations are super clear or predictable. The whole reason for this kind of maneuver is because the regulations are not clear or predictable.

I have no doubt he has discussed the status of ethereum with SEC lawyers before.

> It is not at all surprising to me that he would refuse to answer the question, but the precise reason he is doing that is so that the SEC has freedom of movement to regulate without being pinned down by public statements he has made in front of congress.

Because they're a legal body and what they say off hand is precedent, so of course they have to be measured and thoughtful. This was a shameful display, but not by Gensler.

> I have no doubt he has discussed the status of ethereum with SEC lawyers before.

Me too, but again, I refer you to the DAO Report and the Framework for “Investment Contract” Analysis of Digital Assets

> But that entire notion belies the idea that the regulations are super clear or predictable. The whole reason for this kind of maneuver is because the regulations are not clear or predictable.

They're quite clear, and the whole reason for this kind of maneuver is showboating and pandering. Based on this thread it seems to be working.

In a similar vein I'm confident that Brian and his attorneys have spoken and concluded that they're almost 100% certain to be securities, and for that reason, they chose to avoid working with the SEC at all costs at every point along the way. But of course that determination would undermine the business, so off to court we go.

You don't seem to understand that what he says isn't binding on the SEC

How does he or the SEC benefit by making a statement?

He doesn't

> Why do you think Gensler in official capacity should just dispense one-off soundbite determinations at the request of some clown grilling him?

Because the whole point of the rule of law is that the law same law applies to any clown. If the head of securities law in the country can't tell you whether a basic thing is legal or not then why even bother having a congress and elections and any pretense that we live in something other than a corrupt oligarchy?

> [edit] The law is not just what's written but the entirely of case law. The SEC has provided a framework for analysis of securities in the context of crypto. It's here. [1] And it builds on the DAO report, here. [2]

If the SEC themselves is incapable of applying their framework to the second-most-prominent entry in the category of things it's designed to analyse, then what is that framework good for?

> Because the whole point of the rule of law is that the law same law applies to any clown. If the head of securities law in the country can't tell you whether a basic thing is legal or not then why even bother having a congress and elections and any pretense that we live in something other than a corrupt oligarchy?

In the linked video the questioner is asking about about potential future cases/decisions and one reason not to comment on specific cases/decisions, as is what happened in the video[0], is that an agency does not want to telegraph their moves ahead of time, since that would give potential criminals a heads up that they are on a deadline and need to focus on cover up their crimes.

If the questioner needs insight into how policing actions are decided they can ask about pervious cases/decisions and the reasoning that went into those pervious cases/decisions.

[0]: https://youtu.be/VhA1dZXeao0?t=58

> In the linked video the questioner is asking about about potential future cases/decisions and one reason not to comment on specific cases/decisions, as is what happened in the video[0], is that an agency does not want to telegraph their moves ahead of time, since that would give potential criminals a heads up that they are on a deadline and need to focus on cover up their crimes.

That's putting the cart before the horse. Catching criminals is supposed to be a means to an end; compliance with the law is supposed to be the end, and getting people to voluntarily stop doing crimes is a win. "We can't tell people what the law is because then they might stop breaking it" is absurd policy.

> If the questioner needs insight into how policing actions are decided they can ask about pervious cases/decisions and the reasoning that went into those pervious cases/decisions.

The whole reason people are arguing about this stuff is that there are no clear precedents (or there are multiple contradictory ones); crypto is similar to a lot of things but not exactly the same as any of them.

> That's putting the cart before the horse. Catching criminals is supposed to be a means to an end; compliance with the law is supposed to be the end, and getting people to voluntarily stop doing crimes is a win. "We can't tell people what the law is because then they might stop breaking it" is absurd policy.

The questioner was not asking about what the law was. They were asking a future potential case or enforcement action.

The questioner in the video could have asked about the law and the details and how it has historically been enforced. They did not though. If they did and questions were still dodged then I might agree with what you are putting out here. At the very least I would think the answerer is not well versed on the topic at hand, but I would want the answer to be straight forward with that.

> The whole reason people are arguing about this stuff is that there are no clear precedents (or there are multiple contradictory ones); crypto is similar to a lot of things but not exactly the same as any of them.

I do not know about that. I think the majority of new crypto coins that have made it into the ads I see are scams, probably because the ones that are scams push for advertisement more. Of those they seem to fall into pyramid scheme and obvious security that would probably run foul of other laws as well. In these cases if a lawyer is not giving a clear answer then you need to hire a new lawyer.

Outside the obvious scams I assume there are people who are at best skirting the law at best and some are turning a blind eye, pretending the law is confusing on the topic when it is really not.

So far it seems like the SEC is ruling and enforcing the above cases, clear cut cases. If you have a part of the current enforcement that is on something that is ambiguous rather than pretty clear cut then I would be interested what makes it ambiguous and potentially reading more into it.

> So far it seems like the SEC is ruling and enforcing the above cases, clear cut cases. If you have a part of the current enforcement that is on something that is ambiguous rather than pretty clear cut then I would be interested what makes it ambiguous and potentially reading more into it.

This article is in significant part about the SEC going after Coinbase, which made a significant effort to stay on the right side of the rules and only allow crypto tokens that operated in ways that are closely analogous to e.g. frequent flier miles. They wrote a great many blog posts giving their perspective and calling for regulatory clarity.

> ... which made a significant effort to stay on the right side of the rules and only allow crypto tokens that operated in ways that are closely analogous to e.g. frequent flier miles.

They list ICOs by the fistful.

I sorted alphabetically and only had to go as far as AAVE to find the first obviously-a-security.

They really didn't try and stay on the right side of anything.

Frequent flyer miles are generally considered to fall under the IRS rebate rule. They're considered rebates on purchases. There's no investment of money (they're a rebate on a purchase), there's no common enterprise, there's no expectation of profit derived from the efforts of others (after all airlines generally devalue miles 10-20% year over year). It fails all prongs of the Howey test. Not to mention you don't own your frequent flyer miles, the airline program does.

If you find me a crypto token that operates 'like a frequent flyer mile' I'll happily tell you why you didn't.

> They wrote a great many blog posts giving their perspective and calling for regulatory clarity.

They wrote a lot of blog posts, I'll give you that. They have regulatory clarity, they just don't like it. [1, 2, lots of case law].

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

[2] https://www.sec.gov/litigation/investreport/34-81207.pdf

> There's no investment of money (they're a rebate on a purchase)

Seems pretty dubious when there are well-documented cases of the miles being worth a lot more than the purchase (from the famous pudding guy onwards). Hell, mine explicitly advertises the option to "buy miles".

> there's no common enterprise, there's no expectation of profit derived from the efforts of others

Miles become more or less valuable depending on how well the airline is doing, exactly like how these tokens tend to go.

> Not to mention you don't own your frequent flyer miles, the airline program does.

The whole point of Howey is that the details of the ownership structure don't matter, the overall economic effect is what does.

> Miles become more or less valuable depending on how well the airline is doing, exactly like how these tokens tend to go.

You can sell your token in this case right, but you can not sell the airline miles, not in the rule/tos of the miles program, at least that is my understanding.

>> Not to mention you don't own your frequent flyer miles, the airline program does.

>The whole point of Howey is that the details of the ownership structure don't matter, the overall economic effect is what does.

This does not seem the structure or details of ownership, it is flat out whether you own the miles or not.

If you have an example of token that acted more like an airline miles and there is an action against it or because of it I am interested to read more about that token and SEC reasoning.

> You can sell your token in this case right, but you can not sell the airline miles, not in the rule/tos of the miles program, at least that is my understanding.

There may notionally be a rule against it, but you certainly can - my airline will let you transfer them (for a fee in miles) and they certainly know or should know that buying and selling happens.

> This does not seem the structure or details of ownership, it is flat out whether you own the miles or not.

You're the beneficiary of them and have contractual rights to them, whether they're notionally held by some other party or not. If anything the idea that you don't own them makes the argument for it being a security stronger.

>an agency does not want to telegraph their moves ahead of time, since that would give potential criminals a heads up that they are on a deadline and need to focus on cover up their crimes.

I think you might mean the "potential suspects" of the investigation.

"Criminal" as a basic categorization is binary in nature. All non-criminals are also "potential criminals." No criminals are "potential criminals" (they've already realized said potential).

> It should be easy yes or no from the lawyers [...]

I've rarely received such an unequivocal binary response from a lawyer...

In general if you're thinking of doing something in a gray area of federal law or regulations then you can write a formal letter to the competent regulatory agency and request an opinion. But you have to be extremely specific and pose your questions in ways that can be answered with a clear yes or no; you can't expect a useful response to a vague request for clarifications or definitions. If the agency does give you a letter containing a positive opinion then it serves as a nearly ironclad defense against any civil enforcement actions or criminal prosecution. Those opinions can change later for political reasons, but you won't be punished retroactively for actions prior to the change.

Yes, see for instance prediction markets in the US.

FundersClub did this for creating a portal to invest in startups.

Right, good example. You can read the SEC letter here. As long as you ask the right questions you can get useful answers and protect your business.

https://www.sec.gov/divisions/marketreg/mr-noaction/2013/fun...

It’s not a matter of what tokens are “permissible” but rather what protections market participants get against fraud and instability. There was plenty of opportunity for crypto to actually raise the bar in protecting the consumer and it just never happened.

> Coinbase issuing public statements to SEC “tell us what is a security” were basically a ploy or the lawyers involved were extremely inexperienced.

I take it as a stunt intended shift the layman's perception of Coinbase's legal responsibilities onto the SEC. They're counting on cryptobros using this "SEC won't tell us what's legal" talking point to affect favorable political / legislative change.

But newsflash: government regulators aren't obliged to act as your legal council.

The stance isn’t about whether Howey can be applied literally everywhere

The stance is that applying it to digital tokens as unregistered securities means applying it to other places, like Nike shoes and baseball cards, just because any random individual expected to profit when they bought one

that this framework is not applied everywhere, specifically how congress exempted spot commodities and commodities derivatives from the SEC framework specifically because it was untenable

That there is a difference between a digital commodity and a digital security that is mutually exclusive, but the SEC has provided no way of understanding that distinction, and now has resorted to just arbitrarily claiming random assets are securities in cases against the people that trade those assets, instead of taking up cases against the issuers of those assets and letting those issuers defend themselves or reach a definitive conclusion

That it is impossible to comply if it was applied everywhere, as registered security status inherits tons of unrelated regulations to protect incumbent intermediaries

That the SEC will never achieve congress’ delegated mission of investor protection and only hurt investors

And that actually inconveniencing everyone will put this framework under a constitutional test that the SEC probably needs to avoid, but I’m all the SEC going after the entire sneaker trading ecosystem as unregistered broker dealers as fallout to their crusade just to prove they aren’t just trying to debilitate crypto

(The staking program has a separate evaluation)

Nike shoes and baseball cards are clearly commodities.

If you were to stake your Air Jordan's with coinbase and Coinbase told you in a years time you'd have 2 pairs, it would become a security.

like I wrote, the staking program has a different evaluation and my post was not about that. we agree that any asset can be transferred in a way that is a securities transaction.

Why would a sneaker fall under the terms they're using to define a security if not every digital token does?

> Why would a sneaker fall under the terms they're using to define a security

because the sneaker trade market focuses on sneakers that are released with artificial scarcity, where many participants in that market buy with an investment of money, with a reliance on the issuer and others to keep them scarce and valuable and promote them, with an expectation of profit.

the SEC is basically saying if any random person has an expectation of profit guiding their purchase at any time, the entire asset and all transactions is a security and everyone that is trading it needs to be a registered broker dealer or registered promoter, and then even if they could be registered they would not be allowed to trade unregistered securities, or even registered esoteric securities like shoes and digital commodity units because the Self Regulatory Organizations are too permissioned for shares and bonds exclusively.

> if not every digital token does?

that's the point. there is either a way where a digital asset is exclusively a commodity, or there isn't at all and every corporate controlled unnatural commodity inherits the same regulatory framework that the SEC is trying to impose on digital assets and the entire trading ecosystem.

They wouldn't. 'yieldcrv is not demonstrating knowledge of the Howey test, and appears to be heavily focused on a narrower reading, "buying something with the expectation of increased future value" -- which they're setting up as a strawman's Howey's test.

Sneakers would not meet the Howey Test: An investment contract exists if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."

The four parts of the Howey test, distilled down to plain English (and therefore losing a great deal of nuance in the process):

- It is an investment of money.

- The investment is in a common enterprise.

- There is an expectation of profits.

- The expectation of profits is solely from the efforts of the promoter or a third party.

Buying the latest Yeezy's is not a common enterprise. The fourth point is debatable.

that’s an interesting use of strawman to invalidate the observation

The howey test doesn’t need all prongs satisfied and avoidance is based on probability only

The SEC and securities industry has enjoyed a symbiosis for 70 years, where things that blurred the lines didnt exist, were never imagined, or were never challenged. Challenging one challenges them all.

> Buying the latest Yeezy's is not a common enterprise.

And yet buying a token is? What's the distinction here?

>Maybe Coinbase should have listened to its own advisors ...

Maybe they just hired @butlerm which definitely knows what s/he's talking about and ... well here we are :)

What is a plausible range of outcomes for Coinbase here?

Years of litigation. Some people think they're hoping for Congress to intervene and moot the case.

The SEC provides NO guidance on what is or isn't a security. We have the Howey test to go off of. There is no way to register, no legal way to achieve anything that should be legal in a democratic capitalist society. You just have the threat of an SEC lawsuit on nebulous terms. It's completely fucked up.

Another incredibly important point is the $1 million net worth and $200k income based test for becoming an "accredited investor" is racist, classist, sexist, and evil. People should have the right to invest their money how they see fit. If you want people to sign some kind of disclosure, or some kind of term sheet that makes it very clear to a retail investor what they're getting into, fine. But the law as it exists is outrageously undemocratic.

In regards to the SEC, a system that was built for 1933 is not even relevant in a world where you can spin up a million new tokens in 10 seconds and deploy to 24/7 worldwide markets in 5 minutes from anywhere.

Keeping the 1933 SEC Act in tact in 2023 is like trying to keep Prohibition going even though it's raining whiskey from the sky.

Sounds like you're advocating for Matt Levine's "Certificate of Dumb Investment" proposal. The fact that so many retail investors have been scammed by crypto gives support to the current regime, but I think there's something to Levine's idea.

https://archive.is/ggCjN

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