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Comment by Animats | Hacker News Reader

This SEC action has nothing to do with Binance being a crypto exchange. It has to do with it being an exchange, a broker, an asset custodian, a market maker, and a trader for its own account, all at once, with no regulation. Sam Bankman-Fried was lobbying Congress to make that legal. That plan went nowhere. Binance just assumed they could get away doing all that.

Worse, the SEC has already found large transfers out of Binance into what seem to be Zhao's private accounts. That looks an awful lot like the FTX situation. Which is why this action was taken. That's what happened with just about every crypto exchange that went bust, all the way back to Mt. Gox. The insiders dipped into customer funds. The SEC is trying to stop the leak before the money disappears.

This is not a new crypto-related problem. Stockbrokers routinely go to jail for misuse of customer funds.

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> This SEC action has nothing to do with Binance being a crypto exchange

The SEC press release (https://www.sec.gov/news/press-release/2023-101) includes a section titled "UNREGISTERED OFFER AND SALE OF CRYPTO ASSETS".

The SEC also filed https://www.sec.gov/news/press-release/2023-102 against coinbase.

The coinbase one makes it much more clear that yes, in fact, just being a crypto exchange is the same as being an illegal unregistered securities exchange, and no, the SEC will not let you actually register as one (coinbase has tried).

> This is not a new crypto-related problem. Stockbrokers routinely go to jail for misuse of customer funds.

It being illegal to run ponzi schemes and sell unlicensed securities is not new, but it very much is a crypto problem. The fact that there are currently zero crypto exchanges that are licensed with the SEC, and the SEC's filing against coinbase, together make it clear that it is not legal to operate a crypto exchange in the US.

It is possible to legally operate a stock brokerage. It is not so for crypto. That's a notable difference.

There are legal crypto exchanges in the US. Gemini, for one.[1] They're a trust company, regulated as a bank by New York State.[2]

[1] https://www.gemini.com/

[2] https://dfs.ny.gov/apps_and_licensing/banks_and_trusts/comme...

The SEC certainly thinks gemini is running an illegal exchange, and said so quite clearly when charging them of that earlier this year: https://www.sec.gov/news/press-release/2023-7

The case has not been dropped, and I think pretty clearly states the SEC's opinion, which is quite consistent with what I said above. It is not legal to run a crypto exchange in the US (under current security laws I should add).

That case appears to be specific to Gemini Earn, a "staking" product where users would loan Gemini money and in exchange would get returns on that money through Gemini/Genesis's investment of those funds.

Under the Howey test (a security is "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") this is pretty clearly an unregistered security IMO. Whereas e.g. using Gemini solely to exchange N USD for M BTC with the customer retaining ownership the whole time is probably not. So had the Winklevi stuck to being a traditional exchange, they could have avoided this specific issue.

Of course, the SEC seems to believe that many shitcoins are also securities ("Buy this token for a % share in our company! Totally not equity!" is... not a convincing argument). But that's not what the complaint you linked is actually about.

> That case appears to be specific to Gemini Earn, a "staking" product where users would loan Gemini money and in exchange would get returns on that money through Gemini/Genesis's investment of those funds.

Yes. You put money with them, they invest it, you get some return, maybe. That's unquestionably a security.

Note that there's real staking, as with Etherium validators, where you lock up some Etherium in exchange for a cut of the gas fees. You're still exposed to Etherium going down, but the risk to the principal is low. Then there's fake staking, where you lend someone assets which they then control and invest. That's not "staking", it's an investment deal. A bad deal, because it has a capped upside and an unlimited downside. Someone else thinks that they can get a higher return than you can, but you take the risk if they fail. See Terra/Luna, BlockFi, etc.

This is only true if you trade in crypto that is a security.

Notably, Bitcoin is not a security. But every stablecoin, or any other more complex system that is in some way related to something that exists in the real world is.

So you could run a Bitcoin exchange, but if you add any of the new, complex stuff you will end up getting shut down by SEC.

If Bitcoin looks like a security, acts like a security, trades like a security, is used by almost everyone as a security, then why are we pretending that it shouldn't be regulated like a security?

See my reply to your sibling comment. Bitcoin is not a security, because there is a legally well established definition of security and bitcoin does not meet it.

> Bitcoin is not a security

What makes you say that?

Security in the US is defined by the Howey test, and other jurisprudence. Bitcoin does not meet the definition any more than collectible trading cards do.

Any crypto that imply some kind of stake or ownership of something that exists outside of that instrument are securities. This includes all stablecoins, all defi, and probably plenty of other things I don't even know about. But pure currencies that are backed by nothing other than scarcity and other people's expectation about their value are not securities. They are either commodities or currencies. Which of the two they are is still unclear and will probably have to be litigated at some point, as this distinction has other tax and regulatory significance, but neither option gets SEC on your ass the way unregistered securities does.

This is in fact an argument against the usefulness of crypto/blockchains in general -- unlike some proponents claim, you really can't actually use tradable crypto to do anything interesting, like name resolution or whatever, because if you can freely buy and sell the tokens, as soon as you can do anything more interesting with them they probably become securities.

Got it, that makes sense. I suppose the CFTC may come knocking on your ass instead ;-)

What the rational on stablecoins? The Howey test requires an expectation of profit which I think isn't even debatable there (also an "investment" which seems dubious, but at least debatable if you don't define an investment as also requiring an expectation of profit).

Not to suggest that I'm speaking in favor of them, due to bad security properties, I wouldn't... and not to say that they don't run afoul of non-SEC rules... I'm just not aware of the rationale that they're securities.

You can be regulated as a bank by New York State meanwhile also be running an unregistered securities exchange. That is in fact what Gemini is doing, as the SEC has said.

And yet, customer money seems to be consistently disappearing into scammer's pockets. The SEC doesn't seem to have been wrong so far.

The person you're replying to doesn't claim that the SEC is wrong, nor that Binance isn't a scam. Maybe you meant to reply to someone else?

What's your point, they're crypto so doing illegal stuff is ok because it's 'different?'

Hmmm. It is really good to know that this has nothing at all to do with crypto, and that it is just a coincidence that this Mt. Gox, FTX et al. are crypto companies. I am completely reassured. Thank you.

> Stockbrokers routinely go to jail for misuse of customer funds.

While some people might take reassurance in a comment like this, regarding the SEC and it's duty to the public, it's hard to look at the mortgage meltdown of 2008 and conclude that banking & investment in this country, and its overseers including Congress, is anything but corrupt to the core, and they are only going after "big crypto" because they're not going to let a bunch of amateurs get in on the action.

> "They are only going after 'big crypto' because they're not going to let a bunch of amateurs get in on the action"

I'm sorry, I'm not able to understand what you mean here? Not letting amateurs in on the action would be attacking small fish instead wouldn't it?

"Amateurs" here meaning people that didn't go to an Ivy League school and isn't part of the same clubs. They definitely are not small fish. That's the point. They made out like bandits (literally), and they're not part of the "club," therefore, they have to go.

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