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Comment by gurchik | Hacker News Reader

Sorry for the stupid questions, I really know very little about crypto. With that said,

> Gensler firmly maintains that the vast majority of crypto assets are securities, with the exception of Bitcoin

Why? From an article on Reuters[1],

> Bitcoin is not considered a security because its anonymous and open-source origins mean investor profits are not dependent on the efforts of developers or managers, said Carol Goforth, a law professor at the University of Arkansas.

How is this different from, say, Ethereum? What about when changes to the Bitcoin network are done (either directly e.g. bug fixes or indirectly such as hard forking), does this not count as "efforts of developers or managers?"

^1: https://www.reuters.com/business/finance/what-makes-crypto-a...

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In bitcoin software contributors can propose changes to the protocol and software, but they have no absolute power since they can just be rejected by the miners, who are not paid directly from bitcoin raising in price, but from fees from the operation of the network itself. So there is no organization or entity promising returns for owning bitcoin.

In Ethereum, a centralized group of people put together a public sale of the token, promising great returns in exchange due to their visionary ideas. This is all perfectly fine, except they didn't register their sale as a security and companies touching Ethereum and other tokens continue to not follow security rules; which involve for instance disclosures about ownership and conflicts of interest. Ethereum is an extremelly centralized business with a few key figures with an interest in the appreciation of the asset, advertising it illegally to a US audience without following US laws.

"In Ethereum, a centralized group of people put together a public sale of the token, promising great returns in exchange due to their visionary ideas. This is all perfectly fine, except they didn't register their sale as a security"

If I write a book with visionary ideas that promises to change your life (great returns) and continue to work on revisions as I come up with new ideas - should I register it as a security before I can sell my book?

The whole concept of securities laws makes little sense if you try to expand its reach beyond narrow traditional finance use cases... if even those cases make sense in the first place.

Might be better off repealing all this complexity/bureaucracy and better enforce existing generic laws about theft/fraud...

You nailed it, securities law doesn't make sense if you don't apply it to finance. Not sure that really advances the rest of the claims.

Owning the book does not promise returns.

How about, say, Pokemon cards? Lots of people buy them with an expectation of profit, which relies on the efforts of The Pokemon Company (among others) to continue to grow the player base.

They very well could be. I'm knowledgeable enough to answer.

I also wonder how does it work with one-of-a-kind collectibles, such as old letters written by famous people, paintings, rare/unique coins, ..., and NFTs.

Neither does owning Ethereum. You could lose money.

> If I write a book with visionary ideas that promises to change your life (great returns) and continue to work on revisions as I come up with new ideas - should I register it as a security before I can sell my book

Is there an expectation of profit in those buying your book? No? Then it’s not a security.

It’s a multi-prong test. Investor protection laws are substantial; everything is constantly being challenged in courts as a security.

Everyone buying a book expects to profit at least as much as the cost of the book from it

But not in actual money. "Profit" in utility, not in cash.

> Ethereum is an extremelly centralized business

The development of Ethereum is more decentralized than the development of Bitcoin. Bitcoin is primarilly developed by Bitcoin Core while Ethereum has multiple client implementations.

Anyone can join the Core Devs meeting and discuss new features and push back on ideas. You can also propose these features outside of the core dev meetings and never attend that meeting if you don't want to.

New ideas aren't centrally proposed and are handled by raising an EIP and getting support for it, just like BIPs in Bitcoin.

For example, EIP 1559 was dead for years until a community member decided it was time to push it and worked with many different people to present it in a way that convinced multiple teams to implement it in their client.

The validators can always reject a change just like Miners can reject changes to Bitcoin clients. The big difference is that Bitcoininers don't have many clients to choose from, so they have to be more willing to accept whatever Bitcoin Core implements.

The bug difference between BTC and ETH from the SEC perspective is the initially issuance being an investment of money, and whether PoS is a return on investment or if running a node is similar to running a PoW node and you're providing a service and not simply expecting a return. In other networks, you can "stake" without running any hardware and that's clearly different than Ethereum's PoS model.

The crux of the problem for ETH is its first few months after launch where they indeed raised money. So ETH was a security at first (according to the Howey test) but now probably not anymore.

Matt Levine said it best:

https://www.bloomberg.com/opinion/articles/2023-06-07/when-i...

"Some of them did securities offerings, but by the time the SEC noticed they were too entrenched and decentralized and it would have been a pain for the SEC to go after them. Ethereum, most notably, very very clearly did an ICO in 2014, raising about $18.3 million by selling ETH tokens. If they did that today, or in late 2017, the SEC would have some serious questions. But by the time the SEC got around to cracking down on ICOs in 2017, Ethereum was big and decentralized and the SEC would have had a hard time, practically and legally, challenging its 2014 ICO. And so everyone sort of grudgingly concedes that ETH is not a security."

For those who saw Bitcoin and Ethereum from day 1 or close to it it makes more sense.

Bitcoin started out as a toy with no value, even perhaps a proof of concept, which eventually gained value and began to be traded. Even years after its' creation people gave it away for free, there were faucets. The creator disappeared and the protocol intentionally has been designed in such a way that making changes is difficult and there's a lot of veto power by users.

Ethereum has nothing like the same origin story. There was an expectation of value from the beginning, Vitalik is still around, and there are often huge centralized changes like PoS, the DAO rollback, etc.

>Ethereum has nothing like the same origin story.

Ethereum was the first token sale. There was no precedent established at the time of people profiting off of token sales. The token sale agreement explicitly said not to expect a profit. It was treated by participants as more of a kickstarter to crowdfund the launch of a new kind of decentralized computing platform.

Going off tangent: if a token sale explicitly states that participants should not expect to profit, then the SEC should have no jurisdiction over it. Securities laws, as is, are already severe limitations on the right of adults to freely contract. To then shoehorn tokens - that represent no equity and make no representation of giving a claim to assets - into being subject to securities laws, is just egregious suppression of basic rights.

> Ethereum was the first token sale.

That's not true. The first token sale (ICO) was Mastercoin, 1 year before Ethereum's ICO.

*first successful token sale

Ethereum ICO‘d and therefore doesn’t pass the Howey test.

The Howey test is applied to the current status of an asset. It doesn't take an asset's origins into consideration.

If you believe that Ethereum currently represents "an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others", then it is a security. If not, then not.

Is there a statute of limitations or a similar concept? For example, hypothetically would it be possible 30 years after the Ethereum ICO for the SEC to declare that ETH has been a security the entire time? As of now, it's been almost 10 years since the Ethereum ICO.

5 years unless there is evidence of active fraud.

but that doesn't mean that if something exists for more than five years it can't be a fraud. It means they would have to find an action by Coinbase that was illegal and was done within the last five years. If it was illegal for coinbase to be a broker continually up until the present day then that would be within the statute of limitations

If it was a security, but no longer is, the sale of an unregistered security back then was still a violation of the law that (barring statutes of limitations) could presumably still be prosecuted. The sale of ETH today would not be if it has transitioned into commodity status.

The Howey test would be applied to the status of the asset at the time of the alleged violation of the law that is being prosecuted.

Right, but past violations of the law have nothing to do with how an asset should currently be regulated, which is what this thread is about.

It has plenty to do with it.

People are going "well they say BTC and ETH are OK, why not this random shitcoin?"

The answer is "ETH wasn't OK when it was still like said random shitcoin".

> How is this different from, say, Ethereum?

The House Financial Services Chairman asked Gensler (Head of SEC) point blank half a dozen times whether Ethereum was a security.

Half a dozen times, Gensler refused to answer. :/

https://youtu.be/VhA1dZXeao0

That's a good point. It sure would be helpful if Gary Gensler elaborated on his reasoning, rather than handing down his opinions with no explanation.

I think he did explain it: Most coins have a centralized development team who are focused on increasing the coin's value. It's a classic investment no different than a startup.

Bitcoin has a centralized development team who is focused on increasing the coin's value. By writing more efficient clients, coordinating soft forks, and curating standards, the Bitcoin Core dev team is directly supporting the asset. So why did the SEC declare it not to be a security? We could speculate as much as we want, but at the end of the day these are the hard-hitting questions that the SEC has been avoiding, and their avoidance of these questions has been bad for everyone involved.

Right now everyone is guessing why exactly the SEC considers most of the top 10 coins to be securities, except Bitcoin, with Ethereum apparently in limbo. Most importantly, it leaves companies guessing whether they'll have to wage a bankrupting 50-million-dollar lawsuit against the SEC to try to defend themselves if they launch a coin they believe not to be a security, but that the SEC later classifies as one through their opaque reasoning process.

I mentioned it in a comment above, but the SEC needs to release something like a 10-step process for determining whether a certain crypto is a security. Something that's clear enough that a company's lawyers can apply it to their products to determine without a doubt whether they are in compliance with the law.

It's not centralized...

What do you call the group of developers who control write access and pull request approvals for the Bitcoin Core GitHub repository? You can't just apply to become one of these devs; they're grandfathered in from the early days. And they're the sole group who effectively have the final say on what features make it into the network protocol.

To me, that sounds like a centralized team employing centralized decision making.

The Bitcoin network is steered by these developers, but as we saw with the User Acitvated Soft Fork (UASF) of 2016, the users ultimately decide what Bitcoin is.

The vast number of users, or at least, those who run their own node, choose to run a forked version of the client software that activated a contentious upgrade (the upgrade was Segregated Witness).

Only after the fact, this code was merged into the Core branch.

> Only after the fact, this code was merged into the Core branch.

That's incorrect. The code was merged into the Core branch first. The protocol change was initiated by the developers, not by the users.

The difference is that nobody has to actually accept updates that the core team make - and this has happened a few times, resulting in forks, although those cases were for things the core team refused to do - how can you “fork” a security? What is the common enterprise when forking a PoW chain?

> how can you “fork” a security?

Exactly the same way you fork a non-security. Security is a legal designation, not a description of how a particular asset is implemented (in a forkable structure like a blockchain).

> What is the common enterprise when forking a PoW chain?

The developers/promoters of the fork, potentially.

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