Matt Levine: Ripple Is a Security and It Isn’t
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I wish we would just let the free market work. That means prosecuting those committing fraud, but otherwise allowing investors to invest how they wish, and learn their lessons the hard way, which is to lose money.
Copy-pasting my earlier comment on this:
What was remarkable to me was how quickly the token sale investment sector evolved between 2016 and 2018.
When token sales began in 2016, a white paper alone was enough to raise $40 million worth of cryptocurrency. By the end of the brief experiment, which ended with the SEC's entry into the sector in early 2018, the typical token investor was highly discerning, with the result being that only reputable teams were able to raise money.
This transformation occurred completely independently from any regulatory action. The collective intelligence of the market increased from hard-won lessons in the need to do due diligence, and the emergence of numerous internet resources that advised on how to effectively invest in token sales.
My preference would be for the government to not intervene with regulatory regimentation of the token sale market, but that obvious frauds - where a team promises the moon and then uses the money raised to buy themselves lamborghinis - be punished after the fact. In other words, that the government establish the rules of a free market - no prior restraint, but consequences if you are found to have committed fraud. Yes people would still lose money, but at least the fraudsters wouldn't learn that crime pays, and survive to defraud another day.
This would provide the benefits of free market evolution, while still removing bad actors from the market.
* FTX * CEL * 3AC * SafeMoon * The entire NFT "ecosystem"
There was mybitcoin.com, in 2011, which closed down after it claimed it had been hacked for 250,000 worth of customer BTC.
Then there was Bitomat.pl, the third largest exchange, which closed down in 2011 after accidentally deleting their wallet.dat file and with it, 17,000 of their customers' BTC.
There was MtGox - the largest exchange which at its peak accounted for 80% of crypto exchange volume - which was closed down in 2014 after it was revealed that it has been hacked for 850,000 BTC.
There was Bitcoinica which shut down after it was hacked for around 100,000 BTC in 2012.
There was Bitfinex which was hacked for 120,000 BTC in 2016.
By 2017 the major crypto exchange had proper security in place, and major crypto exchange hacks became far less frequent.
Here is a list of hacks and the dates they occured:
>the situation was much worse in 2010-2016
That might be true, but the people being scammed with lambo dreams in 2016 were a fraction of those getting scammed in 2021.
Celsius and FTX (FTT) also attracted much of their capital because reputable and established exchanges like Coinbase were prevented by regulatory gatekeeping from providing competing products. The SEC ordered Coinbase to cancel its LEND program that would have competed direct with Celsius for example.
>>but the people being scammed with lambo dreams in 2016 were a fraction of those getting scammed in 2021.
I have no idea what the basis of your claim is. In any case, a proper comparison is to look at what fraction of token sales were fraudulent at the beginning of the token sale era, and at the end of it, in 2018. That tells us whether free market development works to create a progressively better functioning market.
>CEL [...] wasn't an obvious scam at the outset
From the Celsius website:
>Earn up to 17% APY and get paid weekly when you HODL your coins with Celsius
It is not possible to pay 17% on deposits in a time of historically low interest rates while taking the low level of risk Celsius was claiming. The specific mechanism that was claimed, namely that they were taking a lower spread than banks, was obviously absurd. On the same website there is a diagram that is literally a circle explaining how CEL returns work.
>reputable and established exchanges like Coinbase
Gemini is supposed to be reputable and established. How are investors in its Earn offering doing now?
My point was that the total number of people who gave away sovereign currency in exchange for cryptocurrency they did not intend to use directly (i.e., buying a pizza, publishing smart contracts, etc) was much larger in 2021 than 2018. I think we probably have different ideas about whether speculating in a manipulated market rife with fraud counts as getting scammed, but surely we can agree that crypto had much wider reach in 2021.
As for Gemini, it did traditional lending. Coinbase Lend used Compound to do algorithmically enforced loans that are over-collateralized. Compound, along with every other well-regarded DeFi app, survived the crash with all loans paid back.
In any case, if you're looking for anecdotes negating my point, you can find them. The point I'm making is that a much higher proportion of large token sales were baseless in 2016 than in 2018. I observed rapid improvement. I did not say that by 2018, every investor was sophisticated, and every project that raised capital was well-run, or responsible with the investment capital they received.
Was a reference to terra and the anchor protocol. And while it's true that its flaws were less obvious than some truly stupid tokens from 2016, I don't think that's a fair characterization of the problem. In some ways it was actually a more obvious failure than dumb 2016 tokens. If I announce a perpetual motion machine, you don't need to actually analyze its schematic to know that it can't work the way I say. The same is true of a self balancing token pair scheme. A high school economics class is all that's required to understand why it can't work.
An overcollateralized loan is traditional lending. It's a software-implemented mortgage. How reliable it is is dependent on the risk profile of the backing assets and the creditworthiness of the borrower. A liquid market is a workable but imperfect way to assess value. It cannot measure risk - the information simply is not there. Volatility is not risk.
As for what portion was baseless... I think that's a fundamentally subjective question. From my perspective, the vast, vast majority in both years was baseless. I look at the entire cryptocurrency space as a place where interesting tech could have found value, but it's so infested with fraud and speculation that it can't.
Terra had actual development, a viable ledger, actual deployed dApps, and decent wallet software and consensus infrastructure integration, in being a Cosmos blockchain app.
Terra was bad, but when the totality of the projects is examined, nowhere near as bad as what was once common.
>An overcollateralized loan is traditional lending. It's a software-implemented mortgage. How reliable it is is dependent on the risk profile of the backing assets and the creditworthiness of the borrower.
The protocols that now constitute DeFi primitives survived completely unscathed in the recent crash, while numerous centralized lenders both inside and outside crypto became insolvent.
When loan contracts are enforced transparently and in accordance with terms that are immutably encoded, there is virtually zero risk of fraud and mistakes.
Like solend?
https://app.realms.today/dao/7sf3tcWm58vhtkJMwuw2P3T6UBX7UE5...
* Uniswap V1/V2
* MakerDAO
* Aave
* Compound
* Curve
They're immutable, heavily audited, and been subject to intense live-testing in an adversarial environment, where billions of dollars worth of digital assets have been locked by them for years, which has acted as an effective bounty for every hacker in the world.
- It's created from nothing by the US Government in order to create a pool of "investors" who will fund the business of running the country.
- They regularly "buy back" USD in the form of issuing Treasuries
- It pays its employees in USD just like Meta pays its staff in stock.
- If USD becomes less valuable it makes its "stock buybacks" cheaper (borrowing is cheaper)
- It trades on public exchanges.
From the USG's perspective isn't it a security?
I'm not a lawyer ...
Regarding the U.S. government, it is generally not considered a common enterprise for the purposes of the Howey Test. The U.S. government does not typically operate as a profit-seeking enterprise or pool funds from investors for the purpose of generating profits. The U.S. government is a political entity responsible for governing and providing public services, rather than engaging in commercial or investment activities.
Of course this is only an answer for the US legal system.