More like sketchy behavior coming out of Coinbase. Coinbase terms:
Acknowledgement of Risk. By opting into Lend, you are acknowledging the following: Lend is not a checking account nor a bank savings account, and Coinbase is not a bank. By participating in Lend, you are making a loan of your eligible Digital Currency to Coinbase, Coinbase is your counterparty and you will have only a contract claim against Coinbase for the return of Loaned Digital Currency. As with any loan transaction, you could lose all your Loaned Digital Currency if we are unable to repay your loan. Coinbase does not provide you with collateral for the Loaned Digital Currency. You acknowledge that while you have the right to make a Return Request at any time, if Coinbase becomes insolvent or bankrupt or is placed in receivership your Loaned Digital Currency may be lost. Your Loaned Digital Currency is not protected by the Federal Deposit Insurance Corporation, the Securities Investor Protection Corporation or other insurance.
Coinbase may use Loaned Digital Currency in its sole discretion, including uses which generate returns for Coinbase in excess of the Lend APY, which Coinbase is entitled to as compensation for Lend. Any returns generated by the use of Loaned Digital Currency are not returned to you as part of Lend interest. Therefore, although the interest rate will be determined in accordance with Section 2, the interest rate is determined by Coinbase and Coinbase may have a conflict of interest with you in setting the Interest Rate.
OK. So Coinbase wants to borrow your money, invest it in something else, not tell you what that something else is, and hopefully pay you back. In the real world, they're selling you a bond or commercial paper. That's a security.[1]
Morrison and Forster lists these requirements for commercial paper that doesn't have to be registered as a security.
- Negotiable (No)
- Prime quality (No)
- Eligible for discount at Federal Reserve banks (No)
- Not ordinarily purchased by the general public (No)
- Used to facilitate “current transactions” (No)
- Maturity of nine months or less with no automatic roll-over. (No)
Nope, doesn't qualify.
Coinbase is trying to pretend to be a bank without qualifying as a bank. They have to know this; they're a public company and have now filed SEC filings for two whole quarters.
Ok - seems strange, how can lending be a security?
The naïveté of this statement by CB beggars belief. If you ask people for money now in exchange for more money later you’re creating a security. The law has been on the books since 1933.
Is it possible this sort of disingenuous attitude is an act? It seemed to work for Uber and Airbnb. They skirted by on legal technicalities until they had enough VC-funded legal firepower to tip the scales in their favour.
A security is by definition a tradable instrument. Your bank account is not tradable, and therefore is not a security, despite the fact that you are lending the bank money and interest is paid in return.
What the actual fuck? Never once have I said that these wouldn't be regulated, nor has the Coinbase CEO, and I have no fucking clue how you would jump to that conclusion. Jesus Christ...what a fucking moronic straw man.
There are over a dozen financial regulatory bodies that are not the SEC. FINRA is the most likely choice here, considering the fact that they already regulate securities lending.
He's right. You don't have the option to choose which laws apply to you, and your attempt to explain why is irrelevant, as the law does not support your claimed definition
The SEC is getting involved because they are the correct people to handle this.
This is not something an outsider should be trying to pan as someone else's wheelhouse.
No, he's not right because his entire argument was a straw man, trying to claim that I was sovereign citizen-ing financial regulation.
The Coinbase CEO is not an idiot. He has been very clear that this would be a regulated instrument. The SEC has no jurisdiction here. Either this is an interest-bearing currency lending account, for which the FDIC would be the regulatory body, or it is a securities lending account, for which FINRA would be the regulatory body. The SEC has not ever regulated securities lending or interest bearing accounts. They have also never had any regulatory authority over non-tradable financial instruments. They're literally the least likely agency to get this turf, which is why industry insiders like Matt Levine are shocked by this. It's only complete outsiders like you that think the SEC has any stake here, because you have a completely facile understand of the jurisdictions of the financial regulatory bodies in the US.
Do you have a source for Matt "Everything is Securities Fraud" Levine being shocked by this? He seems like the last person I'd expect to be surprised by the SEC's broad mandate.
> But a lending platform that says “hey put your Bitcoins into this pool and we will give you a 10% return on them” probably is offering a security.
Also
> A collateralized stablecoin is basically a money market fund, money market funds are regulated by the SEC and their shares are securities, so the SEC naturally wants to treat stablecoins as securities and regulate them. I am less convinced that this view is correct, 2 but it’s probably the SEC’s view
and
> The speech is not exhaustive, and I am perhaps wrong in interpreting it to mean “everything in crypto is a security until proven otherwise.”
Now, maybe he misspoke and didn't mean shocked but rather meant that Levine disagreed with categorizing it as a security, but given that first quote I think even that extremely kind reading of his comment would have no standing.
He claimed that you are making the claim that someone can merely opt out of regulation by deciding that it does not apply to them. That is what it would mean to "soverign citizen" things - those folks are people who appear to genuinely believe that if they state, in their opinion clearly, why the law doesn't apply to them, that it really doesn't. They frequently get dragged to jail in chains, ranting about how the tassles on a flag mean it's an admiralty flag, and as a result, some string of hedge logic means it doesn't apply on a technicality.
I agree with his impression of you. You appear to be making random, incorrect, unjustified claims, and then drawing from those claims the impression that the law doesn't apply in context, and the actual people who run this part of the legal system are too dumb to understand what you understand, and aren't the right people to handle it.
Here are some literal quotes of you, which I believe support this perspective on what you're saying.
.
> A security is by definition a tradable instrument. Your bank account is not tradable
Three things:
1. That is not the correct definition of a security, no. It both gets things wrong, cites irrelevant things as if they were key, makes correct factual claims in a way that makes clear they're not well understood, and omits defining details. This like saying "a car is a wooden box with a radio and a minimum of two wheels, at least one of which a steering wheel."
2. Yes, your bank account very much is tradeable. I would say "please go learn about securitization," but since you're trying to define what a security is, it seems likely you'll say "I already know about it," unaware that securitization is the process by which something that didn't used to be a security is turned into one, and that the United States has had two different financial crises in the last 20 years caused directly by bank accounts being tradeable.
3. The sub-average NPR listener can explain this. Maybe befriend one and ask.
.
> trying to claim that I was sovereign citizen-ing financial regulation.
You're the guy saying "The SEC is wrong and they don't even do this and here's why and I have no reference and when you say I'm wrong I'm going to ignore you and make fun of you and not address your points."
I guess I don't think he's incorrect about you, frankly.
Vaccine deniers also get angry when they're compared to Flat Earthers, because they're so busy telling themselves that they're right that they never bother to learn why people are taking the social cues that they're taking.
I suppose it's possible that you know more about financial regulation than the SEC, even though your claims stand in direct contrast to recent high profile history
Would you like to provide some evidence, or at least stop throwing around the misapplied fallacies?
.
> The Coinbase CEO is not an idiot.
So, there are three obvious possible ways to take this.
1. You think the SEC are idiots
2. You think that when the head of a shady company criticizes the financial regulator who's supposed to prevent them from doing something illegal, it's because he's smart, and not because he's a snake oil salesman
3. You didn't know Coinbase has a history of breaking financial regulations
Is it one of those, or a different thing?
> He has been very clear
When you said "the Coinbase CEO has been very clear," what I actually heard was you yelling "bitconnect" with a Spanish accent.
Try to keep up. The embattled CEO of a shady company with a history of legal problems, who's just been notified by a regulator that /yet/ /again/ they're breaking the law?
Most of us don't care how clear they've been.
If you go back, you can find people talking about how the statistics on Theranos are completely impossible for the last ten years. How the size of sample they're talking about drawing is so small that frequently there won't actually be any blood cells in it to get data from.
How it's a criminally obvious fraud from freshman year statistics.
And you'll find investors proving H L Mencken right, the entire way.
"Elizabeth has been very clear."
That's nice.
.
> that this would be a regulated instrument.
That isn't how those words work.
You are very easily fooled.
(continued in self-reply because it's too long for one comment. i wish these pages wouldn't do this.)
I also explained why I agreed with the statement, explained why I felt that the straw man claim was spurious, and linked to an article that explained how I felt about the use of fallacies thus.
> If you look at their other comments, it's very obvious they're not saying it should be free of regulation.
>
> For you to have said you still agree with that assessment
There's a difference of meaning here.
Original criticizer and I are saying that this person thinks that this event is free of regulation from the SEC because they're the wrong body.
Not free from all regulation. You misunderstand what I, and I think also they, have said.
.
> For you to have said you still agree with that assessment, even after clarification was made, was you being completely unreasonable.
Another possibility is that you've misunderstood the meaning?
I wish people would be less condemning in this thread.
The strawman was > You can't just magically say, "I'm a not a thing at all, you can't regulate me!"
Sounds like "free of all regulation" to me.
Maybe you didn't mean "all regulation", but then in addition to confusingly saying it wasn't a strawman you really flubbed the wording on "the claim that someone can merely opt out of regulation" by not making that distinction clear.
I've seen more coherent rebuttals from schizophrenic bus stop vagrants. Jesus, how is anybody even supposed to read that? I have never once claimed that this product is exempt from regulation, merely that the SEC is not the one to regulate it. And I have been pretty damn consistent in saying that this clearly belongs with FINRA and/or FDIC. No amount of rambling about HL Menken and imagined interpretations of words will change that.
> I have been pretty damn consistent in saying that this clearly belongs with FINRA and/or FDIC
Naw dawg. FDIC isn't a regulator. You were perhaps thinking of the OCC? Their jurisdiction is just over banks.
And you have to understand that the entire framework of securities & exchange law sets up SEC as the regulator of all that shit. It's, like, explicitly laid out in the 33/34/40 Acts.
Wall St. guys (exchanges & broker dealers) have managed to carve out a little relief and petitioned SEC to allow them to regulate themselves for some annoying bureaucratic stuff.... but for anything major, the SEC steps right in and asserts their jurisdiction.
For example, if you're arguing that cryptocurrency-related lending is in fact some sort of securities lending, then it clearly falls under Rule 15c3-3 under the '34 Act.... which, you will note, is promulgated and administrated by the SEC. It's what they do. The SEC gives marching orders to FINRA, and then FINRA codifies some policies & procedures. If FINRA is fucking up, or they don't want to handle it, then the buck still stops right on the Commission's desk.
Nivertech below lists the Howey test, which I'm going to reuse here.
1. An investment of money - You're certainly not depositing it for safekeeping when they don't insure you against loss, and the only thing that inspires people to deposit unsafely is an earning on their investment
2. In a common enterprise - Coinbase Loan is a common enterprise umbrella, everyone using Loan expects to get paid when they all do the same common thing
3. With the expectation of profit - Laundering the investment gains through interest earned and skimming is the novel argument being constructed here
4. To be derived from the efforts of others - If you aren't doing any work and you're getting paid, that's the effort of others, and depositing the coin doesn't count as work
So I expect the SEC to win using a "money laundering" interpretation, and they'd rather not explain that to Coinbase yet. Coinbase is trying to money launder the profits of their investments through an "interest rate" for all "depositors", but that's not likely to stand up in a court of law. If they're thinking ahead far enough in political strategy terms, this product offering is bait for an eventual SEC settlement that incorporates terms that legitimize Bitcoin and destroy their competitors. I hope the SEC doesn't take the bait and just convicts them of offering an illegal/unregistered/whatever investment opportunity. It'll be interesting to see if the SEC argues that it doesn't matter whether Bitcoin is a currency for the sake of Howey, since doing this with an investment opportunity derived somehow from Beanie Babies would end up being illegal in the same way, even if the market didn't exist at all.
(I am not your lawyer, internet forum posts are not legal advice, etc.)
Thanks for this - I found it particularly enlightening. I viewed the Twitter thread thinking “damn SEC!” but now? While the SEC should probably be more transparent here, clearly CB is up to shenanigans, which justifies their threat of lawsuit.
I don't know about the regulation part of it, but why shouldn't the SEC just respond to a company asking for clarification with a clarification? I'm assuming, based on the Twitter thread, that they have not done so.
SEC clarified that the program must not be launched or a lawsuit will follow. As to why - apparently SEC is collecting information to provide a guidance. You don’t want to rush guidance.
Thanks for that link, gives great context for the US situation around the regulatory situation around commercially offered crypto lending program. There's a good summary on page 17.
From reading, the requirements you quote are specifically to be excluded under Section 3(a)3. There is also the possibility to be excluded under Section 4(a)2. Looks to me that out of those, the following points rule that out as well:
- the issuer cannot use general solicitation or advertising to market the securities
- the issuer may sell its securities to an unlimited number of accredited investors and up to 35 other purchases
- each resale of CP, including each resale by a purchaser in the secondary market, must be made in a private placement transaction
Now, my question is: How does this apply (or not apply) to interest on accounts with banks or credit unions? I think it's also quite clear that those don't apply here; is there some separate legislation (that I assume have other requirements, like holding some form of banking license) that regulate these?
Kraken has a Wyoming banking license since last year, making them federally recognized as a bank. I'd be curious to know if this means that they have a way to offer lending services that Coinbase aren't allowed to.
> They have to know this; they're a public company and have now filed SEC filings for two whole quarters.
This makes me think there may be something we're missing here. In any other case I have the impression of CB to be doing their best to play by (their interpretation of) the book. They employ some of the most competent advice in the states on compliance matters. It'd be inconsistent of them to just flagrantly ignore something like this without having any ground at all to stand on. I wouldn't blink if Poloniex/Circle or Binance US did any kind of shenanigans and excusing themselves with "regulatory uncertainty" but it's not congruent with what we've seen from Coinbase so far.
EDIT: Alternative take: CB are so worried about an exodus of liquidity if they can't match lending terms of other exchanges that they knowingly violate securities regulations to stay competitive. Under this model BA's tweets are theater. This would indicate a significant shift in values but not impossible.
Coinbase is being willfully naive here if they are pretending like they've never heard of the Howey test.
Coinbase's Lend product pools USDC from customers, and lends them out to ??? who does ??? and pays Coinbase interest for it. Presumably the ???'s are "crypto traders" and "trades crypto, possibly with leverage", respectively. Those specific details dont matter, though.
According to the SEC: "To determine whether a transaction involves an offering of 'securities,' courts employ a four-part test outlined by the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. Under that test, a transaction qualifies as an offering of 'securities' if it involves:
(1) an investment of money,
(2) in a common enterprise,
(3) with a reasonable expectation of profit,
(4) to be derived from the efforts of others" [0]
I'm not a lawyer or a securities regulator, but it seems hard to see why Coinbase Lend doesn't qualify as a security under those rules.
> Serious question, under this test, why shouldn't an ordinary savings account be considered a security? Do banks just have a grandfathered exemption?
I'd guess a savings account at least fails the "common enterprise" part of the test.
From the linked PDF:
> Lower courts have disagreed about the proper test for assessing the “common enterprise” element
of the Howey test, and have adopted three basic approaches to this requirement: (1) “horizontal
commonality,” (2) “broad vertical commonality,” and (3) “narrow vertical commonality.”105
Under the horizontal commonality approach, a “common enterprise” exists where investors pool
assets and “share in the profits and risks of the enterprise.”106 By contrast, vertical commonality
emphasizes the relationship between an investor and the promoter of an enterprise. Under the
broad vertical commonality approach, a “common enterprise” exists where an investor’s fortunes
are dependent on the efforts or expertise of the promoter or his agents.107 Under the narrow
vertical commonality approach, a “common enterprise” exists where an investor’s fortunes are
dependent not only on a promoter’s efforts or expertise, but also on a promoter’s profits.108
I think you mean "e.g. orange groves". "i.e." is an abbreviation for "id est" meaning "That is" (or you can remember it as being like "In essence"). If orange groves were the only thing with monetary value then i.e. would be appropriate. If orange groves are an example of a thing with monetary value then you want "e.g." (for example).
Stock lending (for short selling) is not considered a security, it is considered lending. Most cryptocurrencies aren't even considered securities by the SEC...only a handful of tokens. It would be reasonable to expect a similar treatment here.
Exactly. The same goes for margin accounts. I can see both the FDIC and FINRA having a claim to regulate these crypto lending accounts...the SEC is the last that I would expect to do so. The fact that they're trying to classify something that can't even be traded as a security is mind boggling.
You’re thinking of something else. FINRA is a non-profit self-regulating organisation. It has no power over anyone who doesn’t voluntarily submit to its rules. It is not a part of the government.
The SEC was created by the Securities Exchange Act of 1934. It regulates FINRA [1].
The regulator the SEC has constant turf battles with is the CFTC [2].
> You’re thinking of something else. FINRA is a non-profit self-regulating organisation. It has no power over anyone who doesn’t voluntarily submit to its rules. It is not a part of the government.
Financial industry participants are required by the SEC to submit to its rules and regulatory authority. You literally cannot create a financial institution without being forced to submit to FINRA.
> You literally cannot create a financial institution without being forced to submit to FINRA
Yes, you can. To trade securities you have to be a member of an SRO, of which FINRA is one and the largest. (MSRB is another. Before 2007 there were non-NASD NYSE members. And if you're starting a bank or a hedge fund or a VC firm, FINRA has nothing to do with you.)
Going back to the original assertion: yes, FINRA was created by and is subservient to the SEC. If FINRA has proper jurisdiction, the SEC certainly does.
I may be confused, but https://www.fdic.gov/regulations/laws/rules/8000-6200.html literally defines notes, bonds, swaps, and evidence of indebtedness as securities. Just because Coinbase currently holds an asset of mine, doesn’t mean that if they offer me to use that to become a debt investor in a fund they’re running, that’s magically no longer a security, right? It seems very much within the SEC’s discretion.
Sure, the SEC’s enforcement and communications are spotty, and they deserve to be called out on that, but why would Coinbase ever assume they wouldn’t consider this a security?
But these aren't notes or bonds or swaps or evidence of indebtedness. They're not tradable. This is a lot closer to a bank account, which is also an interest bearing instrument that is not tradable.
Interest bearing lending accounts are widespread...you can find them at banks, brokerages, credit unions, and even grocery stores. They are not regulated by the SEC, but by other regulatory entities, which is the whole point that TFA is making.
> Ostensibly the SEC's goal is to protect investors and create fair markets. So who are they protecting here and where is the harm? People seem pretty happy to be earning yield on these various products, across lots of other crypto companies.
People were probably quite happy earning yields with Bernie Madoff as well.
He mentions the law being unevenly enforced. Are there other american companies offering high yield lending/savings products, and which haven’t faced scrutiny?
I know a bunch of offshore ones do, like Binance. And I checked and Nexo lets you earn interest on tokens, but not on Nexo’s own token.
To which companies is Coinbase referring? I know the space is full of unreasonably high interest offers so I wouldn’t be surprised if the SEC has failed to act against some. But which ones match this fact pattern?
Edit: someone below mentions earning yield on GUSD at Gemini. That does seem to be the same sort of thing. And sounds like Blockfi does as well.
Could be more suits are in the works. SEC has announced nothing yet, this is Coinbase trying to get ahead of it.
No, it doesn't matter who issued the USDC token, in fact it doesn't matter what assets are used to earn yield on. It can be any money surrogate/medium of exchange/barter instead of the actual money, e.g. orange groves.
Any company offering a yield product is ticking all the boxes in the Howey Test[1], and therefore offering a a security.
Only the banks have an exception for CDs.
[1] Howey Test
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
TO: @alasdair_ (can't reply directly; thread is too nested?)
> By this definition, a player playing at a craps table with other players all sharing the betting on the same outcome is in the process of creating a security each time they roll the dice.
Where is the "efforts of others" - i.e. non-players? So far it's just a Cooperative (aka DAO in millennial-speak).
> A husband who asks his wife to join him in paying the $25 to sign up for a joint bank account so that they get the free toaster is engaged in Security creation as well it seems
Family isn't considered common enterprise. Also, where is the "efforts of others"?
> A club that buys newspapers collectively to cut out the coupons each club member wants meets all four of the criteria as well.
This is a border case, there were case where golf club membership or timeshare units where found to be securities.
But there is also a consumptive utility, the question is do the club member actually read these newspapers, and does the value of coupons is sufficient "expectation of profit"? :)
The problem here is the US legal system is principle-based, not rule-based. So there is never a legal clarity. That's the disadvantage. But it also makes it anti-fragile and future-proof.
By this definition, a player playing at a craps table with other players all sharing the betting on the same outcome is in the process of creating a security each time they roll the dice.
A husband who asks his wife to join him in paying the $25 to sign up for a joint bank account so that they get the free toaster is engaged in Security creation as well it seems.
A club that buys newspapers collectively to cut out the coupons each club member wants meets all four of the criteria as well.
What is actually financed by crypto denominated loans? Who is paying the interest that’s remitted to crypto-denominated savers?
AFAICT the chief borrowers seem to be other crypto-denominated savers initiating loans against their crypto, hence the apparent demand[0] for stablecoin denominated loans. So USDC savers on Coinbase may be much more exposed to BTC and other crypto assets / securities than they expect. If BTC goes way south and borrowers get called, USDC savers have only Coinbase’s promise of a peg to support them, and Coinbase/USDC may have less fiat reserves than expected, having sent some or much of it out on margin loans.
OK, what's really going on here. Lots of people have US dollar balances with Coinbase. Right now, Coinbase can't use that money for their own purposes:
USD Wallet. Your USD Wallet allows you to hold and transfer USD with your Coinbase Account as described below. In general, we will combine the balance of your USD Wallet with other customers’ balances and either hold those funds in a custodial account at a U.S. FDIC-insured bank or invest those funds in liquid investments, such as U.S. treasuries, in accordance with state money transmitter laws. Coinbase owns the interest or other earnings on these investments. Pooled customer funds are held apart from Coinbase’s corporate funds and Coinbase will neither use these funds for its operating expenses or any other corporate purposes.
So there's all that juicy cash lying around that Coinbase can't touch without someone going to jail for theft. But if they can get you to turn on "Lend", they can get their fingers on your money and use it for their own purposes. That's what this is really all about.
Now, remember that Coinbase is behind Tether. Tether is known to not have enough real dollars behind it. Coinbase is evasive about what assets actually back Tether. Tether holders are just creditors of Coinbase. So are people who enabled "Lend". So, by enabling "Lend", you have opted in to the risks of Tether.
You should probably rephrase because it’s ambiguous whether “himself” is the house or one of the losers. Although maybe that ambiguity is actually accurate.
Weird. I’ve been earning yield on the Gemini dollar at Gemini. Are they regulating that as a security?
BlockFi (which I use as well) is also offering similar services and has informed users of ongoing SEC action to classify those offerings as securities. EDIT: actually that’s just state agencies.
I'm wondering if Coinbase's relationship with Circle is part of the issue? Returning yield on a token that you are sponsoring smells a bit more security-ish then commodity-ish.
>Whatever their theory is here, it feels like a reach/land grab vs other regulators.
That seems to be Matt Levine's read of the situation as well, a few weeks prior.
>The SEC is not about “investor protection” broadly; it is about investor protection from scammy securities. If bad-faith actors speculate on the value of gold, the SEC can’t really stop them, because gold is not a security. The fact that crypto is rife with scams does not mean that the SEC has to address it; the SEC has to address it only if it is rife with securities scams.
>Gensler argues — or at least asserts — that it is. But he is biased: He runs a regulatory organization, he is interested in crypto, he doesn’t like scams, so he wants to use his regulatory power to crack down on crypto scams. He might be tempted to expand that power, to treat borderline gray-area things as securities and crack down on them, even if they aren’t really securities.
I don't understand where people got this narrow interpretation of the SEC's mandate. The SECs mandate in the securities Act has 3 parts 1)Protecting investors 2)Facilitating capital formation 3)Orderly capital markets.
It absolutely is about investor protection broadly. Check out 15 U.S.C 78aaa through 78lll
The SECs mission is not that broad because other regulatory bodies regulate different types of instruments. For example, the FDIC is the agency that regulates most bank-origin instruments like CDs and savings accounts. FINRA regulates margin accounts. The Commodities and Futures Trading Commission regulates commodity-related instruments, including gold, forex, futures, etc..
And at least within the industry, it is pretty well known that there is an ongoing turf war between the SEC and the CFTC, with each encroaching on each other's regulatory authority in various scenarios. It's not hard to see that the SEC would encroach on other regulatory bodies as well. And that's why various experts like Matt Levine see this as the SEC stepping out of line: they have a very poor claim to authority to regulate these instruments.
Yup I know about the SEC vs CFTC turf war. I've actually had meetings with both of those regulators where they've staked overlapping claims to regulate certain things. As nice as it would be to have a clearer setup, the way financial regulations work in the US is that there are lots of areas of overlap (state vs federal as well as with multiple agencies) and if you're a regulated entity you have to keep all of the regulators satisfied. And even if you're not a regulated entity they can (in certain cases) just decide you are. For example if you make banking software believe it or not at some point the OCC will just decide you're important enough that you have regulatory obligations and they will examine you (I know about that case specifically through personal experience).
I really don't see why you're saying they have a poor claim to regulate here. There is a clear investor protection angle and that's in their remit. Coin issuers can't claim that it's only qualified investors that are affected and the SEC has traditionally protected retail investors. Secondly the SEC could make a case through their remit on orderly markets and capital formation.
All of the financial regulatory bodies are tasked with investor protection...that's not something unique to the SEC. The SEC has jurisdiction over securities and some types of markets. These aren't tradable entities, and if you can't trade it, it's definitely not a security, and there's no market to regulate either. The SEC may have jurisdiction over cryptocurrency markets and some types of cryptocurrencies, but this product is neither of those. It's an interest bearing lending account.
There are far better equipped agencies for regulating these lending accounts than the SEC, with actual jurisdiction that makes sense. FINRA and the FDIC immediately spring to mind...they both regulate interest bearing lending accounts for retail investors. FINRA for retail investment accounts, FDIC for retail banking accounts.
Consenting, competent adults should be allowed to opt-out of having the SEC as their ‘white knight’.
(Matt Levine also has a version of this idea, where he suggests people should, with sufficient effort, be allowes to sign a piece of paper to the effect of, “I’m an idiot & won’t sue if I lose all my money” and then put their money into whatever the hell they want –but I can’t find his canonical description of his proposal at the moment.)
A neat, elegant solution with one problem. The whales involved in these kinds of operations are using OPM - "other people's money". They can sign whatever piece of paper they want.
The people whose money they're 'investing' however will absolutely go to the SEC if things go upside down.
That’s okay, we already had that experiment in 1929 and 2008. Consenting legal adults can crash the economy for everyone.
Hell, just from 2008 Dodd-frank, banks are not allowed to invest without having very specific amounts of collateral (eg you better have a billion before you speculate with your customer’s billion).
Why would the rules for highly regulated, specially-privileged-under-the-law banks have to do with what individual consenting adults should be allowed to invest in?
Because those consenting individuals can break the economy for everyone, which happened in 1929 and 2008.
Yes, this is exactly what the GP said, but really it says everything that needs to be said. If I don’t have any involvement in the financial market, a few consenting adults can still force the company I work for to shut down due to liquidity issues.
What can they break that normal corporate investors couldn't?
Requiring a percentage of collateral doesn't do anything to stop stupid investments. If the investment itself is harmful, then 10% reserve means you're still doing 90% as much damage.
The banks were going to become insolvent in both scenarios. Coinbase is proposing you lend them Bitcoin, not other individuals. If they don’t put up the collateral and leverage hard and manage to fail for whatever reason, they pretty much screw everyone out of their coin.
This is a fairly well accepted lesson everyone digested by this point.
I don't think the SEC would say everything is fine if they changed the plan to have 10% more collateral. So I still don't understand this particular complaint.
The rule after Dodd-frank is closer to 100% collateral. But sure, the discussion really doesn’t start until we enter this realm, no point over discussing.
And which economists make the case that regulatory prior restraint of individual investor choices is how to avoid a recession/depression? (Rather than, say, fiscal or monetary policy?)
A major reason for the success and growth of crypto is that it is permissionless (i.e. unregulated) finance. This sector is extremely high-margin, full of old boys' networks, licensed monopolies / oligopolies, it's opaque, confusing, and somehow this convinces mere mortals that the basic business of finance (deposits, lending, interest) is so complex that it must be kept far away from peasants. Meanwhile the average securities and annuity peddlers are not exactly the smartest people ("but at least they are licensed!").
Crypto is blowing the whole thing up. We are witnessing frauds and scams, but also a huge amount of innovation that I believe will change finance for the better.
If you like using your bank and brokerage, keep doing it. But the brave souls building and using crypto finance are doing a very bold experiment, and I say let it continue.
Acknowledgement of Risk. By opting into Lend, you are acknowledging the following: Lend is not a checking account nor a bank savings account, and Coinbase is not a bank. By participating in Lend, you are making a loan of your eligible Digital Currency to Coinbase, Coinbase is your counterparty and you will have only a contract claim against Coinbase for the return of Loaned Digital Currency. As with any loan transaction, you could lose all your Loaned Digital Currency if we are unable to repay your loan. Coinbase does not provide you with collateral for the Loaned Digital Currency. You acknowledge that while you have the right to make a Return Request at any time, if Coinbase becomes insolvent or bankrupt or is placed in receivership your Loaned Digital Currency may be lost. Your Loaned Digital Currency is not protected by the Federal Deposit Insurance Corporation, the Securities Investor Protection Corporation or other insurance.
Coinbase may use Loaned Digital Currency in its sole discretion, including uses which generate returns for Coinbase in excess of the Lend APY, which Coinbase is entitled to as compensation for Lend. Any returns generated by the use of Loaned Digital Currency are not returned to you as part of Lend interest. Therefore, although the interest rate will be determined in accordance with Section 2, the interest rate is determined by Coinbase and Coinbase may have a conflict of interest with you in setting the Interest Rate.
OK. So Coinbase wants to borrow your money, invest it in something else, not tell you what that something else is, and hopefully pay you back. In the real world, they're selling you a bond or commercial paper. That's a security.[1]
Morrison and Forster lists these requirements for commercial paper that doesn't have to be registered as a security.
- Negotiable (No)
- Prime quality (No)
- Eligible for discount at Federal Reserve banks (No)
- Not ordinarily purchased by the general public (No)
- Used to facilitate “current transactions” (No)
- Maturity of nine months or less with no automatic roll-over. (No)
Nope, doesn't qualify.
Coinbase is trying to pretend to be a bank without qualifying as a bank. They have to know this; they're a public company and have now filed SEC filings for two whole quarters.
[1] https://media2.mofo.com/documents/151203commercialpaperprogr...