> Coinbase, as with most crypto platforms, has decided it wants to simultaneously operate as an exchange, broker-dealer, and clearing agency. These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them. Coinbase would need to fundamentally change its business model in order to separate these functions, and thus far seems unwilling to do so. “[Crypto intermediary compliance is] not just a matter of ‘paying lip service to [the] desire to comply with applicable laws’ or seeking a bunch of meetings with the SEC during which you’re unwilling to make the changes needed to comply with the securities laws,” said Gensler in a speech a few days ago.
Can someone knowledgeable here clarify if this really is the crux of the problem?
The previous HN thread seemed to mainly be of the opinion that Coinbase wasn't registering the non-Bitcoin crypto, but that the problem was the SEC wasn't giving clear guidance on whether they needed to be.
But I don't understand what ramifications that has. Why didn't Coinbase just register everything non-Bitcoin? Would that have limited/destroyed its business model in the way the quote above suggests?
Edit: thank you so much to all the replies so far! This is incredibly helpful.
Rather that claim knowledge, I would suggest you read Matt Levine's newsletter on this. He is a former securities lawyer who is extremely knowledgeable. -- I mean very extremely, he wrote an entire Business Week magazine about it.
Some key takeaways: For historical reasons as well as practical ones (who would you sue) BTC and ETH are probably considered commodities. Most of the rest are very similar to ICOs which were securities and rife with fraud. But you can't really go after the issuers very easily for a lot of reasons. But there are two parts to the SECs laws. One part is the issuance of secuirties, the second part is the brokers (or in this case exchanges). FTX, Binance, Coinbase, do things that would be illegal to do with securities (conflicts, lack of disclosure etc.). The SEC is just pointing out that most coins are securities and what they are doing is illegal under current law.
On top of that it is very, very hard to not see staking as unregistered securities offering. It is so bad that many states issued an immediate cease and desist letters, as well as awarded fines per violation, that is per investor.
For ETH they can sue Vitalik Buterin, the rest of the Ethereum Co-Founders, and the Ethereum foundation. They are the issuers and majority of the ETH supply is there since the beginning.
Maybe they will. I don't know anything Buterin. But it seems like whoever created bitcoin was sincerely trying to make an independent token for exchange or a digital commodity. Many of the subsequent versions of crypto behave exactly like fraudulent securities, with hype, poor disclosure, wash trading and pump and dump. It makes sense to go after the predatory things first and cut some slack to things that were well intended.
Again, I don't know anything about the creators of ETH, but they may have a better defense of their actions then-- say -- Sam Bankman Freid.
The problem is that issuers of crypto don't file S-1's and the like. They apparently claim it's because the investment involved in crypto is technology-enforced scarcity and not any interest in an actual business. They might propose instead publishing a white paper about how their technology works. Since there's no satisfactory registration, there's no legitimate industry. The Coinbase situation is a follow-on consequence.
Which, when you think about it makes sense. Why would consumer protection folks waive consumer protections simply because the would-be issuer confirmed there was no intrinsic value in the offering?
If you can't cash out it's just entertainment. That's why you don't have to be 18 to play pinball.
[actually the history of pinball and other arcade games is fraught with legal action, there were a few iterations of payout before we got to the harmless, kid-friendly machines of today, really good podcast about it, interviewing the guy who heads the Pacific Pinball Museum: https://art19.com/shows/the-madecast/episodes/6753c3e6-e12d-...]
"Kid-friendly" but really kid-robbing, though - AFAIK most of arcade games that let you win something, e.g. a toy, have subprograms that can override your victory, making it look like you've lost; those are triggered randomly, based on venue-configurable parameters like "max winning rate" and "daily wins threshold". This is designed to ensure the venue always makes a profit, by turning what's advertised as games of skill into games of luck.
What really angers me about this is not even that the nature of these machines isn't advertised to, or generally known by, parents and children, but that the way those overrides are implemented, they're quite literally gaslighting children (and for kids playing on such machines way too much, it's likely ruining their hand-eye coordination). There are many slow-motion / high-framerate YouTube videos demonstrating how these arcade games will fake input delays to turn perfectly timed win into what seems like split-second loss. And don't get me started on the fuckery that goes on with those "toy claw" games.
I feel there's something deeply corrupted about screwing up with children like that. I mean, when my kid starts playing a game and thinks she got good at it, and wants to show me how good she is, and then the software override kicks in and the game lies to her that she lost, what am I supposed to say? Gaslight her further by saying it was bad luck or still big enough of a challenge - when I know perfectly well the real reason is a bunch of greedy adults with broken moral compass adding a biased RNG to what they advertise as pure game of skill?
I worked in an arcade growing up, and you're not wrong about a lot of them--but pinball doesn't fall into that bucket. Every pinball machine I've ever seen is played pretty straight. Sometimes they have nasty game mechanics, but they don't have the issues you describe here (which is much more in the pseudogambling, Dave and Buster's style of games).
What frequently happens with pinballs though is that the score you need to get a free replay adjusts automatically so that the ratio of free games stays at a certain target percentage.
Absolutely true. That said, in practice, if you can hit a high score (usually extremely high anyway), you can hit the next one. It doesn't get harder to do, you just have to be consistent.
The difference between entertainment and a casino game is that a casino game is designed to try and get you to put in more and more money, where most entertainment oriented games will have you pay once for the entire experience.
Of course the gap between these is closing by the introduction of lootboxes and similar mechanics. I do think these should be regulated as it aligns the incentives to get people addicted to your game, which is a fairly basic variation on preying on the vulnerable. In addition I -- and I assume most people -- do not like getting treated as a money piñata.
> Why didn't Coinbase just register everything non-Bitcoin? Would that have someone limited/destroyed its business model in the way the quote above suggests?
Coinbase wouldn't be the one to register the security - the company offering the security would be the one registering it. Coinbase may have some securities of its own - but it is unlikely that it would be able to provide the necessary information for much of them or take on the necessary responsibilities for providing the auditing.
The registration forms a company files with the SEC provide significant information, including:
A description of the company's properties and business;
A description of the security to be offered for sale;
Information about the management of the company; and
Financial statements certified by independent accountants.
> In order to register a security under the Securities Act, a company must file a registration statement with the SEC. Typically the type of registration statement used for an initial public offering will be a Form S-1 Registration Statement (Form S-1). A Form S-1 includes two parts (Part I and Part II). Part I is the prospectus, the legal offering or “selling” document. In the prospectus, the “issuer” of the securities must describe in the prospectus important facts about its business operations, financial condition, results of operations, risk factors, and management. It must also include audited financial statements. The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities. Part II contains additional information that an issuer does not have to deliver to investors but must file with the SEC, such as copies of material contracts, signatures of management and other representations.
Most organizations providing cryptocurrency based securities are unable or unwilling to provide the required information.
It's important to note that event for the projects creating new tokens, there is NO WAY to register.
It exists, in theory. Many people have tried, nothing has progressed even an inch. It's not even a matter of the SEC putting out a list of clear conditions that people deem unacceptable. Instead, the applications just seem to be mired in bureaucracy.
As I understand, there is deliberate gaslighting from the SEC and Gary Gensler.
Gary keeps telling the media "the law is clear" and "companies should come and register", but then never answer's even congress' own questions on what constitutes a security, and makes it impossible for crypto projects to register.
There is nothing in the law that explicitly prevents the registration of a cryptocurrency. The problem is that the people making them are not able to answer the kinds of questions the SEC asks. How many cryptocurrency companies do you know of that could pass an audit? Even when ICOs aren't out-and-out scams I have never encountered one transparent enough for me to want to touch it with a ten foot pole. Why should the SEC bend over backwards to create new rules that allow exactly the sort of opaque, unaccountable offerings it is their job to prevent?
Everything about this screams "system working as designed to protect the public".
Would you kindly point out a company that tried and failed to register an ICO? I have done a little research and been unable to find any that even went through the motions. Perhaps the specifics matter.
Hmmm, I see that Stacks has 2 seed rounds, a series A, and a VC round all separately listed prior to the token fundraising. Good to see you were able to be partly successful at traditional raising, at least enough to afford the lawyers and the filing fees, before you had to raise from tokens. Not every one has those opportunities or connections.
Sure - Greyscale is a Cryptocurrency holdings company. They have tried several times to make a Bitcoin ETF, but keep getting strong armed by the SEC to the point that Greyscale had to sue them for reasons why they were not allowed to register the bitcoin ETF. The SEC isn't even letting crypto companies register their crypto ETF's.
There is mountains upon mountains of evidence that show that the SEC is biased towards crypto and that killing it will be done by way of confusion and corruption through dumb lawsuits.
> How many cryptocurrency companies do you know of that could pass an audit?
This is, quite simply, zeitgeisty prejudice. Most well-funded cryptocurrency companies have passed audits. I've worked for or with four crypto companies and three of them were audited (also all of them still exist).
You aren't allowed to count "fraud cryptobros from miami creating an ICO" if you don't count "fraud fratbros from harvard/yale creating a hedge fund". And if you do count both, then you'll notice that the proportion of fraud is roughly the same everywhere, we just allow ourselves to notice it in some places more than others.
> Why should the SEC bend over backwards to create new rules
Because you don't apply old rules to new contexts if you're a responsible government, especially if you're claiming jurisdiction over those new contexts. Registration and filing processes created for the paper era simply don't cut it for regulating self-executing financial instruments. Why doesn't the SEC have a registration smart contract? It is the SEC's responsibility to adapt to the times.
> Would you kindly point out a company that tried and failed to register an ICO
What do you not understand about "there is not process"? I've been a part of two companies who have tried. We have had "conversations", aka we try to reach out and a different attorney occasionally gets back in touch with us and rehashes the same conversation every six months. The longest effort went nowhere in four years. There is no registration, there is no process, there are no boxes we can check on the existing forms which govern what we do.
> Most well-funded cryptocurrency companies have passed audits.
This is true in practice but untrue in spirit. Any nonsense project can pass an audit by hiring an equally nonsense auditor.
> You aren't allowed to count "fraud cryptobros from miami creating an ICO" if you don't count "fraud fratbros from harvard/yale creating a hedge fund". And if you do count both, then you'll notice that the proportion of fraud is roughly the same everywhere, we just allow ourselves to notice it in some places more than others.
This is blatantly untrue. Yes, there are plenty of forms of fraud which occur in hedge funds, but the public is shielded from many of these, because the most obvious forms of fraud were recognized and regulated decades ago. There's practically no such protections around crypto, and as a result, a whole host of obvious scams have flourished.
If you talk to almost any crypto investor, most of them have been scammed at some point. The same is not true of investors in traditional markets.
You can absolutely legally register your cryptocurrency as a security. The requirements just make it a non-starter.
There's is nothing inherently different between cryptocurrencies and securities. The accounting is irrelevant. If you promise people that their money will increase in value if they invest, then you need to register as a security if you want to sell to retail customers. You can continue selling the unregistered securities all you want to professional traders.
I'd love more details and a source about how all these people have tried and the applications get mired in bureaucracy. Does the process takes too long? Does the SEC demand information they don't have? Bureaucracy takes lots of forms, so something ending up mired in bureaucracy sounds like a bad thing but could also just be the bureaucracy working as designed. A drug manufacturer could describe a drug as "mired in bureaucracy" when what they really mean is "the FDA didn't like the results of our trials".
If it's the speed of it, I can agree that the government is slow, but it's generally accepted as the cost of doing business in a regulated sector that you wait for regulatory approval before proceeding. There's work to be done making things more efficient, but in the meantime everyone still needs to play by the rules.
If it's missing information that the SEC is demanding, that information is required for a reason. If it doesn't apply to your token, maybe your token is broken by design?
You reach out to an agency (generally CFTC and/or SEC). An attorney from that agency eventually contacts your attorney. You have a conversation. You hear nothing back, so you reach out again. A different attorney reaches back out again months later and you rehash the same conversation again. Repeat for years. Best case scenario it goes nowhere and you do voluntary third party audit/compliance/monitoring to demonstrate good faith. Worst case scenario despite any good faith you get a notice because you were already on their radar and the newest attorney smelled blood instead of just wanting to talk again.
Because in the US a lack of explicit laws against something is typically interpreted as legal support. See pretty much any disruptive business mired in legal controversy. It's a cultural difference to many other countries where just because there isn't a law against something doesn't mean people will jump at the chance to exploit it at scale.
Uber is perfectly legal here in Spain, but they're regulated as regular VTC vehicles. Uber can't arbitrarily lower the price. It has to be within some percentage of regular taxis for same level of service. Taxis have an advantage though because they have exclusive access to certain areas.
Someone once told me it costs like $60K to register a crypto as a security... A chicken and egg problem. How will you get $60K without an ITO? Yet if you have an ITO in order to raise the $60K that you need to register your ITO legally, you're already in breach.
It has similar vibes as the US law which only allows accredited investors to invest in fast growing startups... 'To protect mom and pop investors' yeah right. Is there even a single person in the entire country who actually believes that?
Suppose you want to turn your business into a publicly traded company. If you don’t already have enough cash to pay for the process, you raise money from accredited investors (VC funds, angels, whatever). Then you do the paperwork. Then, when everything is approved, you get to sell shares to the general public. The overall process has been well established for a long time.
For some reason, people seem to think an ITO should change all the rules, and that first you sell to the general public, and then you figure everything else out (assuming you don’t just take the money and run). This is IMO nonsense.
It's the legal advice and accounting specialists required to produce an adequate prospectus that's the big cost. But again: if you're raising millions, it seems not unreasonable to front some of that, even as personal debt, in order to prove "skin in the game" and that it's not a scam.
EOS raised $4.2 billion dollars. You're telling me they can't front 60k?
The veneer of a working system really started coming off over the past few years. Everything feels like a massive psyop. At times it even feels like a significant portion of the population is in on it... I mean, most people are probably just brainwashed into compliance but their level of commitment to the whole charade makes it seem like they're actually in on it.
> Why didn't Coinbase just register everything non-Bitcoin?
The organizations that created the assets have to register them as securities, Coinbase didn't create the assets.
A broker-dealer (a securities exchange) can only trade registered securities, broker-dealers have to register to exist. So even if Coinbase went through the process of registering as a broker dealer (to be a securities exchange), they could not trade unregistered crypto securities, and cannot unilaterally register things they didn't create as securities.
Registered crypto securities are a mixture of non-existent, or not the things people want to trade. There are zero popular registered crypto securities.
Those organizations with those "unregistered securities" quote on quote, also don't believe they are creating securities at all, just digital products, cryptoassets. A distinct asset class. This should be possible to do compliantly, but it is also not clear how to do so or where the line is.
Regardless, those organizations have not been approached by the SEC saying "hey you created unregistered securities and sold them, we're suing you".
The SEC has indeed tried a couple of those cases against different crypto assets and their creators and had mixed results, the well funded ones are dragging the SEC through court for half a decade now, for a single case. While the number of crypto assets continues to balloon every single day.
So the SEC changed its strategy recently and started suing exchanges using circular logic, claiming assets that they never said were securities to be securities and saying "these are unregistered securities and you are trading them in violation of Federal Securities laws", having never proved in court that these were securities.
> So the SEC changed its strategy recently and started suing exchanges using circular logic, claiming assets that they never said were securities to be securities and saying "these are unregistered securities and you are trading them in violation of Federal Securities laws", having never proved in court that these were securities.
You're describing the procedure of proving in court that they're securities.
The SEC claims they are, sues someone over it, and they fight it out with them in court. The court decides who proved what.
When the SEC had a disagreement about the category of an asset or transaction, they would go to court to hoping to get the judge to agree those were securities being traded noncompliantly, with the defendant being the issuer
After getting an agreeing verdict on that they would go to the promoters and exchanges and sue them too
Now they're skipping that and going straight to the exchanges, because the SEC wasn't exactly winning
Coinbase is a lot more accessible to the SEC than a shitcoin out of China or Bulgaria or whatnot. It's hardly an unreasonable choice, and I'm not aware of any legal theory that says the SEC can't (or even shouldn't) take that approach.
Coinbase needs far better defenses than they are using, definitely screams incompetence on their end too
There are defenses to the SEC’s approach as it has nothing to do with the remoteness of some issuers, it has to do with the shaky legal ground and symbiosis that the SEC has relied upon. The SEC’s standard can be equally applied to anyone that purchased a baseball card hoping to flip it, where that unilaterally makes all shops and ebay to be unregistered securities exchanges in violation of Federal Securities laws no matter what the baseball card company did to ensure otherwise. Either all consumer product industries and intermediaries are affected, or most crypto tokens aren't at all. Or there is a clear way to make a crypto token that fits into the consumer product framework exclusively, but the SEC wont say and says “its always been clear”. Thats pretty much where we are, based on the SEC’s own logic used in this very case.
> The SEC’s standard can be equally applied to anyone that purchased a baseball card hoping to flip it, where that unilaterally makes all shops and ebay to be unregistered securities exchanges in violation of Federal Securities laws no matter what the baseball card company did to ensure otherwise.
No; the baseball card market fails various bits of the Howey test. If you sold shares in a baseball card collection, that might be a security.
> When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an "Active Participant" or "AP") provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.
In the baseball card market, the card manufacturer could cease to exist without the success of the enterprise being impacted. (This is why BTC and ETH are currently being treated by the SEC as non-securities; the original creators of both could vanish without impacting the market for the coins, which is much less true for most coins.)
> the card manufacturer could cease to exist without the success of the enterprise being impacted.
while a promoter, sponsor, or other third party could pop up at any time.
it says nothing about manufacturer or issuer for that prong of the howey test.
and the same is true for all of the tokens listed in the case against Coinbase.
I guess your argument is based on looking for differences to support your worldview instead of looking for similarities, and its not clear if you're aware of the similarities.
The "manufacturer" disappearing from tokens makes them more scarce in many cases. Their functionality remains the same.
another thing you might not be aware of is that the SEC is aware of this. Other commissioners - specifically Hester Pierce - and enforcement division personnel has made this observation, the people calling the shots in the enforcement division and the head commission are avoiding this because it breaks their whole framework if the courts really feel compelled to break this down more holistically. Thats why their approach to unilaterally calling things "evidence" when they haven't even proved they are evidence is a weak evolution of their practice. Prolonging an inevitable challenge to their authority and aspects of their existence.
> > These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them.
and...
> The previous HN thread seemed to mainly be of the opinion that Coinbase wasn't registering the non-Bitcoin crypto, but that the problem was the SEC wasn't giving clear guidance on whether they needed to be.
See, this is why we need regulation. It's to deal with people like the HN crowd who will go up to the limit of the law with no consideration for ethics whatsoever.
A normal, ethical person would never run into the problem Coinbase has here. They'd see that the differing parts of their business had conflicts of interest which were pitting them against their own customers, and they'd do the right thing by splitting them up so that their customers are served. The law never has to get involved, because good people don't need the law to tell them to do the right thing.
But contrary to the end-stage capitalist beliefs of HN, corporations are not good people. Capitalism doesn't result in the best service for the lowest cost. If there's any way at all that corporations can make a profit by screwing over other people and getting away with it, they will, or someone else will. Without regulation to limit this, bad people bubble to the top. Coinbase has plenty of smart people who could have noticed the ethical problems here, but they didn't, because they didn't care. Coinbase has been successful monetarily because when they had a choice to do what's right or what's profitable, they chose to do what's profitable.
And as is typical of HN, the top comment identifies with the bad guys. The problem, in your eyes, isn't that what Coinbase did caused conflicts of interest which harm consumers. The problem, in your eyes, is that regulation wasn't clear enough for Coinbase to know exactly which conflicts of interest they could get away with. Like Coinbase, you're unconcerned with ethics, instead blaming regulators for getting in the way of the only thing you care about: profits.
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?"
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...
> 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.
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.
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.
"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 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.
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.
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.
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.
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.
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?
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.
> It is scary to me how much legislating is done by these government bodies inside the (executive ?) branch.
Congress explicitly delegated these authorities to these agencies as part of the administrative state overhaul in the beginning of the 20th century. The reason was to help become more responsive, and less beholden to daily politics by putting neutral experts in charge, and by and large it works. Safety and security shouldn't be party politics.
That is good history to know , thank you. It does feel like to me in this case, this is a failure due the government being slow to respond and unable to produce an interpretation of the law consistent with a completely analytical meaning letter of the law, in my opinion.
> unable to produce an interpretation of the law consistent with a completely analytical meaning letter of the law
The legal profession writ large (including legislators) consider this a feature, not a bug. The reason this is the legal profession's opinion essentially three points:
1. You can't write "bug free" laws and regulations
2. Fixing mistakes in laws and regulations is slow
3. The amount of damage someone can do with unintended legal cover can be catastrophic (imagine if I found a legal loophole to take possession of your home!)
So this has been chosen as the "least bad" solution. My personal opinion is that the SEC is acting within the spirit of the law which is what we should expect and if congress wanted to change things they should pass a new law.
> I understand the spirit of the law, but I do not feel like that can override an analytical interpretation.
You may feel so, but our entire legal tradition is based on the idea that this is not the case. In fact, no active legal tradition I'm aware of nation holds strictly to analytical interpretations of its laws. This is one aspect of the world it's better to accept as a fact of life, I believe there's good reason it's what everyone has settled on.
Delegate to agencies is a way for government to be less slow. In the case where congress is faster, they can pass new laws with more specifics and less left to the executive branch, but that's often not very fast.
> clear requirements in black and white terms of what is and isn’t acceptable.
I’ll give you the benefit of the doubt and assume you have been misled by this frequently made claim. It’s just not true. The requirements have been clearly stated for a long time, they’re just not what people in the crypto space want to hear, so they pretend the guidance and law doesn’t exist.
This document dates from 2019 and lays out in detail what constitutes a security wrt cryptocurrency from the SEC’s perspective. They’ve been quite clear about this for a long time. The relevant case law has been settled for 70 years.
The SEC has repeatedly and publicly stated in no uncertain terms, what the definition of a security is and also identified specific coins traded on coinbase that they believe to be securities. Here’s an example from last year from an insider trading case.
> For example, on November 12, 2021, Ishan learned that Coinbase would soon announce the listing of the crypto asset POWR. As alleged further below, POWR was a crypto asset security
> A digital token or crypto asset is a crypto asset security if it meets the definition of a security, which the Securities Act defines to include “investment contract,” i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.
> Coinbase planned to announce the listing of crypto asset AMP on its platform. As alleged further below, AMP was a crypto asset security.
> Coinbase intended to announce on July 14 that the RLY token would be listed on its platform. As alleged further below, RLY was a crypto asset security.
Rather than accept those statements and obey the law coinbase chose to ramp up the PR offensive instead.
The real issue is that cryptocurrency companies hoped they had found a loophole —they wish the law and SEC guidance weren’t what it is, and they keep dishonestly claiming a lack of clarity exists in the hope that doing so will change things.
And the fact that it's stuck so well is what troubles me so much. The Securities Exchange Act is about a hundred years old and written in a way a laymen can understand the gist of it.
It's a security. Just because you called it something else doesn't mean there aren't laws or guidance on how to register it. They just don't want to.
Everyone into crypto parrots the "they won't give us guidance" line without even doing 5 minutes of research.
It's troubling, but shouldn't be surprising. It's that old "a lie told enough times..." approach to corporate governance, and it's just the latest in a long line of "if I can break the rules without serious consequence long enough, I get to win" business plan. The players repeat "is NOT" every time someone points to the very easy to find rules and says "there it is" and the and uncritical torches and pitchfork mob get spun into a frenzy about the bad old SEC.
Because they don't care what the truth is, they are HEAVILY invested in crypto going up so they can cash out, and this whole "being explicitly illegal" thing is a threat to that.
I couldn't tell you the reason he was evasive about Ethereum's status in that line of questioning. But highlighting edge cases where there is room for debate while ignoring blatant examples actually at issue feels like motivated reasoning. Pointing to an example where Gensler was personally unwilling to make an assessment about a fact-specific question does not invalidate the reams of guidance that _do_ exist, and the law itself. The SEC is not your lawyer, your lawyer is.
Coinbase is not being sued for being an Ethereum exchange, they're being sued for
- operating an exchange, broker, and clearing agency for specific tokens that easily fail Howey (which their internal rating framework unambiguously found to be securities)
- offering and selling their own securities via their Staking program
Fun story, it literally doesn't matter what Mr Gensler says or doesn't say, the related law exists on paper. Gensler doesn't make the rules. The SEC is tasked with enforcing the rules.
If your company wants to know what is and isn't a security, that's up to your legal department to put together a working theory, one you think could win in court if the SEC sues you. Judges are the only people who get to clarify law without writing new law.
Gensler could be fired tomorrow and the only change would be the case getting dropped, but that wouldn't make Coinbase and others compliant, any different than states with legal marijuana are compliant with the law.
The very first sentence of that executive summary actually lays it out nicely: The SEC is bound by the law that congress writes, including the laws around securities. Gensler can only make rules that are in alignment with the relevant laws. The Howey test and securities laws are actually pretty much out of his jurisdiction, and more importantly, his individual and personal opinion about whether or not BTC or ETH are securities literally doesn't matter.
This is just the reality of operating in a grey area. If you believe you are in compliance with the law, and the regulators disagree or otherwise are giving you a hard time, then the matter WILL be settled by the courts or congress. Importantly, if Gensler comes out tomorrow and says "No tokens are securities, trade anything you want, we won't go after anyone", that isn't binding, and it doesn't change the law, and the next head of the SEC is still free to take you to court for being in violation of the law.
Granted the the SEC is bound by federal statues, but they have certain rulemaking authority within those statues, and it's not wrong to say they create (administrative) laws.
True, administrative laws are not permanent, but when they want to change things, they need to follow a certain process under the APA. Particularly relevant to the case at hand, where Coinbase argues that the APA process needs to be followed - https://assets.ctfassets.net/c5bd0wqjc7v0/5PWsXaPsqQ61gA9wlF...
It's called regulating. For areas that require complex administration, Congress passes laws that express its intent and directs the administrating agency to make rules that implement their intent. Congress can amend these laws to expand, contract, or direct the regulations made by these agencies.
Vague laws that take years of law to interpret then passed to an agency that does not have the same context of laws passed 100 years ago. If the system worked and the sec felt this way Coinbase should have never existed . This is proof that it is not working.
There's nothing about a crypto token that make the economics different though. That's the whole point. That's why law from 1930 is relevant. Crypto isn't economic innovation.
The SEC is not part of the executive branch. It is an independent agency. While it is also not part of the legislative branch, the legislative branch is the one that effectively controls it.
You are mistaken. The SEC is very much a part of the executive branch.
> It is an independent agency
So is the CIA. This just is a term of art for a particular type of executive agency distinct from a cabinet department with additional insulation from political control. SEC commissioners are nominated by POTUS and confirmed by the senate, a characteristic unique to the leaders of executive branch departments.
"Independent agencies exist outside of the federal executive branch. More specifically, the term is used to describe agencies that, while constitutionally part of the executive branch, are independent of presidential control, usually because the president's power to dismiss the agency head or a member is limited."
> Not according to the government, and they're the horse's mouth on this.
You seem to be referencing some specific statement that you didn't provide.
I'm guessing that you are confused about the phrase "independent agency". Or possibly you're remembering cases like Lucia v. SEC where certain SEC staff were (unsuccessfully) challenged as not conforming with the Article II appointments clause. The insulation of these sort of agencies from direct presidential oversight continues to be a source of debate in conservative legal circles, but where these agencies sit in the constitutional order is not remotely controversial. They're not part of the judiciary and they're not part of Congress so they can only be part of the executive.
> The executive branch also includes executive departments, independent agencies, and other boards, commissions, and committees.
More to the point, congress lacks the ability under the constitution to create government structures outside the three branches. The language establishing the SEC makes very clear that its structure conforms with how Article II defines the executive branch:
> There is hereby established a Securities and Exchange Commission (hereinafter referred to as the ‘Commission’) to be composed of five commissioners to be appointed by the President by and with the advice and consent of the Senate.
> he shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law:
The SEC is established and appropriated by congress, staffed by people who receive government paychecks, led by presidential appointees, etc etc. I'd be interested to know whether you think it's either
- not part of the US government
- part of a different branch
- part of the US government outside a branch that the constitution specifies
The SEC is an agency of the federal government. It is not a part of any particular branch, really. The executive branch cannot just demand that the SEC engage in any particular action, unlike agencies that are formally part of the executive branch.
The legislative branch can demand particular action from the SEC, albeit indirectly, by altering, passing, or revoking the laws that the SEC is tasked with enforcing.
I read Humphrey’s Executor and skimmed Selia v CFPB last night and now I feel somewhat less confident in my assertions. My takeaway is: the government is complicated.
Thanks for the insight. It does feel like the organizations ability to interpret the laws is more related to a political agency than the letter of the law.
There should just be a letter of the law , analytical meaning branch of government.
It's also useful to know that Congress created the SEC in response to the 1929 stock market crash. Their primary purpose is to prevent the conditions that caused that.
> There should just be a letter of the law , analytical meaning branch of government.
I don't think that's a thing that is possible. You can't write laws to cover every possible case, and writing them to be "self-interpreting" would be an extraordinarily difficult thing. Interpretation will always be required.
That’s why it’s a systemic failure . Years of law study to interpret laws with context long dropped. The fact that the sec let Coinbase last this long is proof the system is over complicated and cannot be maintained efficiently.
It's a systemic failure of analytics, not a systemic failure of the law.
> The fact that the sec let Coinbase last this long is proof the system is over complicated and cannot be maintained efficiently.
There are numerous other possible reasons it took this long for the SEC to take action, other than the system being overly complicated or inefficient (lack of workers, bigger fish to fry [prioritization], the evolution of Coinbase into less of a commodities trader and more of a securities trader). Complications and inefficiencies usually require additional time and effort, but additional time and effort is not an absolute indication that something is complicated or inefficient.
Yeah for the longest time Coinbase was mainly hosting the relatively old coins that tended to be closer to commodities than securities. While they were doing that it's a very different regulatory environment.
"you can run a company for nearly a decade while spending a great deal on lawyers talking to the government the whole time and still have no clue if your business is legal"
> There should just be a letter of the law , analytical meaning branch of government.
This is called "a court".
(There is a particular phrase for "the law is unclear so I'm going to sue the regulator in advance to determine if something is legal", but I've forgotten it. It's linked to judicial review)
It's so much worse than that. "Laws should be exhaustively comprehensive" is a completely unworkable system. You cannot predict every possible combination of context and law, and attempting to do so would be literal combinatorics explosion.
People who push that kind of system know this, and want the system to be hamstrung by exactly that situation. They want a system that can only outlaw their new, explicitly harmful scheme after an entire game of politics in congress, such that they could prevent something becoming law by encouraging the already bad stonewalling in congress. They want government agencies to be so bound up by poorly written law that they cannot administrate at all.
I just want a system that is predictable , objective and that works quickly . Saying that there are flaws in the current system simply offends the gate keepers of the system.
The entire point of Congress writing laws and delegating the specific rulemaking to agencies is so that informed experts can make the laws, with input from affected parties and the public, instead of uninformed legislators.
And note: Congress has the opportunity to reject rules passed by an agency that it determines conflicts with the intent of the governing law(s).
Why? I think it makes sense to delegate rule making to specialized agencies that are specifically staffed for handling the kind of regulation they're meant to apply.
I don't doubt that the process could be improved, but insulating decisions about how to protect investors from political interference sounds like a fine idea.
Originally well intentioned , I think we are seeing it break down here. I am not a lawyer, but as a layman I am not convinced by the sec and their interpretation of things. I am inclined to think that they will bow to political pressure and what is expedient for the current legislature instead of looking at things in a completely objective analytical manner.
I may be confused here. But to my understanding, the role of the executive branch is to enforce laws.
In this situation, there exists a law that was passed by Congress. Coinbase is breaking that law. Is it not the executive branch's role to enforce that law?
Is a loss for Coinbase a company-ending event? Or is being forced to register all the coins that aren't BTC or ETH a costly regulatory burden?
What are the implications of registering all these coins as securities? Does it affect whether they can be offered to non-accredited investors? How expensive is it? Who bears the costs?
The issue is that if most coins are securities, then that means in order to operate, Coinbase has to become a registered securities exchange in order for it to do what it does. The regulations for securities exchanges are onerous, but also many of them aren't possible to comply with for crypto because of how it works.
So the SEC is saying "You are an unregistered securities exchange"
And coinbase is saying "Please give some kind of route by which we could possibly be compliant given the nature of cryptocurrencies"
And the SEC is saying "We have no obligation to give you such a route, just as we have no obligation to provide such a route for criminal black markets"
Who you interpret as being unreasonable here depends on if you think crypto is closer to the black market example, or if it's closer to being like regular securities but with a few tweaks to the rules to make it work.
Here is only one such brutal squeeze: registered security brokers must maintain control of all securities [0]. In practice, this means brokers use custodians[1]. Regulators have been working on making holding crypto harder for custodians [2].
The SEC expects the disclosure of various types of information which are impossible to create/state in the case of a decentralized security/commodity/currency like crypto.
Yeah, I'm not an expert here, but I believe it might be the reporting rules. This is the law that governs it, though it delegates a lot to the SEC and the particular requirements could be in the rules that the SEC puts out itself
And the SEC is also saying "you don't get to ignore the rules just because you don't like them". Whatever the rules should be, it's clear Coinbase is on the wrong side of what they are now.
We don’t do that kind of thing in America except for the occasional Enron when extreme levels of fraud are involved and someone takes out California’s electrical grid to boost profits.
IANAL but these SEC violations don’t seem to fit the bill.
Even if they loose they could probably still work out a way to broker btc and eth for Americans (as commodities). And also operate in other countries with different regulatory approaches.
The stock price would seem to suggest it's a long way from being a company-ending event, otherwise it would be $5 instead of $50. one of the nice things about the EMH is it gives a good heuristic of assessing how important or serious something is, just by looking at how the stock price reacts, without having to understand the actual details. much of the problem has to do with staking.
I like reasoned critiques of crypto. Heck, I think many crypto actors are scammers and should be punished. However, a lot of crypto is legit and this piece reeks of bias. Some examples:
- comparison with heroin - wtf? To extend that ridiculous analogy, it would be akin to FDA approving heroin based products (similar to how SEC approved Bitcoin ETF in 2021) and then going after heroin. What message is SEC trying to deliver? That holding Bitcoin via futures-based ETF is okay but crypto itself is scam? Kafka couldn't have invented a better plot
- scare quotes when saying “tyrannical” Gary Gensler - tyrannical is an apt description of Gary. See the previous point about kafkaesque treatment. Also see the congressional testimony where the dude didn't even have a clear answer about the status of Ethereum, which is bigger in market cap than 90% of S&P500. Talk about protecting American consumers!
> To extend that ridiculous analogy, it would be akin to FDA approving heroin based products (similar to how SEC approved Bitcoin ETF in 2021) and then going after heroin.
So uh, you know you just described the opioid crisis in a nutshell right?
Modern opioid painkillers are in fact generally if not entirely accurately, 'heroin based products.' Not just that, prior to the Narcotics Tax Act of 1914 it was kind of a free-for-all, Bayer was selling heroin too! Opium was used to settle fussy babies (note, I'm sure it was very effective). [1] They were approved by the FDA. Then, of course, the FDA went after the makers of these drugs and tightened access to the drugs themselves.
[edit] If I were to offer a generous interpretation of the actions of the SEC, it would be that they didn't want to be seen as killing innovation in the crib. They gave crypto latitude, and then they decided they really didn't like what they saw. It's kind of a 'damned if you do, damned if you don't' thing - you either kill it early and get reamed for that, or you let it fester and get blamed for ever having allowed it at all.
I hate to do this but I don't want people to read your comment and make that their understanding of history:
The FDA did not exist until 1930. Even if you count the predecessor agencies they did not 'approve' drugs. They were tasked with fraud prevention (selling things that weren't what they claimed to be) and safety in the sense that the product wasn't poison, but not with ensuring that the thing it claimed to be was actually safe. The legislation which gave the FDA authority to restrict drugs to prescription use and require safety and efficacy approval was the Federal Food, Drug, and Cosmetic Act which was passed in 1938.
It is certainly unclear what I meant when I said "they were approved by the FDA" - I was referring to 'modern opioid painkillers' - medications like oxycodone and fentanyl [1], not heroin. Those enjoy FDA approval to this day. Heroin, as a schedule I is not recognized as having any medical use.
> Opium was used to settle fussy babies (note, I'm sure it was very effective)
In central/eastern Europe, there was historically brew/tea being done from poppy heads, to calm down babies. Generally poppy growing is very much allowed in places like Slovakia and Czech republic and part of many cakes and pastries, and nobody thought about doing opium/heroin out of it.
But go over the border to Poland and its all banned, just like most of Europe, for obvious reasons. Imagine raising a really fussy kid as opium addict in medieval ages...
I think you're dangerously conflating opium and poppy just like people sometimes conflate cannabis and hemp.
I can't speak for all of Europe but here's how it works in Germany: Poppies aren't banned, poppies that can be used to produce opioids ("opium poppies") are. Likewise hemp isn't banned in most of Europe, hemp that has a high THC content is. Actually hemp is more strictly controlled (e.g. you need a license to grow hemp at all and high THC hemp is banned outright) whereas you'll find poppies grow by the wayside or sold at florists - unthinkable for hemp. In Germany (like Poland) poppy seeds are also a staple for bread and sweet pastries, so you'll find them in the baking section of most supermarkets (tho they're likely no good for growing).
Also a fun fact: poppy seeds can set off drug tests so if you know you are going to take one, it's recommended you don't eat anything with poppy seeds in it and if you did, you're supposed to inform the person performing the test because it will skew the results. There are trace amounts of opium in regular poppies even though it's not enough to use them to produce actual opium.
Anecdotally, my grandmother told me that when she was a child it was considered normal to douse a knotted rag in hard liquor and let fussy babies suckle on that.
Gripe Water[1] used to be Quite Alcohol: "For a 4kg infant, the maximum recommended dose of Woodward's gripe water (3.6% alcohol) would be the equivalent of almost five tots of whisky in an 80kg adult."
No, it was definitely Papaver somniferum, opium poppy. Nobody was regulating markets in any way back when I was growing up behind iron curtain, heroin (same with all other modern drugs bar alcohol and nicotine) was literally unheard of. I had to explain to my parents what cannabis is (and grandpa thought I was growing hemp in my youth to make some clothing or backpack).
We had maybe 30kg bag of dried poppy seeds for the winter, same as my grandparents and other friends and family, you can imagine how big the fields were. We used some of the seeds to plant next season, and this continued for decades within families, nobody was buying seeds back then.
People were not so desperate to get high and escape reality, alcohol was enough. Probably the only advantage to life in communism, that and lack of organized crime.
You can make poppy seed tea with unwashed poppy seeds. From experience, you even used to be able to buy unwashed poppy seeds from Amazon in the UK.
It's incredibly addicting and even harder to quit than heroin, because there are many alkaloids present in the tea, all with different half-lives and strengths.
All you'd do is pour some seeds into a bottle, add some citric acid, add some strong-tasting liquid to cover the taste, then shake the whole thing, strain out the seeds and drink the result.
I'd like to add that doing this is very risky, because it can be quite hard to know how strong the tea ends up being, and so it's easy to take too much. And poppy seed tea absorbs a lot faster than you might expect too. I had friends who were "seasoned" opioid users who supposedly knew what they were doing, who OD'd and died from poppy seed tea.
Huh, TIL. Looked it up and they loosened up the regulations last year to permit growing poppies for personal use. It's bizzare given that poppy seeds are a very common ingredient in our cakes and pastries.
I agree that you have an excellent point in relation to the thread ancestor, but to refocus the debate on the actual matter at hand:
A key difference being that opioids have a very real potential to cause massive, undeniable and observable harm to casual users (like all mind altering drugs including alcohol).
Crypto means that people can trade without having the regulators whitelist all the transactions. Historically speaking, that would appear to be an extremely positive thing for the traders. There are worrying signs about that we are about to repeat the 1920s, 1930s then the 1940s - this is a great time to start working with government-independent money. The Canadian trucker incident alone is a nasty foreshadowing of what we are likely to see more of as energy availability tightens. The government is not governed by compromising liberty-minded types.
The illegal uses of crypto aren't going away, so we may as well make it easy for all the honest people to use it.
And there are people who think that consuming energy is in itself a bad thing. I wonder how they feel about people voluntarily taking holidays, which are a much bigger waste of energy. At some point we have to let people make their own choices about what they value without trying to second guess them based on personal opinions.
> There are worrying signs about that we are about to repeat the 1920s, 1930s then the 1940s
The rest of this comment was not where I thought you'd go with this. You realize the creation of the SEC was a direct result of the stock market crash in 1929 ,due mainly to people's life savings being invested by commercial banks without regards for the underlying economics of the investments, exactly what the SEC is trying to prevent happening with crypto (by regulating it under the same doctrine)
I mean, so? Crypto isn't an investment. I haven't heard a plausible theory why its value would increase over time. It'll be lucky if the equilibrium position is value holding steady.
Crypto is an asset with no yield and a maintenance cost in keeping the network running. That doesn't sound like a very promising investment. If any asset counts an an investment then sure, it is that. But it isn't going to be a money maker.
Over time it is probably going to behave more like savings. The price looks like it might be stabilising with respect to gold which is an interesting thing [0].
Sorry, so the key difference is that opioids have the potential to be useful or harmful, and so should be regulated, while crypto has the potential to be useful or harmful, and so should not be regulated?
> comparison with heroin - wtf? To extend that ridiculous analogy, it would be akin to FDA approving heroin based products (similar to how SEC approved Bitcoin ETF in 2021) and then going after heroin
You’re describing regulated opiates versus street heroin. That is the point. Nobody thinks street heroin distributors can reasonably be shocked they’re breaking the law just because pharmacists distribute similar products.
Expressing good arguments forcefully isn’t irrational. The comparison to heroin distribution is an argument ad absurdum showing why Coinbase’s arguments aren’t novel. The rhetoric would not be a structurally different argument if it were instead about jumbo jets or vodka.
> the dude didn't even have a clear answer about the status of Ethereum
Is he required to? The SEC isn’t doing anything to suggest it claims jurisdiction over Ethereum. (It’s also not at his discretion.)
> The SEC isn’t doing anything to suggest it claims jurisdiction over Ethereum. (It’s also not at his discretion.)
That's the thing - they are not clarifying whether they have jurisdiction or not. And then you have to play the guessing game, with CFTC also chiming in about their preferences.
This is the cost of operating business in a grey area. Nobody put a gun to Coinbase's head and forced them to open up shop and get stupidly rich.
If you are running a sketchy business, you better have a team of lawyers going through case law and sketching up a theory of law that is defensible in court. Instead, it looks like Coinbase disliked the answer lawyers gave them, and went for the PR strategy instead. If Coinbase honestly thought they were on the right side of the law, they wouldn't be begging the public to vote for different people.
Not knowing the answer to the most obvious question is mildly embarrassing, to say the least. It's clear that he didn't do his due diligence and jeopardized the SEC competency and integrity. His very clear conflict of interests with FTX (i.e. Sam) and Binance (where he was refused a position some years ago) were already not really helping.
And yeah, not knowing the most obvious answer just begs a simple question: how shall all these crypto exchanges have known (better than the SEC) that A, B or C are a commodity but D or E aren't? Please...
Crypto will prevail, Gary is just a bump in the road. The question is how much more damage he is going to cause to the US before he is removed, while the world is watching China toying with Ethereum having issued yesterday tokenized notes on that blockchain.
> Not knowing the answer to the most obvious question is mildly embarrassing, to say the least
Whether Ethereum is a security is far from obvious. Had Gensler acted like it was, he would have lost credibility. In any case, it's irrelevant to Coinbase, who weren't charged in relation to their Bitcoin or Ether trading.
> how shall all these crypto exchanges have known (better than the SEC) that A, B or C are a commodity but D or E aren't
The SEC released The DAO Report in 2017 laying out a framework [1]. This is when crypto's lobbying stepped up; the status quo was clear. They wanted a different one.
> while the world is watching China toying with Ethereum
China has banned crypto since 2021 [2]. BOCI's $30mm placement in Hong Kong through UBS is interesting, but far from a belwether [3]. (UBS Tokenize has been selling digital assets to wealth management clients in Hong Kong and Singapore for a while.)
I suspect that Gensler was obfuscating intentionally when asked about cryptocurrency. Modern regulators seem to prefer retrospective punishment over prospective advice and regulation.
It seems like a massive regulatory failure to let Coinbase IPO if there are the sort of glaring issues they claim. Coinbase has a market cap of around $10 billion, and is owned by retail investors as part of standard index funds. If it goes to zero tomorrow because of the SEC, that is billions of dollars in losses that could have been avoided by more responsible regulatory behavior. Meanwhile insiders will have cashed in through salary, stock sales, etc.
> Bitcoin sparked a revolution by proving the ability to create digital scarcity: a unique and finite digital asset whose ownership could be proven with certainty. This innovation laid the foundation for an open financial system. Today, all forms of value – from those natively created online such as in-game digital goods to traditional securities like equities and bonds – can be represented digitally, as crypto assets. Like the bits of data that power the internet, these crypto assets can be dynamically transmitted, stored, and programmed to serve the needs of an increasingly digital and globally interconnected economy.
> Today, we enable customers around the world to store their savings in a wide range of crypto assets, including Bitcoin and USD Coin, and to instantly transfer value globally with the tap of a finger on a smartphone. We provide companies with new ways to transact, incentivize, and reward their users, from offering compounding rewards on savings that pay out by the second to compensating users for virtually completing tasks through global micropayments.
The claim is that they're selling assets and traditional securities that are represented digitally.
And they acknowledge the risks of future regulation:
> • We are subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition.
> ...
> • A particular crypto asset’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if we are unable to properly characterize a crypto asset, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, and our business, operating results, and financial condition may be adversely affected.
The 'i's are dotted and the 't's are crossed. Is the SEC to evaluate those future possibilities that the assets they claim (in addition to Bitcoin) may be considered securities? Coinbase said its a risk and, well, yep - it is.
I did... the article lists several examples with the claim that the SEC cannot be expected to understand every business under the sun before approving a public sale, completely ignoring the fact that in this case, knowing if a company is operating as an unregistered securities exchange is their supposed expertise and reason to exist.
Do you think that if the SEC thinks that Coinbase is operating some sort of unregulated securities exchange, that they should bring some sort of enforcement action?
Also do you think that if Coinbase admitted that the SEC might take adverse regulatory action in the S1, should anyone be surprised when the SEC actually does?
Sorry but law enforcement entities do not have a mandate for, nor are they required to, tell you specifically whether an act is expressly legal or illegal if you ask them.
Call a police department and ask them if you are allowed to bury your recently deceased relative on your property. They will tell you to get a lawyer. If they feel like arresting you for illegal disposal of human remains you can't use the defense 'but I asked them and they wouldn't tell me'.
I think there is a very important difference here, specifically that the police department is not going around deciding what is and isn't legal but the SEC is deciding what is and isn't a security.
This changes what, exactly? Are you suggesting that the government act as a free lawyer to everyone asking?
Example: 'Would it be fraud if I bought an Amazon gift card with my credit card and sold it for cash since that would be a cash advance but it went through as a regular purchase?'
Would you expect that the FTC answer that question for you in a binding way?
I don't think I said that. You seem to be setting up a(nother) false dichotomy here as if there can only be one end of the spectrum or the other, with no grey area or nuance in-between.
I love it when people refuse to follow the logical conclusion of their own argument and then act like they are being clever when they stonewall with that logical conclusion without realizing what they just did.
You have fallen into the trap of thinking that government bodies tasked with such things should be providing you a customer service -- but they are providing society with a customer service and you are treated as a road would be treated by the government, not as a driver would be treated.
Note: by 'you' I mean if you were in the position of a regulated entity.
But they have, repeatedly, haven't they? Crypto coins except for Bitcoin are securities, and must be treated as such. Any business allowing for their trade must behave like any other securities trade business.
They haven't said that all coins other than Bitcoin are securities. They've said that most coins are securities, and former SEC members have said that Eth isn't a security, but the current SEC isn't commenting on Eth at all.
They have muddied the waters with their public comments.
Hopefully these lawsuits will provide better clarity or we'll have to wait on pending legislation to provide clarity on how the US views decentralized asset classification.
"If the SEC was in the business of making merit-based judgments on companies before they IPOed, they would need to somehow have expertise in everything from industrial filtration to financial management to projection technology to biotech to the manufacture of skincare products, bandages, and mouthwash. It’s simply not feasible, much less desirable."
Yeah that part doesn't make sense. A "merit-based judgement" that requires that kind of expertise is obviously not what is being asked for! The request is for them to look at [sufficiently big] securities [or possibly-securities], in the exact same way they would look at them post-IPO, using their normal realm of expertise.
One of their jobs is to protect consumers from unregulated securities.
The earlier they act, the better, and right before IPO is the most impactful time they could intervene.
> In this case they would’ve been content with the disclosure that the entire business was at risk of being regulated
They don't have to do it, but they could make that risk disappear and it would be very good if they did so. So I wish they did have to make those decisions, unless there's some huge downside.
It's perfectly reasonable that the Coinbase S1 doesn't include any descriptions of activities that are illegal, and for Coinbase to subsequently start doing illegal things. They even list this risk in the S1!
The SEC saying your S1 and IPO offering is probably kosher isn't a carte blanche to then do whatever you want without continued regulatory oversight.
> It's perfectly reasonable that the Coinbase S1 doesn't include any descriptions of activities that are illegal, and for Coinbase to subsequently start doing illegal things. They even list this risk in the S1!
It's also possible for the Coinbase S1 to contain descriptions of things that are currently not known to be illegal, and which subsequently become illegal, without any changes on Coinbase's part.
It seems to me that regulators who are power motivated have more to gain by not saying what can and cannot be done and instead implying that you're breaking the law and using that as leverage over you.
> Modern regulators seem to prefer retrospective punishment over prospective advice and regulation.
In most cases that’s what you want. The Communications Decency Act was written way too early and most of it was struck down, except the important section 230. When the Food, Drug and Cosmetic Act was revised in 1962 a huge swath of previously approved drugs of longstanding experience (e.g. aspirin) were grandparented.
Most cases. Nuclear reactors are a good counter example.
I consider cryptocurrency mathematically interesting but otherwise arrant nonsense. Nevertheless I think the “wait and see” regulatory approach, while frustrating, was the right one: don’t stop it (so people can innovate) but don’t provide the protection of widow-and-orphan rules until it has had time to develop. After all, perhaps there is a pony in there, and early regulation could have strangled it.
I think there's a reasonableiddle ground and that the SEC waited far too long to take a stance. Allowing companies like Block One, Solana, and IOHK to start up and offer highly-centralized "crypto" assets to US consumers put those consumers at risk of "highly volatile crypto" + centralized control.
The SEC did the right thing when suing Ripple, but they've missed opportunities to go after bad actors who were misrepresenting their product as a decentralized network, and now retail investors will be the one who lose.
In my opinion, they've failed to act in a reasonable time frame and their inability to do their job will end up hurting common people in the US. I'd like to see Gary Genslar held accountable for his mistake. It's not like he is ignorant around crypto assets and he even evangelised his friends blockchain network to his students when he was teaching at MIT.
I mean he was chumming up FTX before it imploded. He seems personally butthurt about crypto for some reason. He’s contradicting himself on statements just a few years ago. He has the maturity of a child, playing games.
> Modern regulators seem to prefer retrospective punishment over prospective advice and regulation.
The pertinent laws have been in force since 1933 and 1934, and the Howey Test since 1946. I'd call that regulation prospective enough. Not the SEC's fault that Coinbase preferred wishful thinking (I mean, it sort of worked for Uber).
They are not 'scare quotes' because it is a literal quote of Rep. Warren Davidson. One of the people who introduced the act the paragraph is talking about. It helps explain the purpose of the act and the position the people who wrote it in their own words.
What he should have done: clarified upfront the status of Crypto tokens, like "X, Y, Z are commodities. A, B, C are securities" etc. And then offer a path to register those securities so that Coinbases of the world can start offering them properly.
What he did: sued Coinbase for trading 10-11 tokens as unregistered securities. And good players still don't know how to register Crypto tokens with SEC as securities.
I'm not sure of the legal framework around securities in the US, but I imagine, when a novel financial instrument is being traded, the regulations work along the lines of "Here's the law. We expect you to use it to decide if this instrument is a security or not, and if it is, well, comply. And if you decide it's not, please have a really good argument."
Like when you're filing a tax return, you decide if something's deductible or not, based on the tax code, and if you get it wrong, then the Government unleashes pain on you. But they're not holding your hand.
It makes sense to me that the people with the most to gain from a novel financial instrument should be the ones who determine if it's legal, and explain why it's legal.
And if you don't have legal certainty about the status of token X... ...don't trade it.
The exchanges took the risk, made some good (fiat) coin doing so, and now they're finding out they were wrong.
And tbh I'm not sure there's an path to registering the many tokens that function as effective Ponzi schemes, because they're illegal.
Don't get me wrong, I think that the SEC was asleep at the wheel for years on this, but I can't see how that justifies being outraged when the regulator eventually pulls thumb. They made a lot of money while the regulators were napping.
The analogy was about Binance's desire to be a broker, exchange and clearinghouse at the same time, something the SEC is specifically tasked to prevent (as far as I understood it). That doesn't have to do anything with the Blockchain technology in general - and it seems reasonable to me that if Coinbase conflates those two things, they are trying to muddy the waters, nothing more.
A more specific analogy might go like this: Imagine some awesome new biotech startup that develops a completely new method to interact with cells - activate cellular receptors through long-distance quantum tunneling and gravitational nanolensing or whatever. Then it packages that tech into small, consumer-friendly devices which are programmed to activate a specific metabolic pathway in the wearer's brain: As it happens, that pathway is the exact same that is activated through heroin. Then they sell those devices to the general public without any restrictions.
One day, the FDA knocks on the door and says "hey guys, your tech is cool and all and we're sure it can trigger all kinds of amazing medical breakthroughs - but right now, you're using it as heroin with extra steps. And selling hard drugs for recreational use is forbidden."
To which the startup guys might reply "oh no no no mister, we're not in the business of making drugs, we're actually a long-distance quantum tunneling/gravitational nanolensing company. You see, this is such a new field and fundamentally incomparable with anything that came before it that, unfortunately, there are no laws yet that we would fall under. However, we absolutely do see the need for regulation, and we're willing to work with you and together arrive at a sensible set of guidelines that won't stifle the immense potential for innovation of that field..."
At which point the FDA guy would probably tell them to cut their bullshit and the startup might respond with some long rant about how a tyrannical FDA literally suffocates American innovators or something.
I stopped reading the article when it started comparing cryptocurrency exchanges to the business of selling heroin. No matter your opinion on the issue, that's just alarmist nonsense.
I agree that it's reasonable to apply existing securities laws to cryptocurrency, and I agree that "but they let us go public" is a bad argument, but Gensler's SEC has also been intentionally obtuse about how those securities laws should apply to cryptocurrency. It's not a company's job to go to court over ambiguous regulations, it's the SEC's job to actually research what they are regulating and put out a comprehensive framework for how they make their regulatory determinations, because the Howey Test is so subjective that it's leaving companies guessing on the cutting edge of public programmable assets.
Look at the UK's upcoming crypto bills for an example of commonsense regulation that protects consumers and is in everyone's best interest. The contrast between it and the US's approach is striking.
Then you stopped reading right before you got to the part of the article that really highlights the central lie of Coinbase:
> Coinbase, as with most crypto platforms, has decided it wants to simultaneously operate as an exchange, broker-dealer, and clearing agency. These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them. Coinbase would need to fundamentally change its business model in order to separate these functions, and thus far seems unwilling to do so.
Coinbase's real complaint is that it wants regulation to change so that Coinbase is in compliance, rather than Coinbase changing so that it is in compliance. The lack of "clarity" isn't that it's unclear whether or not Coinbase is compliant, but that it's unclear how Coinbase can become compliant without changing foundational aspects of how it's structured. To honestly argue why regulation should change, you would need to explain why a currently-noncompliant policy should be compliant. In other words, why does an apparent conflict of interest in "traditional" finance not actually exist for the crypto industry (or at least why we should be okay with it existing).
> are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them.
This doesn't appear to be what the SEC is suing Coinbase for though, and is actually far more applicable to the question "then why were they allowed to go public?"
It's possible (likely even) there are nuances I don't grok, but sued for selling unregistred securities is not the same as requiring structural separation.
> far more applicable to the question "then why were they allowed to go public?"
The SEC does not approve IPOs. This is made abundantly clear in the law and rules, it is hammered into every first-year securities candidate as part of their licensing and it is front and centre on every S-1.
Would you really want a big government agency to decide on the merit of your business ehen you IPO? That seem like a good way to increase IPO's hurdles and slow down innovation.
> want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more
Investment banks would love this. It’s pro bono legal advice.
If this is important, require a legal opinion or no-action letter prior to investing in the IPO. Coinbase didn’t secure those and investors didn’t demand it. Here we are.
No, it's asking an agency to clarify its own rules.
If I, as a ham radio enthusiast, find an unclear section of the FCC rules I expect to be able to contact someone and ask what the agency's understanding of it is. They wrote it after all.
For example, if they wrote 5-15Mhz, I might wonder if they mean inclusively. Does that cover 15Mhz, or just 14.9999?
I'm not expecting them to preemptively rule on all legal cases which depend on this, just on their interpretation of their own words.
But for big enough companies, some amount of taxpayer-paid analysis makes sense. It ultimately benefits consumers.
Isn't analyzing the S1 "pro bono legal advice" to begin with?
And they did have legal opinions, just not from the SEC that is still almost entirely refusing to evaluate crypto tokens. Would a no action letter have been feasible?
Probably not, given the integrated broker-exchange-custodian model. But that’s the point. We specifically outlawed that in 1934. Coinbase was counting on rules being changed in the midst of regulatory inertia.
My understanding is that having that structural separation is part of what is required to be registered as a securities exchange, and Coinbase is being sued for being an unregistered securities exchange. (That's why the question of whether crypto tokens are securities is important in this case.)
It is a criminal offense to represent that because the SEC acknowledged the IPO it also approved of the business: it is even written in the Coinbase's IPO prospectus, as Molly points out...
QUESTION 17: “Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." -- TidewaterVirginia
Alesia:
All right. Question 17. "Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." This is from TidewaterVirginia. Thank you so much for this question.
Alesia:
So it's true. On our retail side, we operate a full broker that includes the retail brokerage piece, as well as custody embedded in that retail trading experience. On the institutional side, we operate an exchange, a broker, and then a custodian. What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict. We do not proprietarily trade against our clients. What this means is that we're only executing orders on our customer's behalf and seeking for the best execution on those customer's’ orders.
Alesia:
So when an institutional customer engages with our broker, for example, we're routing that order across multiple liquidity venues; many trades on our own exchange, but oftentimes it trades outside of Coinbase as well, wherever the best price may be for that customer. In doing this, it is an agents-only model. There's no conflict of interest for us operating both the exchange and the broker, because we are ensuring that we're acting in our client's best interest at every point in the transaction.
---
The issue isn't so much that they're doing this, but what the corresponding implications of it when related to unregistered securities.
> The Coinbase Platform merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies. Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets. All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.
It's that they are unregistered as any of those things.
> 8. By engaging in the conduct set forth in this Complaint, Coinbase has acted as an exchange, a broker, and a clearing agency, without registering as an exchange, broker, or clearing agency, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)(1)], and for purposes of Coinbase’s violations of the Exchange Act, CGI was a control person of Coinbase under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)]. In addition, through its Staking Program, Coinbase has offered and sold securities without registering its offers and sales, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
The SEC apparently won't decide if Ethereum is a security so it seems pretty complicated to me. I'm not going to insist the answers are obvious in such a legal minefield.
> It's being sued because it's trading a lot of things that aren't BTC or Eth.
Which the SEC was also refusing to rule on, even though it would have been easy and consumer-protective to get that done within a month or two of the coins gaining popularity.
If I don't treat that as uncertainty, I guess I have to assign significantly worse motivations...
When Coinbase did its S-1 it said that it was trading digital assets - not securities and not unregistered securities. It did say that those assets may be considered securities under future regulatory inspection.
The SEC doesn't rule on things. They make rules (not laws), but they don't decide those things. That is the domain of the judicial branch - not the SEC.
The SEC can say "I consider X to be a security" but it's the judges that apply those rules and decide if the proper regulations are followed.
The SEC, as part of the legislative branch makes the rules to follow under its creation as part of the Securities and Exchange Act of 1934. It can bring things to be enforced or decided to the judicial branch - it isn't the judge or jury.
It would be improper for the SEC to make claims that haven't been decided by judicial branch. The SEC can say "we consider digital assets that can gain value by actions of others to be securities" but its consider - saying "yes, ETH is a security" is something for a judge to decide, not the SEC. The way that is done is for the SEC to take a company that is trading what it considers to be an unregistered security to retail customers to court.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
> In other words, why does an apparent conflict of interest in "traditional" finance not actually exist for the crypto industry (or at least why we should be okay with it existing).
In traditional finance a "securities exchange" is like, the New York Stock Exchange. A big centralized thing of which there are barely a dozen in the whole country and most people would have trouble to name three. There are many stocks that are only registered on one exchange. That wants to be separated from other functions because otherwise it would become an abusive monopoly.
Nobody has anything like a monopoly on trading Bitcoins so that doesn't really apply.
No that’s not the case. Coinbase wants CLARITY. The SEC does not give any guidance, response, or anything related to this issue. At the same time it’s a laat struggle between the SEC and the CFTC.
The SEC messed up for years but not protecting consumers against fraud. Now they’re trying to prove their reason existence / gov funding.
In one of the (I think MIT lectures 2018) videos, btw? Gensler stated that [probably all crypto except Bitcoin, but including Ether, are moody moody most likely securities].
However, the SEC fails to to provide any guidance and doesn’t have any official position. The reason is that if they make a small mistake or missed sleeping, they might’ve given a free pass.
> Coinbase wants CLARITY. The SEC does not give any guidance, response, or anything related to this issue.
Coinbase's PR machine wants you to believe they want clarity. Their actual legal documents instead indicate that they're aware that they're probably violating regulations. Take their petition to the SEC for example--it starts by asking not "are cryptocurrencies securities under the Howey test" but "should cryptocurrencies be considered securities". For a document that's supposedly Coinbase's grand we're-going-to-make-the-SEC-clarify-regulation strategy, it's very long on asking for changes to the regulatory regime and very short on asking for clarifications on the application of regulation to cryptocurrencies. Which strongly suggests that they in fact know how the regulations apply to cryptocurrencies, they just don't like it.
Did they ever ask? You can ask the SEC for a "no-action letter", where they will officially tell you if what you want to do is OK. Here are all no-action letters.[1]
Here's one for Paxos.[2] They asked for permission to run a small-scale blockchain-based clearing operation without being registered as a clearing house. No more than 7 institutional customers, a limited list of stocks, and a time limit.
They got it.
Somehow, Coinbase doesn't seem to be on the list there. It's a public record.
Can't find the part where everything except bitoin is a security, I think that was said later in public.. But these are quotes from the lecture. Interestingly, lecture 18 is not available (it wasn't either when all of this was published), but it's right in the securities/regulations part. I'd highly recommend anyone to watch all of the lectures, because they're highly informational. Gary is a super smart guy. Many people think that regulators don't understand crypto etc, but I think Gary knows a lot more than many many people.
"Blockchain isn't the-- we don't have regulation because of blockchain, and we don't necessarily need a new set of regulations."
https://youtu.be/l0vD_FBWk0g?t=1976
"So we already know in the US and in many other jurisdictions that 3/4 of the market are not ICOs or not
what would be called securities, even in the US, Canada, and Taiwan, the three jurisdictions that follow something similar to the Howey Test that we've talked about.
3/4 of the market is non-securities. It's just a commodity, a cash crypto.
So you'll hear debates about initial coin offerings. And what's a security? And what's not a security? Relevant-- relevant and important debate, but for 3/4 of the market, it's not particularly relevant as a legal matter, as a regulatory matter. "
>In one of the (I think MIT lectures 2018) videos, btw? Gensler stated that [probably all crypto except Bitcoin, but including Ether, are moody moody most likely securities].
As recently as 2 months ago Gensler declined to say whether or not Ether is a security in front of congress.
> Gensler declined to say whether or not Ether is a security in front of congress
Whether Ether is a security is irrelevant to this case, based on an investigation which pre-dates Gensler’s term at the SEC, which is about whether Coinbase is required to register and operate as a securities exchange on account of having traded e.g. Solana. The entire argument obsessing over his refusing to come to conclusions until facts are established reminds me of creationists picking a tiny, side element of scientists’ arguments and then spending their entire time arguing with themselves over a point with zero germaneness.
Coinbase already has a license, but they're not using it.
If it's not even clear what a security is, why would you register as a securities broker/exchange?
> If it's not even clear what a security is, why would you register as a securities broker/exchange
False condition. The SEC has made it clear that various crypto, e.g. Solana, are securities. If you want to trade those, you must register. Again, if you just want to cash trade Bitcoin and Ether, the SEC has shown zero inclination of messing with you.
In 2017, the SEC issued the DAO Report [1]. It—together with guidance around ICOs—made the status quo per the SEC super clear. Investigations and enforcement take time, but the rules of the game were known; the industry had been working to change the status quo.
If you want to know whether something is legal or not, you talk to a lawyer or (less reliably) law enforcement. When Coinbase asked the SEC if it needed to register, without—to my knowledge—exception, it said yes.
> However, the SEC fails to to provide any guidance and doesn’t have any official position. The reason is that if they make a small mistake or missed sleeping, they might’ve given a free pass.
It also helps when one of your former execs came from Goldman Sachs, and were backed by VC including YC and the Stanford mafia--Balaji's buy out of 21 and being placed as CTO confirmed all my suspicions I had during thier mining days.
Honestly, and I say this with all the malice in the World if you
are reading this, Armstrong: I hope we can finally get rid of you and that cancer that is Coinbase and all the BS it has wrought us once and for all, even if it crashes the market for a while.
The fact that they hold that much BTC is a huge issue, but what is at the core of this is more to do with the real problem with this is centralized systems with directly conflicting ideals to the overall community operates with so much weight in an otherwise decentralized network: they were unfit to be in this ecosystem and they exploited a very clear window with their immense access to resources and VC money and while they made the most of it, it seems the tide has finally turned on them.
I can forgive Mark and MTGOX, that was a case of what happens when gross incompetence and unforeseen immense growth intersect; he paid a price for that, spent time in a Japanese prison and had his entire life ruined in the process.
Brian Armstrong has spent a decade being the bane of the Bitcoin ecosystem and sold scams to unwitting customers with no remorse, sided with the FUDsters during USAF etc... this is the typical corpo with no scruples trying to act innocent when he is finally subjected to the same regulatory body who leave the rest of us in the dark: those who I will remind you he sided with all along because it benefited him.
I honestly wish he gets the Charlie Schrem treatment and gets humbled in the same way.
TIL to stop reading the top voted comment if it appears to be outrage and just read the article for myself instead.
Just FYI here's the quote in context. She's posing a hypothetical here and not actually comparing Coinbase to a heroin dealer. This is very much in the style of Matt Levine at Bloomberg, btw.
If a company went to the FDA and said “hello, we’d like to start selling
heroin to the public for recreational use”, and the FDA said “no, you can’t
do that”, the company could loudly complain that the FDA was not giving them
a path to compliance. People would probably laugh at them.
The company could decide the FDA was wrong, demand that they and/or Congress
write new rules to allow for this innovative new heroin business that would
bolster American capital markets, and decide that in the meantime they were
going to sell heroin anyway. People might not be terribly sympathetic when
it didn’t end well for them.
Not really because she mentions SEC doesn't evaluate the businesses themselves when they apply for an IPO.
Coinbase doing an IPO (and them using this argument against SEC) is not being compared to heroin.
The comparison is that Coinbase would go to SEC and ask "hey we want to sell these bitcoin futures and securities, is it okay?" and SEC says "nope it isn't" and Coinbase just says "okay we'll sell it anyways", which is exactly what they did.
They knew the law existed and applied to crypto, yet they decided to go against it anyways because they thought they could get away with interpretation shenaningans.
> a completely flawed comparison, not because of the matter but because unlike the hypothetical heroin case, the SEC did approve the listing
The SEC doesn't approve IPOs. In bold among Coinbase's S-1's cover pages: "Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense."
The fact that the listing was approved is immaterial to whether the business is breaking securities law. The SEC is not required to verify that you are running a legitimate business before allowing you to IPO. They are only required to confirm that the data in the forms you mentioned represents your business correctly.
The Coinbase S1 admits this explicitly: they explicitly list the risk of their business model being contested by the SEC later in the document that the SEC approved.
Would it have helped if she prefaced it with, "Here's a hypothetical about a company wanting to do illegal things..."?
The style of argument is akin to Reductio ad Absurdum, taking an absurd position to it's logical conclusion. The "absurd position" here is a company wanting to sell heroin on the open market, and she takes that to the logical conclusion.
She could have said "meth", "nuclear weapons", or "dead infants", or whatever instead of heroin to make her point. If you read that as a comparison to Coinbase being a heroin dealer than you're the one editorializing her effort.
Here's another reductio ad absurdum argument:
Let's assume the earth is flat. Either the surface of the earth must go to infinity or people must be walking off the edge of it somewhere.
Youre completely.ignoring the fact that "heroin is illegal" is cut and dry. Securities are not illegal. Selling them without a license is. Asking them to clarify the law and getting told "the law is clear" is not in any way the same as selling heroin knowing it is illegal.
Coinbase also writes in great detail in the S-1 about
the risk that the SEC might bring a lawsuit exactly like
the one they just have:
[W]e could be subject to legal or regulatory action in the event the
SEC, a foreign regulatory authority, or a court were to determine that a supported crypto asset
currently offered, sold, or traded on our platform is a “security” under applicable laws… [W]e could
be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in
compliance with the registration requirements, or for acting as a broker, dealer, or national
securities exchange without appropriate registration.
[T]here is regulatory uncertainty regarding the status of our staking activities under the U.S.
federal securities laws.
It's pretty clear they knew they were operating in a shady area from their S1 filing -- and so now you're surprised the regulatory hammer fell on them?
Imagine if a company was selling "ground human meat" (see the movie "Soylent Green"). And they did it, well, because the market for ground human meat was suddenly exploding! I mean, in their S1 they might say "Sure this might be illegal, the FDA might take regulatory action against us." But also "Ground human meat is one hot market right now, you don't want to be left out on this rocket that's going straight to the moon!"
Sounds like they expected in advance for the SEC to do something stupid and were very upfront about that fact. Now that the SEC has done a stupid thing they are complaining that the SEC in fact did the stupid thing. Sounds perfectly reasonable to me.
Enforcement agencies don't have to stop you ahead of time, even if that action is disallowed or even illegal.
For example, police officers will regularly sit by the side of the road with a speed gun. They'll make no attempt to stop you driving at 150mph on the motorway but, in the UK, you'll receive a court summons through your door after the fact (and probably lose your license).
However, abusing retroactive enforcement does create a pretty clear case that the SEC is not interested in forming a regulatory framework for the exchange of digital commodities - instead preferring to import securities frameworks and punishing participants in the nascent industry.
Why should anyone reasonably believe the SEC has intentions to allow crypto to exist, and that coinage just did it wrong?
Statements like this create a pretty clear case that you haven’t read or shown any real interest in the SEC investigation and litigation related to crypto.
The particular product under investigation and or litigation was around for 3 or 4 years, and while the SEC is free to reclassify financial products at will - the fact that they did so and are now attempting to extract company-destroying damages indicates that they did not particularly care.
And if that same policeman happened to be speaking to parliament and was asked whether going 150 mph was legal he would be able to give a clear answer.
A better example is HMRC, the tax authority, in the UK. They won't tell you if your tax avoidance scheme is legal or not, but they will fine you or take you to court if they later decide it is not.
Just reading that, it looks like this isn't free. Essentially, what you're paying the IRS for here is for them to procure legal advice for you (with the added benefit that they'll bind themselves to that for a while?)
However:
> Even with a favorable ruling, a taxpayer has no absolute guarantee of the tax consequences, since the IRS can modify or revoke a previously issued private letter ruling if it is later determined that the ruling was incorrect or inconsistent with the current position of the IRS.
> 1. Firstly, if the law isn't settled, then no they wouldn't.
> The head of the SEC was asked by congress if Eth was a security, and true to form he refused to answer.
So what you're saying is that the Head of the SEC refused to answer a question they're not qualified to. Because it's an unsettled area of law that they're now challenging through enforcement action.
> I don't understand how anyone can believe these people act in good faith.
One way to look at it: the SEC doesn’t decide what is legal. They have an opinion, but it is the courts that decide. This is the process working as designed.
Heroin, as in heroin derivates, are not illegal. That's what a lot of hard, medical painkillers are.
Same goes for weapons in some of the countries with the most restrictions on gun sales and ownership, it is still perfectly legal to sell military grade weapons to the military in those countries.
Funny, how HN seems to qctively failing to understand how regulations and compliance works as soon as they themselves, or one of theirs, is negatively affected by them...
It seems a common "debating" tactic to spend inordinate amounts of effort questioning the analogy and seemingly pretending to not understand what an analogy is.
The law is clear. It's not the job of regulatory agencies to advise companies on how to become compliant with the law and their rules. The law and their rules are...the law and their rules! Hire a lawyer for that!
It would be absurdly burdensome and expensive for the government to have to advise people on how to follow the law when they're not following the law. If you're not sure how to follow the law, get an expert in the law! That's why there's a regulated profession that explicitly provides expert advice on following the law.
I don't want to press too far, because I don't think you actually meant it, but...it's like you're advocating for socialized lawyers. Which is definitely an interesting idea!
> It would be absurdly burdensome and expensive for the government to have to advise people on how to follow the law when they're not following the law.
Isn't this the exact same burden it would be for that person to hire a lawyer? All it would do is require the government to internalize the cost of regulatory compliance, which would increase efficiency by aligning the incentives of the government with reducing compliance costs.
> If you're not sure how to follow the law, get an expert in the law! That's why there's a regulated profession that explicitly provides expert advice on following the law.
Except that they don't actually have the authority to tell you if you're following the law. If you hire a lawyer and they tell you that the law is ambiguous and there isn't any relevant caselaw yet, you still have no idea if you're following the law or not. Meanwhile no one with the authority to make a binding determination will give you an answer.
Without case law, authorities don't know neither. With the two law suites, Coinbase and Binance, we are goong to find out.
Generally so, if a company works in, or close, to a highly regulated industry it is up to that company to do so in a compliant way. Or generally compliant, there isba tendency of start-ups in Germany complaining about how taxes apply to them as well. If said company is not comoliant, it is on them. And does happen all over the place, to all companies, all the time. For stuff ranging from export, to taxes, to anti-trust and corruption. Only that, say, Lockheed isn't getting any slack when it comes to creative sales techniques.
And compliance costs are costs of doing business. If you cheap out on that, well, ypu deserve what ever is coming your way.
> Without case law, authorities don't know neither.
Authorities are the ones who create the rules. If they tell you what the rule means, that's what the rule means, because it's their rule. That's the point of having them be the one to tell you.
You can write rules without knowing how they'll be broken.
Some people defend themselves by saying they didn't take the action they're accused of, others can cop to the action they took, and argue that the law doesn't apply because x, y, z.
So, like, that's why case law is a whole thing, it extends "the rules" to "here's how the rules have been interpreted in these situations"
>If you hire a lawyer and they tell you that the law is ambiguous and there isn't any relevant caselaw yet, you still have no idea if you're following the law or not.
Then you have a couple of choices with various outcomes. One of which is exactly what is happening to Coinbase right now. You can either 100% unambiguously follow the law, or you can push your luck and adhere to what you think either is or should be the law. In the latter case you may become said case law, whether you are able to continue your current ambiguously legal business practices or not!
But that's ridiculously inefficient compared to just going to the regulatory agency before you do the ambiguous thing and having them clarify it. Except that they won't do it.
Coinbase makes their money by working in a grey area. Why should the public subsidize (or reward) Coinbase for their shady business strategy? Why can't it be part of Coinbase's business strategy to remain on the correct side of the law and then lobby congress for changes to those laws?
That's how it's been done for the past two centuries. Why change now?
> Coinbase makes their money by working in a grey area. Why should the public subsidize large businesses in this way?
Because the public through its government is what created the grey area, so it should cover the cost of its lack of clarity, as a disincentive for causing it.
> Why can't it be part of Coinbase's business strategy to remain on the correct side of the law and then lobby congress for changes to those laws?
The entire point is that nobody will say whether they're allowed to do this, so they can't even know if they're on the correct side of the law. How dumb is it that the only way to find out if you can legally do something is to do it without knowing whether you're allowed to?
> That's how it's been done for the past two centuries. Why change now?
The best time to change a bad rule is two centuries ago. The second best time is immediately.
> The entire point is that nobody will say whether they're allowed to do this, so they can't even know if they're on the correct side of the law. How dumb is it that the only way to find out if you can legally do something is to do it without knowing whether you're allowed to?
Isn't that the point of hiring an attorney, or if you're Coinbase, a large team of lawyers? We don't know what Coinbase's lawyers said to them (attorney client privilege). But this could just be a legal ruse, right? Raise doubt? Even though Coinbase knew they were in a shady area and raised it in their S1 filing?
Or do you think Coinbase was really this stupid and naive?
Lawyers can tell you whether an ambiguity exists, not how it will be resolved. To find that out you have to do it and then see if you get punished, which is absurd.
The latter isn't a thing so. Especially if, as Coinbase and Binance did, ignore willingly the most basic rules around ypur business because of tech, innovation, disruption and the internet.
In the very next paragraph she explains the analogy:
> These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them.
She is saying it is like Heroin.
>> >The company could decide the FDA was wrong...
> But why would they decide this? Since Heroin is, again, illegal.
She is pointing out how absurb it is that Coinbase has decided the SEC is wrong (about the separation of roles) since - as you point out - not having the separation of roles is illegal.
It's not "alarmist nonsense", it's just an example of something illegal. And it's not "cryptocurrency" being compared to illegal things, but unregistered security cryptocurrencies. Bitcoin, the biggest name in cryptocurrency, is fine.
Yes well, some claim it's "securities", there is no clear law for that. Can I give you, for example, Amazon shared and get a coffee or a pizza ? Directly, not liquidate it first.
Let's find out how the Ripple lawsuit is going to end, there is good chance to win it.
The woke up one day and they "hey this crypto is a threat to our dollar'. Gensler said "we don't need any more digital currencies, we have USD, EUR, YEN". And that for centuries there was no need to transfer value through more than one medium. That can explain their views clearly.
I think I’ve run into this misunderstanding in my own conversations. The problem is that there are two different lines of reasoning that can look very similar:
A: You say “Z is true of X”, and I respond “Z is false for thing-like-X”, implying “Z is likely false for X”.
B: You say “Z is true”, and I respond “Z is false for Y”, implying not “Y is like X therefore Z is likely false”, but “Z is sometimes false, so we need to actually evaluate whether it’s true of X”.
I think people who use this reasoning would do well to make it more explicit.
(Here, Z is “there must be a path to compliance”, X is Coinbase, and Y – not, I believe, thing-like-X – is heroin.)
Which is damn smart given we let regulated persons manufacture and distribute opiates. In this analogy, Coinbase is upset its heroin sales are illegal when a licensed pharmacist can sell a similar product.
If someone is having a strong emotional reaction, substitute any regulated product—jumbo jets, vodka, legal advice—and move on.
> In this analogy, Coinbase is upset its heroin sales are illegal when a licensed pharmacist can sell a similar product.
In this analogy Coinbase' story seems to be that they asked how to apply to become a licensed pharmacist, but never got an answer. While the SEC suggests they never tried.
This gets confusing when the crime is phrased as unregistered heroin sales.
> Coinbase' story seems to be that they asked how to apply to become a licensed pharmacist, but never got an answer. While the SEC suggests they never tried
They got an answer they didn't like: they'd have to change how they did business. (Also, what they list. The SEC issued The DAO Report in 2017.) We enacted the '34 Exchange Act in part to segregate the broker, exchange and custodial functions of securities trading. Coinbase was asking how to become a licensed pharmacist without having to check prescriptions.
> gets confusing when the crime is phrased as unregistered heroin sales
Try "opiate." Coinbase thought they found something new, and asked if it was okay. They didn't think they got a clear answer and proceeded. Now they're crying foul at the lack of prior guidance, or that someone else does have a license. The author's point is that these arguments don't make sense. There may be other arguments that do, but these aren't among them.
She's making the point that for some products there might not ever be a path to compliance. Heroin is an example here because it's really clear what would happen.
> Rather than initiate new rulemaking, Chair Gensler has repeatedly stated through speeches and testimony that the vast majority of digital tokens are securities, and has asked issuers and exchanges that offer, sell, and trade them to come in and register. We disagree that the majority of digital assets are securities. For those digital assets that are securities, registration under the current rules is, for many market participants, either not possible or not economically viable given the associated and unnecessary compliance burdens.
"Here is how we interpret the Howey test in relation to cryptocurrencies, and here is a ten step process for how we determine whether each particular cryptocurrency is a security" is clarity.
Can you imagine if, back when the SEC first formed in 1934, they put out a press release saying "the vast majority of stocks are securities and need to come register, but not The Bank Of New York, their stock is not a security". Imagine that the SEC didn't elaborate on why they didn't consider that one stock to not be a security, and they didn't elaborate on the reasoning process that led them to that decision.
That's what's happening right now, but with cryptocurrencies.
> Can you imagine if, back when the SEC first formed in 1934, they put out a press release saying "the vast majority of stocks are securities and need to come register, but not The Bank Of New York, their stock is not a security".
This is basically what happened. Mortgage loans and certificates of deposit, for example, aren’t securities by judicial clarification, not definition in the law. (See: Marine Bank v. Weaver)
The Howey test isn’t that complicated, and Coinbase Earn ticked all four boxes.
Sorry, I confused Coinbase Earn (staking services) with Coinbase Lend, which was a previous loan product of theirs that was targeted and shut down by the SEC in 2021.
Still, Earn may well be a security, but that's a product that will fit very cleanly into current securities law when it reaches the court, and it concerns a company's product rather than an entire new asset class, so it's not so egregious that the SEC doesn't provide clarity on it.
The big problem is with their lack of clarity on the cryptocurrencies themselves.
The reason Gensler probably didn't want to say anything publicly: Ethereum is legally a bit of mess and should have clearly been classified as a security when it ICOed, but the SEC kind of dropped the ball. Gensler knows this, the Coinbase lawyers know this and the congressman asking probably also knew that Ethereum was in a bit of a grey area. Honestly, crypto folks should be happy that SEC is taking a "don't ask, don't tell" approach with Ethereum. This is how Matt Levine put it:
"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."
It suggests bad faith to ask why the SEC didn't crack down earlier. Sure, it was politics, but it seems entirely understandable.
We all know that before the crypto bust, a lot of people would've been starting a witch hunt if the SEC had tried to enforce the law. Congress, for starters.
Gensler is being opportunistic now because that's the reality they have to work with.
The wealthy and powerful in this country take it on themselves to personally ruin public servants who get in their way sometimes.
No, it's impossible to prosecute every violation of law, and this has been true since the beginning of time.
Would you agree that each library can't have every book ever written, and do you think there is a distinction between not selecting a book and "banning" it?
A library can't have every book in the world. This doesn't mean that not selecting a book is exactly the same as "banning" it. It does mean the issue is nuanced.
>>The wealthy and powerful in this country take it on themselves to personally ruin public servants who get in their way sometimes.
Oh poor Gensler, former banker turned regulator worth $100 million, getting push back when he robs people of their right to invest their money how they want.
> congressman asked gensler face to face if ethereum is a security and gensler declined to answer
The SEC has brought zero enforcement action that turns on Bitcoin or Ether being securities. Somewhat hilariously, these complaints are an industry endemic with bullshitters flipping out about Gensler being able to say “I don’t know.”
Basically, Gensler is throwing them a bone. Ethereum is very obviously a security but the SEC decided it has been too long since the ICO, it's too big and too decentralized to now go after it. Pretending not to know if Ethereum is a security is a gift from the SEC to the crypto industry and crypto folks should probably shut up about this asap before the SEC feels their gift isn't appreciated.
Because in this case the agency that enforces the rules is also charged with creating them, and how the rules this agency creates apply to novel instruments with no centralized issuer, centralized operator or investment contract, is not at all clear.
No, in most cases, Congress makes laws that say things like “we delegate our rule making authority to the EPA with regards to air pollution” (Clean Air Act). The agencies then create the rules; https://en.wikipedia.org/wiki/Code_of_Federal_Regulations
Sometimes the court system decides the agency’s rules exceed the authority granted to them by Congress.
Other times Congress uses the Congressional Review Act or new legislation to say “that’s not what we meant”.
The laws pertinent to the SEC's complaint are the '33 Act, '34 Act and court cases which constructed the Howey Test. None of them were created by the SEC.
The '33 and '34 Acts give the SEC the ability to write the regulations, via wording like "under rules
and regulations which the Commission shall prescribe". Congress defines a variety of things, but the SEC makes most of the nitty gritty procedure/rules out of those definitions and directives.
The Howey test exists because the SEC enforced said new-ish regulations against someone, and the court agreed with them, holding Howey liable for violations of the '33 Act as implemented by regulators at the SEC.
All this makes the statement "No, Congress creates the rules" upthread inaccurate.
What? The laws Coinbase is being charged with violating are creatures of the Congress and courts, not the administrative state. This is not a case of "the agency that enforces the rules is also charged with creating them" [1].
Coinbase wants the SEC to come up with a process for them to register with the SEC that's amenable to cryptocurrency, via a "petition for rulemaking"; https://www.sec.gov/rules/petitions/2022/petn4-789.pdf. (The SEC is, rightly IMO, saying "nah".)
Again, the point is that both Congress and the SEC make "the rules" around securities. Congress defined securities and gave the SEC the ability to write the rules for securities, with some specific requirements. The SEC's rules can't violate the various Acts of Congress, but they've still got quite a bit of rule-making power delegated to them.
> Congress defined securities and gave the SEC the ability to write the rules for securities, with some specific requirements
Right. Like choosing what's important and what's not. (It's also a totally dishonest framing by Coinbase. Their business model, a unified broker, exchange and custodian, is fundamentally in violation of the '34 Act. They're asking the SEC to break the law.)
What makes no sense to me is the stupidity of fighting the case. I understand Coinbase's PR rallying the crypto base before. They were making a lobbying push to change the law. And the base would throw money at them. But now? Either management has reason to believe they can run out the clock on the SEC before Congress changes the rules. Or they're as delusional as the base.
The opinion only shows how little, read none what so ever, experience some people have in figuring out compliant business processes. Yet another rude awakening for the, let me be blunt, cluelessly naive and in some cases outright criminal tech crowd that seems to flok in huge numbers around crypto in general.
That attitude started aroind the time Uber got big. Maybe even with AirBnB. In a sense, crypto is exactly the tech eco system we deserve. Good that there is finally some enforcement of rules that apply tp basically everyone else.
There's lots of laws that aren't "clear", but people don't phone the police up and ask them what they're going to do. They talk to a lawyer and get advice.
Well, the SEC told everyone to register, but didn't actually tell them how they could. From what has been made public, it seems like the SEC strung Coinbase along for about two years, then said that their application was inadequate (without stating any criteria).
I promise you, a procedure to become a registered securities exchange exists (demonstrably, as registered securities exchanges exist widely) and Coinbase has enough people and money to find it.
The question is whether a procedure to become a registered exchange of crypto securities exists, and that promise seems to be a lot more dubious.
Coinbase doesn't care if it can offer its customers shares of AAPL or TSLA. They care whether they can start brokering the types of securities that are found on public ledgers.
> question is whether a procedure to become a registered exchange of crypto securities exists
Yes, same as the others. What doesn’t exist is registration per Coinbase’s model of integrated broker, custodian and exchange. We specifically outlawed that in 1934 because it did precisely what crypto did in almost exactly the same time frame in the period stretching from 1918 (post-WWI) through the 20s’ boom years into 1933.
The process is the same; securities are securities, crypto or otherwise. They don’t like that process, so they’re asking for a special one just for them. The SEC just said no.
My understanding is that the corporate framework that securities licenses require is literally impossible to satisfy when trading current public blockchain assets. As in, to trade crypto as a security on your exchange, you would need to walk up to every dev team of every crypto you wanted to trade and kindly ask them to KYC/AML every single user of the blockchain so that you could be in compliance.
In practice this just means it's de-facto impossible for any centralized exchange to carry crypto securities.
And the owners of that accounting software can make the case that they should be allowed to be used in the country. Lots of companies do that, and some are even successful!
So you have to ask yourself... why isn't Coinbase making that argument?
> So you have to ask yourself... why isn't Coinbase making that argument?
Coinbase has (obviously) always been a strong advocate of distributed ledger technology, is constantly warning of the ramifications of this software being de-facto banned in the US, and has publicly stated that they have contingencies in place for moving offshore if it's economically unviable to be headquartered in and/or serve the US market.
> has publicly stated that they have contingencies in place for moving offshore if it's economically unviable to be headquartered in and/or serve the US market
They should go. Crypto has a niche outside major economies and developed countries with the rule of law.
If you go back to the 1930s, bankers protested similarly (as they did again in the late 90s). Turns out freewheeling fraud isn’t a determinant for financial centrality. Worst case: we can revisit if London or Singapore make this work, given they’re rapidly approaching being the only financial centres who will stomach this.
Here in the real world that is the software company's problem. Countries do not change their laws just to make some random accounting software company happy, unless they bribe some politicians first.
Accounting software have tons of local adaptations.
>Countries do not change their laws just to make some random accounting software company happy
Countries change laws to give their citizens access to important products. It's not about the company.
The USA didn't decide to rewrite existing telephony laws for VOIP in the 90s because they wanted to give Skype a handout, they did it because they understood the potential benefits of internet telephony for the populous.
> Accounting software have tons of local adaptations.
You can't locally adapt a ledger that is globally shared across all the other countries. Either you allow the ledger in your country or you don't.
> Countries change laws to give their citizens access to important products. It's not about the company.
And Congress was lobbied to do that and they declined. Is your argument that 'they should have done it' means 'the SEC isn't allowed to enforce existing regulations'?
I don't really care. I've got a large enough international stock allocation that if the USA loses its status as the financial capital of the world over the next several decades, I'll be just fine in retirement.
Companies like Coinbase and a16z have publicly stated their intentions to establish international arms to hedge against the US regulatory environment, and there's no reason my portfolio can't follow their lead.
I've read your comment three times and I've yet to make any sense of it for myself, but good luck to you too. I'm glad you enjoy hunting, growing food, and building things - those are some great hobbies.
The whole point of regulations is to make various business models impossible.
The job of the SEC is to enforce the existing regulations and the job of lawmakers to (maybe) change the regulations if they think it's important to make this type of business possible in the US. In doing so they have to weigh potential benefits and harms caused by doing so.
The guiding priciples behind the SEC's current mandate and the current regulatory enforcement framework in the US Securities Laws are 1)investor protection, 2)fair, efficient and orderly markets and 3)capital formation[1]. In making changes to the securities laws, lawmakers would have to decide whether these changes would compromise these principles and whether the benefit of doing so might outweigh the downsides.
An impartial observer might look at the crypto markets thus far and decide that they are not (in the main) fair, orderly and efficient and that investors have suffered significant losses due to fraud and other malpractise and decide that it wasn't worth the risk to make changes to facilitate these businesses. That said, the crypto industry has spent a very significant amount lobbying lawmakers so they may decide otherwise.
Either way, it's not the job of the SEC (Securities regulator) to decide coinbase gets a free pass to ignore securities regulation in this case because the existing regulations make their business model impossible.
> Either way, it's not the job of the SEC (Securities regulator) to decide coinbase gets a free pass to ignore securities regulation in this case because the existing regulations make their business model impossible.
I guess that's the job of congress, then. I think the SEC Stabilization Act is an excellent start. There's nothing unreasonable about wanting to broker securities on a public ledger.
> I don't think it's the "public ledger" part of this that causes the regulatory issue frankly.
Myself I think that's precisely the issue the SEC is hung up on, but we could argue endlessly about what is probably causing the regulatory issue with the SEC and what they are probably okay and probably not okay with. Meanwhile, the UK just laid out a clear framework for crypto securities exchange in their new bill, which gives an unambiguous regulatory green light to any companies who want to relocate there.
It doesn't mean that companies can't be licensed. It just means that they will move out of the USA (to another country that has strong financial infrastructure but sane securities laws like the UK), get licensed there, and exclude US customers from their platforms.
Coinbase and a16z have already publicly stated that they have plans to set up international arms to hedge against US regulatory risk.
So your statement "then you can't be licensed, simple", comes with the corollary of "the USA's strong fintech industry may move entirely offshore within the next decade." If everyone is cool with that, then yeah, go ahead and blanket ban all US residents from trading any financial instrument that's recorded on a public digital ledger.
"It doesn't mean that companies can't be licensed"
Licensed in this discussion obiviously meant the US.
"Coinbase and a16z have already publicly stated that they have plans to set up international arms to hedge against US regulatory risk."
Which is great for them I guess.
"the USA's strong fintech industry"
A tiny, and some might argue irrelevant, part of the US fintech industry is moving offshore.
Crypto to me feels like fusion, it's super relevant, and you just wait some time, you'll see! and then there is another year and another decade and it is still not relevant.
> A tiny, and some might argue irrelevant, part of the US fintech industry is moving offshore.
You'd better be very sure of its irrelevancy before sending it all to the UK, where they're embracing it with a clear regulatory framework. If you are right, the US pushes a small ("irrelevant") amount of crime offshore. But in the off chance you are wrong, the USA risks losing their position as the world's financial superpower. This is not a gamble you want to take if there's even a very small chance that this technology could catch on.
> Crypto to me feels like fusion, it's super relevant, and you just wait some time, you'll see! and then there is another year and another decade and it is still not relevant.
It gets discussed multiple times per week on Hacker News. It's talked about constantly in congress. It's beginning to polarize people so much that it creates single issue voters in both directions. The word "NFT" has been etched into the public's consciousness as a meme. Banks and central governments are issuing bonds and other paper on public blockchains. The US is itself planning a version of the US dollar with a design inspired by distributed ledger technology. More than 1 in 5 Americans own cryptocurrency now. I don't know what measure of "relevant" you are using, but it's obviously very different from mine.
The USA is the world's finance hub because it has the most reliable systems for trading financial assets, and because it has the most reliable currency. But Ethereum network transactions are pretty damn reliable too, even more reliable than wire transfers in some ways (if a bit costly at the moment). Trading on Uniswap is generally more reliable than trading stocks in my brokerage account, and I like how I can bundle multiple trades, borrows and sends together so that they execute atomically, a feature that my brokerage account doesn't support and probably never will. I like that with DeFi, I get to choose my asset-backed loan underwriter separately from my custodian, rather than them both having to be my broker (many of which charge way above market rates for margin loans). Trade settlement happens within seconds, not days. And there has been a cambrian explosion of stablecoin designs, some of them unreliable, some of them quite a bit more reliable than most government currencies.
Is any of it truly better than the current way stocks and currency are traded and held? Maybe, maybe not, but the stakes are much higher than I think most people understand. Distributed ledgers certainly offer some specific advantages that people really sleep on.
> This project, thankfully, was dropped by the Fed after preliminary study.
> USA is the world's finance hub because it has the most reliable systems for trading financial assets, and because it has the most reliable currency
We had the largest consumer market which underwrote a deep financial system. That depth and breadth, together with a rules-based system, is what fuels American financial hegemony. Between political volatility, sanctions and our archaic payment system, we do not hold out reliability as a selling point. (You have to go out to the 1910s to see American financial infrastructure being at the forefront.)
There are definitely lessons to be ported from crypto to our system. But they can come from academia and non-commercial hobbyists or be copied once demonstrated in e.g. London.
> Nope
Yes. You’re citing Q3 ‘22 materials. The programme lost the support it was limping on after Silvergate, SVB and Signatures’ failures. FedNow makes more sense anyway. (We probably wouldn’t have it without crypto.)
As a counterexample, I haven't needed regulations to be able to have great confidence that my Uniswap DeFi trades will settle within seconds. The system is extremely reliable, despite no other participant in it being regulated or even trustworthy.
Coinbase lists less than 300 of the tens of thousands of cryptocurrencies out there - indeed a tiny minority of them, and they do have some kind of legal review process, so while that claim may well be untrue, it's not absurd on its face.
I don't agree that a regulatory agency saying "hint hint time to register" for years on end is an effective way to regulate.
The first step of effective regulation is to state exactly what is out of compliance, which they finally did only a few days ago by listing which particular coins are the ones that put Coinbase out of compliance.
The second step is to explain why those particular coins cause them to be non-compliant and why other coins (Bitcoin) are exempt, in such a way that Coinbase has rules they can apply to determine whether a particular new coin is compliant or not. That clarity is the part we're still waiting for.
> I don't agree that a regulatory agency saying "hint hint time to register" for years on end is an effective way to regulate.
Nah, the alternative is why cops get away with everything via qualified immunity. Conmen don’t get given a pat list of what is and isn’t allowed; no one wants to play the “but you saaaaaaid!” game that results.
No; “fraud” is illegal. They don’t have to specifically list each of the different possible techniques somewhere.
Same with securities. The Howey test exists. The courts and Congress occasionally find a tweak that needs making, but they aren’t likely to be impressed by shenanigans like “oh it isn’t a shared enterprise because of this cute quirky thing”.
So according to you, following the SEC's lead: Selling Bitcoin is legal, selling Solana is illegal, and selling ETH (Ethereum) is in a quasi-state of legal and illegal. Nobody knows exactly why any of this is the case, and that's totally fine with you because you don't want to dive into any of these "cute quirky things".
> Elsewhere in the speech, Hinman explained: "If the network on which [a] token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract."
They're not listing coins at random. They claim to have vetting specifically considering this kind of regulation and to reject the vast majority of coins.
Even if we assume Coinbase is in the wrong here, a hypothetical exchange with better vetting could also list dozens of coins and be entirely legit with no securities.
No, it's an adoption from "If you're reading it, it's for you" by The Last Psychiatrist. Not that I'm as clever as he is. Pointless seems in the eye of the beholder.
If you don't understand something, the easiest thing is to condemn it and call the person who made the comment stupid.
My comment pointed out that they outright refuse to state which ones fall into which category. That is a 100% factual statement and highly relevant to the discussion.
If you'd like to provide a rebuttal to that, be my guest. But childish swipes that don't address the point being made are just that... childish.
> Where can I learn about which cryptocurrencies constitute securities and which don't? Is there a list?
Yes. Start with the SEC’s complaint against Coinbase: SOL, ADA, MATIC and ten others [1].
Beyond that, ask a securities lawyer or ask the SEC. Coinbase did. The SEC answered. Coinbase didn’t like the answer, and focussed its messaging on irrelevant statements (or a lack thereof) by Gensler about Bitcoin and Ether. If someone only cash traded those two, they would have a legitimate argument against the SEC’s ambiguity. But practically nobody does: instead they operate unlicensed and illegally-configured securities outfits.
I was taken aback at first as well but then I realized I was misunderstanding the point.
The article isn't saying crypto is harmful like heroin at all -- it's just using heroin as an arbitrary example of something illegal. It's clear to everyone that selling heroin is illegal, in a way that e.g. insider trading perhaps isn't.
So it's not alarmist nonsense, it's just a vivid analogy.
> So it's not alarmist nonsense, it's just a vivid analogy.
And, given this discussion, it vividly illustrates the point.
The number of people who literally can't entertain even the vague possibility that Coinbase might be doing something illegal (as in illegal like heroin) and thus can ONLY interpret the analogy as Coinbase is bad (as in bad like heroin).
Never understood posters who will claim they stopped reading an article as if that bolsters their point somehow. It, like, heavily undermines you... You don't even know what the rest of the article says, or if it qualifies or develops that idea. It doesn't score you any points at all.
If you actually read the UK crypto bill[1] rather than what Coinbase says about it, you find that it's quite restrictive.
"The government’s view is that cryptoassets and the activities
underpinning their use should follow the standards expected of other
similar financial services activities, commensurate to the risks they
pose, while harnessing potential benefits of the technology behind
them."
...
"HM Treasury proposes to capture
cryptoasset activities provided in or to the United Kingdom."
...
"For cryptoasset issuance and disclosures, the government
proposes to follow a similar approach to that for securities and apply
regulation when the asset is admitted to trading on a regulated
cryptoasset trading venue and therefore becomes exchangeable for fiat
currency, or subject to a public offer."
...
"The government considers public offers of cryptoassets –
including ICOs where a fund raiser creates new tokens and sells
them to investors – may meet the definition of a security offering"
...
"In practice many cryptoasset exchanges play a central role in the
cryptoasset ecosystem – conducting many more activities than solely
operating a trading venue (e.g. custody, post-trade activities,
proprietary trading, lending and admission of cryptoassets to a
platform). Some venues may also issue their own native cryptoasset or
act as intermediaries for the distribution of stablecoins. This is
sometimes referred to as “vertical integration” or “agglomeration”.
Accordingly, the government expects, as a minimum, that these
entities follow rules covering all of these activities – not just those
relevant for operating a trading venue. To illustrate, a major cryptoasset
exchange would be required to comply with the issuance and
disclosure rules for assets that they admit for trading (Chapter 5), the
rules relating to the operation of a trading venue (Chapter 6) and
certain surveillance and reporting requirements to detect and prevent
market abuse (Chapter 9). Additionally, and depending on the sorts of
activities they undertake, they would also need to comply with rules for
market intermediaries (Chapter 7), cryptoasset custody rules for
cryptoassets which they safeguard or safeguard and administer
(Chapter 8) and rules for operating a cryptoasset lending platform
(Chapter 10)."
All this is close to what the SEC requires. If it works like a security, a broker, or an exchange, it's regulated like a security, a broker, or an exchange.
This is probably more "clarity" than Coinbase wants.
No, the SEC requires cryptoassets to slot perfectly into existing regulation, making it de-facto impossible for any public-ledger-based-securities exchange to operate. I cover that in my comment here:
Contrast that with the proposed UK law, which applies existing regulations in a commonsense way while realizing ones and zeroes in a public ledger behave fundamentally differently than the legal contracts they're used to regulating, and that those ones and zeroes absolutely, categorically cannot do certain things that 1930s laws might ask of them.
> This is probably more "clarity" than Coinbase wants.
Two months after the crypto bill was proposed, Brian Armstrong publicly stated (at a conference in London) that the UK's system is better for Coinbase than the US's system in the sense that there is one regulator providing clear guidelines (FCA) rather than two regulators squabbling over jurisdiction (SEC and CFTC).
He said: "You don't have this unfortunate thing happening where the CFTC and the SEC are having a turf battle. We actually have contradictory statements from the heads of the CFTC and the SEC coming out almost every few weeks. How's a business going to operate in that environment? We just want a clear rulebook."
So Coinbase has come out explicitly, emphatically, saying that the UK's crypto bill is exactly the level of clarity that they want.
Yeah agreed; at least heroin sales don’t directly fund nuclear weapons programs in North Korea, enable gigantic ransomware attacks on innocent civilians, or generate massive carbon emissions+e-waste in order to continue existing.
Idk many crypto firms did assist in the sale of heroin. Heck some even assisted money being transferred to known terrorists. With those funds used to kill civilians globally.
I don't understand how anyone can take this obviously super-biased articles from someone who has made it their career to hate anything crypto-related seriously. It's full of personal jabs and bias like "my guess is that it’s going to involve a lot of PR stunts and headline-grabbing"
It's obvious that there is zero incentive here to do any real reporting or research. It's just clickbaity headlines and statements appealing to people who hate crypto. Of course it's hidden under a veil of neutrality with a biased selection of links that nobody actually clicks on scattered throughout the article.
It's not about what's wrong, it's about the selection bias of what's included in such an article. You can write a technically "factually correct" article by only including statements that heavily favor one side of the argument, which is what's done here.
Also, "facts" in topics that touch politics and law are complicated. This is not like science where measurement can be unambiguous. Most facts in topics such as these like these are not scientific facts, but highly politicized opinions that are ambiguous and open to interpretation. Much of the legal code is (on purpose) open to interpretation, including what's a security and what's not.
When trying to understand a topic like this the IMO best thing you can do is seek our content from people who have a somewhat neutral stance. Don't listen to a16z who want to pump all their crypto tokens. Don't listen to Molly White whose whole career depends on bashing anything crypto-related.
That's called "expressing an opinion." What world would we live in if the very fact we wanted to talk about something meant we couldn't?
You're welcome to write a rebuttal but you're attacking the messenger repeatedly instead.
She wrote a cogent concise article that describes what's going on in the real world. Now, we await your brilliance, as soon as you're done repeatedly telling us it's "her career."
Nothing wrong with expressing an opinion, it's just sad to consistently see these highly biased and political opinions being upvoted on a website that's supposedly about rational thinking, not political incentives. I would expect upvoted articles here to strike a fair balance in presenting both sides of the argument, not just one.
I've been here for a few years and never got the impression that this was a rationalist, both-sides kind of site. People submit interesting articles, not fair and balanced coverage of some political debate.
From the submission guidelines:
"Anything that good hackers would find interesting. [...] anything that gratifies one's intellectual curiosity.
Off-Topic: Most stories about politics, or crime, or sports, or celebrities [...] If they'd cover it on TV news, it's probably off-topic."
> You can write a technically "factually correct" article by only including statements that heavily favor one side of the argument, which is what's done here.
So we should hum, listen to people who say poor people who become "banked" by buying bitcoin ? Crypto is a clown car, so it's hard to make a balanced point on it: either you want to sell your snake oil or you point out it's just snake oil.
I enjoy reading a perspective with a little passion behind it, a little anger, some eye-rolling. It's entertainment, not wikipedia.
I already agree with Molly, but I'm getting to learn a few things that are going on while enjoying her rant. She's not trying to persuade any crypto-fans, she's just expressing her exasperation.
The reason why many like crypto is that it's the purest form of speculation. Stocks, pork halves, the $, all are more or less tied to reality and influenced by reality - even gold. Crypto isn't which makes it so beautiful in the eyes of some.
When approving the S-1, the SEC was asked to review a business, not one selling filtration technology, but one selling illegal securities, well within their area of expertise.
I think Americans should fairly expect their regulators to be clear enough about the rules that the very securities regulator, whose job in large part it is to protect retail investors, not allow a company who is in the business of selling illegal securities to go public, and then take multiple years to file suit.
Any crypto sceptic who does not see a problem with this is tainted by their priors.
>whose job in large part it is to protect retail investors, not allow a company who is in the business of selling illegal securities to go public, and then take multiple years to file suit
First, it's not ideal, but an investigation takes time.
Second, had the SEC said "we're not allowing you to go public because we think your business might be breaking ambiguous laws" it would have destroyed Coinbase with a combination of reputuational damage and the inability to raise money to operate. All for something that might be true but was unproven? That doesn't sound ideal, either.
By the way, love the "anyone who thinks otherwise is tainted" bit at the end, it truly speaks to our political climate.
> because we think your business might be breaking ambiguous laws
I think Coinbase and the their investors would have appreciated a real a priori ruling on whether their business is an illegal securities exchange before going public but we can't do that for some reason.
Risks To Our Business: The SEC might shut us down for being an illegal securities exchange but has no way of telling us in advance if we're breaking any laws ¯\_(ツ)_/¯
I think there is very little room for this sequence of events to be considered fine. If there is any sense at all that the SEC's mission to protect retail investors "their whole publicly stated business model might be illegal and we might sue them out of business" is something you might say, "we're not sure if we're comfortable with you going public yet."
They didn't use those words, but they basically did put that in the S-1 [0]:
> We are subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition.
> ...
> A particular crypto asset’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if we are unable to properly characterize a crypto asset, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, and our business, operating results, and financial condition may be adversely affected.
> ...
> The SEC and its staff have taken the position that certain crypto assets fall within the definition of a “security” under the U.S. federal securities laws. The legal test for determining whether any given crypto asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular crypto asset as a security.
Reviewing the S1 is not a complete review of the legitimacy of a business model, and, of course, cannot predict whether a company will comply with regulations in the future.
It’s notable your argument doesn’t address the fact that the S1 disclosures seemed accurate, e.g.:
> [W]e could be subject to legal or regulatory action in the event the SEC, a foreign regulatory authority, or a court were to determine that a supported crypto asset currently offered, sold, or traded on our platform is a “security” under applicable laws… [W]e could be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in compliance with the registration requirements, or for acting as a broker, dealer, or national securities exchange without appropriate registration.
It seems coinbase knew there was a substantial risk and proceeded anyway.
> Any crypto sceptic who does not see a problem with this is tainted by their priors
Someone shoulda stopped me is never a good defense. Perhaps they should have. But if it was so clear to them, it should have been even more clear to you, and you have the primary responsibility for your actions and decisions.
It’s up to coinbase and the others to figure out how to create a legal business model around crypto, not the SEC.
While crypto was growing and experimenting and not causing great harm, the regulators were happy to let it do its thing.
The moment major losses occurred due to large scale fraud collapses, THAT is when the regulators decided to pay more attention and look for rules that might be getting broken.
Moreover, with the increased use of crypto by nation states such as North Korea, Russia, Iran, Hamas, etc... to evade sanctions and launder money, and the general lack of any material crypto economy, then parts of the gov't, in general, are starting to think the show needs to end for crypto - and are talking to regulators to shut down exchanges.
That is why there are no "productive conversations" between Coinbase and regulators. The regulators don't want to give them any valid methods of operating - because they NOW don't want them to operate at all.
"Any [person] who [disagrees with me] is [committing an error]" is a thought-terminating statement. Best to avoid using that kind of language -- it doesn't particularly hurt anyone else, but it will hurt the growth of one's own understanding.
On the other hand, sometimes people are just not correct, due to motivated reasoning, and keep asking the same question ("Is this an illegal security?" "Yes") over and over again hoping to get a different answer. Ultimately you have to terminate thought somewhere or you get bogged down in trivialities by people who are trying to exhaust you.
You made a good comment and then absolutely ruined it with your last sentence. Blanket statements like that are not only disrespectful but they’re useless. This isn’t Fox News…it is Hacker News.
Second, you’re arguing they were involved in illegal activities since before going public. How do you know that for sure?
> You made a good comment and then absolutely ruined it with your last sentence. Blanket statements like that are not only disrespectful but they’re useless. This isn’t Fox News…it is Hacker News.
I appreciate this feedback. I like how another commenter put it: "I think there is very little room for this sequence of events to be considered fine" - from a non-crypto-partisan, rule-of-law perspective.
> Second, you’re arguing they were involved in illegal activities since before going public. How do you know that for sure?
Because that is what the SEC is alleging in their lawsuit.
> I like how another commenter put it: "I think there is very little room for this sequence of events to be considered fine" - from a non-crypto-partisan, rule-of-law perspective.
I would encourage you to consider your own priors and read the feedback that you're getting on this idea as well. In spite of your attempts to cut off opposition, there are a lot of very well-reasoned arguments for the SEC's approach.
Take your pick. You've so far only replied to the people calling you out for trying to cut off discussion, not to the people who are actually taking on the claims you consider to be so ironclad.
I'm personally not invested enough (or knowledgeable enough) in this topic to debate you on it, but if you're so sure of your position you'd do well to get out there and defend it.
Maybe the SEC will be able to lay out in court that they have been very busy with their investigation since 2019 (the date they are alleging is the latest Coinbase started trading securities).
I doubt it - but even if so, that's just not good enough.
Crypto sceptics generally agree that the SEC has been asleep at the wheel. What they aren't willing to acknowledge is that there are basic, non-crypto-related due process concerns with a regulator who lets a company operate, very publically and thus with its tacit approval, for basically a decade (that is how hold this debate around securities law is) - before then deciding they don't like it after all.
I’m sorry but your third paragraph doesn’t make any sense. I can’t engage with anything like that. You seem to be arguing against the investigative process and unless you’re an actual investigator, I just don’t believe you’re qualified.
Well, not really. When they decided to file the S-1, they were likely in a very different business model, and the underlying cryptos (for the most part) were very much non-scams (as far as that can be applied to cryptos).
It would be like going public as a company that looked like ebay, and then later most of your userbase is buying and selling heroin, and now your business totally revolves around the heroin, and you've taken certain steps to encourage and participate in this heroin market directly.
Backpage is the more relevant example, at least in the US IMO. But, no as much drugs as the 'adult services.' I don't think they were publicly traded, either.
> Any crypto sceptic who does not see a problem with this is tainted by their priors.
I'm not qualified to comment on the legal or financial aspects, but this is a hostile and aggressive statement that detracts from the conversation.
You made a claim and offered reasons why you believe that claim. The correct thing to do from there is to allow other people to defend the other position, not end the discussion by saying "and if you disagree with me you're self-deluded".
> When approving the S-1, the SEC was asked to review a business, not one selling filtration technology, but one selling illegal securities, well within their area of expertise.
> Any crypto sceptic who does not see a problem with this is tainted by their priors.
My priors include the idea federal agencies operate within a scoped statutory authority, and the scope of that authority can even vary from function to function. It's a very "swim in your own lane" kind of partitioning.
It can lead to counterintuitive interactions, but on the whole makes sense if you step back and look at the system of congressional delegation to agencies they legislatively invent.
> Any crypto sceptic who does not see a problem with this is tainted by their priors.
Who is this addressed at? I think most (any?) crypto skeptic would see the problems here and suggest that these exchanges should have been shut down much earlier. The fact that they were allowed to operate so long gave them the veneer of respectability which just brought in more suckers. Coinbase et al knew (or should have known) exactly what they were doing, they were making hey before the regulators caught up to them.
Nobody's claiming that the US legal system is perfect, but here we are. The wheels of justice grind away slowly. At least they're finally regulating these things.
People who want to ridicule complaints of a lack of 'regulatory clarity'. You can hold the view that crypto should have been aggressively regulated against much earlier, while also recognizing that regulators / the state have a due process obligations.
The state should not be allowed to take away your residency permit even if it was issued incorrectly 10y ago due to an oversight on their part. Similarly, it is reasonable to argue that the state should not be allowed to punish a business for behaviour it has tacitly approved of by doing nothing for a decode. It's not like Coinbase was doing this under the radar and the SEC just noticed recently.
> I think Americans should fairly expect their regulators to be clear enough about the rules that...
The trouble is that there aren't really clear existing rules - they are getting made at the moment by court judgement. If he had the power Ginsler would probably ban cryptocurrency but he doesn't.
- Just because something is a commodity doesn’t mean it’s not a security
- just because something is a currency doesn’t mean it’s not a security
There’s a reason why we separated exchanges, brokerages and clearing houses. Now it seems Binance is touching customer funds. Perhaps we just can cefi and use defi in crypto. If people want fiat on ramp they get a circle or tether account and redeem there
Off-topic but addressing the article, text which can be highlighted with a mouse should also be obviously a link (underlined, or in an aqua font in this case) if it functions as a hyperlink.
> On June 5, the SEC filed thirteen charges against crypto giant Binance, companies under its control, and its CEO Changpeng “CZ” Zhao. The charges against the companies involve unregistered offers of securities and investment schemes; failing to register with the SEC as an exchange, broker, broker-dealer, or clearing agency; and making materially false and misleading statements to investors. Two of the charges are against CZ specifically, as the control person over Binance and Binance.US.
The point here is that if the SEC is letting illegal businesses go public, it is doing really badly at it's job. If that is the case, it might be legal for the SEC to act that way, it would not make coinbase legal (permission to go public is not a get-out-of-jail-free card), but it would be really really damning for SEC leadership.
It would be like a cop giving a speeding ticket to a kidnapper and then letting them go because he's "just on traffic duty". That would be perfectly legal, that would not make kidnapping ok, but I'd still fire the cop for gross gross negligence.
It's not clear to me why almost any of these coins even need to be listed by regulated exchanges.
Couldn't they just stick with BTCUSD and a few others then let decentralized exchanges deal with crypto-crypto trade?
Would they really lose that much business? I always assumed (though I've never actually checked, it doesn't interest me that much) that almost all of the shitcoins were like, the long tail few % of revenue for these businesses, and it feels like that's where all the risk is, since Bitcoin is generally recognised as a commodity.
I mean, if needs must, spin off the shitcoin stuff into its own entity?
You could probably address 99% of the market only selling BTC, a stable coin, and small amounts of Eth needed for gas and then any other trading could happen on dex's. And you could make that a modestly profitable business if you run a tight ship. But you won't build an empire doing that.
Congress has been far from united on the crypto issue thus far, particularly in the wake of the FTX collapse, and the various drafts of legislation that have been proposed have largely been dead on arrival. But Coinbase has put a significant amount of time, effort, and money into lobbying: in 2022, they spent $3.4 million lobbying the crypto industry (on top of Binance’s $1.1 million spent lobbying in the US, all coming together to amount to around $11.9 million in lobbying efforts from the industry that year).
This seems like very little relative to a company worth tens of billions of dollars?
For context the largest tech companies in the world spend in the range of $5-20M on lobbying each year. So these crypto cos spending $1-3M is either very high or in line with expectations, depending on your perspective. For AMZN, my employer, $20M is pretty small compared to the $514B revenue and $10B in profit (excluding the rivian charge). Coinbase spending $3m does seem high in that comparison.
Lobbying isn't bribes to congresspeople. It's hiring some specialists who are known to congresspeople in order to sell those congresspeople a line. After a point more money doesn't buy you that much more benefit.
Pardon my ignorance, but what possibilities? It’s been more than 10 years since BTC was promoted as “peer-to-peer money transfer with no middle men!”, but in all western countries this idea has been rejected by public due to limitations posed by blockchain itself (e.g. no reversals). The past 6 years, all I’ve seen is either ICO scams, or casino-like trading which impacts the poor mostly (same concept as why lottery is being bought by poorer population at large).
We can’t even say “oh, it’s not even mainstream yet!”, as I’m sure almost everyone has heard of Coinbase, FTX, Crypto.com and etc. through superbowl ads or casual bar conversations. So, I get a bit confused nowadays when people say “US will lose by not adopting the technology”, since there’s nothing really to adopt yet.
I can think of many use cases that may be non trivial to get running. For example, if crypto had a privacy layer, which a lot of people are working on right now, it could easily enable a secondary market in digital goods, subscriptions etc. Imagine you bought a 1 year subscription to something which is locked behind some credentials. 2 months down the line you feel you're not using it a lot and would like to get some of your money back by trading those credentials. Crypto networks would enable a secondary market for those. Sure it can be done with web2 but crypto presents another possible solution.
It could also be a way to organise open source software communities around paid work that can incentivise activity around the preferences of the donor, in addition to the current model of free volunteer work. Even NFTs could be used as an abstraction for the access of digital properties. Their popular use for distributing art became a limiting distraction.
10 years since BTC is hardly enough time for anything. As more sophisticated features are developed for the underlying networks, good use cases will come. A lot of oxygen was sucked out by use cases involving speculative investment.
The gambling aspect of crypto is never going away and I don’t think its a problem. Some responsibility has to be taken by the people who chose to trust scammers with their money. In fact at the height of the NFT craze people who are public influencer types were openly scamming and rug pulling marks on fucking youtube. How many of them got arrested? It is right to ask for action against criminals. But instead of that you have US government agencies trying to shut down an entire sector of commerce just because some guy made important people in seats of power look bad. None of this is being done to protect the people who lost money.
I don't think crypto is valuable for things like poverty alleviation etc. That is a challenge which has to be taken up by individual countries. Anyone who says crypto is going to save the world should be looked at with as much scepticism as the tech founders 10 years back who were claiming to do the same thing.
Crypto is super interesting technology that is one of the few tools that can fight the inexorable oligarchization and centralisation of all things in this world. It can make a lot of people very rich by providing them with opportunities that wouldn’t be possible under the current system of monopolies and governments controlling access to everything. For that reason it doesn’t deserve to die.
In any case, SEC can only set back the adoption of crypto networks in the US. But as tech proliferates around the world, cutting crypto off from the home of “tech” will not kill crypto. It just pushes the timetable back a little bit.
Well their entire careers is to endlessly scream the complete destruction of all cryptocurrencies, which is simply not going to happen. It's all about the rolling out of the FedNow rails, to place their own CBDCs there.
Overall, this outrage (and the article) is nothing short of wanton alarmism and sensationalisation of the situation. Not a mention of the Ripple Labs vs. SEC case which in the latest of the case the SEC attempted to request the sealing of documents on Hinman's speech in 2018 which that request was denied [0] and will benefit Ripple's case against the SEC's internal decision making of the matter which is also relevant to the current Coinbase vs. SEC litigation.
China on the other hand is now doing the exact opposite. [1]
How? If CEX operations are restricted in the US due to excessive, antiquated, or ambiguous regulations, citizens would be left with fewer ways to acquire these assets including research and hobby usage.
To continue with Molly’s drug analogy: look at psilocybin, where academic, hobbyist, and medical research in them has been delayed for many decades due to unreasonable legal restrictions and ideological campaigns against them.
> If CEX operations are restricted in the US due to excessive, antiquated, or ambiguous regulations, citizens would be left with fewer ways to acquire these assets including research and hobby usage
They can publish hypothetical blockchains in peer-reviewed journals and sell overseas. The point is to separate "acquir[ing] these assets," which has been a money pit, from the potential benefits of the data structure and technology.
The emerging system appears to be China outsourcing this work to Hong Kong and America to London. We don't want the mess at home. But nobody wants to write off the people and projects.
A “hypothetical blockchain” sounds useless if it cannot legally be applied in practice. It’s the sort of draconian policy that HN commenters would abhor if it were anything but blockchain.
To use these networks—and to test & objectively measure them—you need to be able to acquire tokens.
Like it or not, crypto is going to stay. If the US pulls out the vacuum will be filled by those that the Americans consider criminal jurisdictions - Russia, China etc. or hopefully by competing powers - EU, Japan. The opportunities here as an alternate financial system will not be ignored by the rest of the world.
The desire that this should be confined to academic is nothing but a pipe dream at this point.
>> “Remember: The SEC reviewed our business and allowed us to become a public company in 2021.”
If it's normal for a startup to patch their software to keep up-to-date with changes/time, I wouldn't be surprised if SEC / Gov / Justice Dept updated their Views/Position with time!
Self custody is always the best route, if you know what you're doing. If you have zero clue on how to set up and secure a wallet and don't care to do it, Coinbase is probably an ok option, for now.
Not financial advice, but smart move to be buying ETH.
Yesterday would be fine too. In general you should not hold a balance anywhere but in a bank that is backed by the Federal Deposit Insurance Corporation (FDIC) or your local equivalent. If it's pocket change then it doesn't really matter.
FDIC is great, sure. But there's a significant difference in risk in having $500 in Amazon gift cards versus that store in the dying mall that's probably going to be gone in six months. And it's reasonable to try to figure out which one Coinbase is.
There are many value that are neither trivial nor worth the effort of upgrading from pretty safe storage to completely safe storage.
No. Part of the reason they went public is to show: “hey look we’re a publicly traded American company, not some legal entity operating out of a Caribbean country”. Them remaining an American company is a big part of their pitch for choosing them over others.
Look guys, people are allowed to write articles with an opinion you disagree with. If you want to tell us all you stopped reading when a comparison was that you feel is unfair take a moment to reflect that really, that just makes you look silly and tells us nothing about the article. It's honestly the weakest form of critique.
I think she raises some really salient points, and it looks extremely bad that the CEO of Coinbase is making clearly specious arguments. I don't believe the SEC's approval of his filing says anything about the regulations around this securities law. I think he thinks he can win some cheap PR points with people who don't know any better. Acting like that does indicate that he probably doesn't have any real defense. People don't make bad arguments if they have good ones available to them.
> The SEC just can't imagine a world where customers are fine without their 'protection'. We don't want your help, we don't need your help. GO away.
This is all well and good until you mess up the economic system for the rest of us. The Great Depression didn't just hit those with stock certificates. And the Great Recession didn't just hit those with mortgage-backed securities.
You might be sufficiently informed on the topic and sufficiently good at managing your crypto, but if you've seen the whining after any crypto company has turned out to be a scam or has otherwise failed, it's pretty obvious that most people cannot be trusted with the ability to participate in an unregulated crypto market.
In a way, the mere existence of these big centralized exchanges is indication enough of the fact that the average person cannot be trusted to handle crypto without government backing them.
Can someone knowledgeable here clarify if this really is the crux of the problem?
The previous HN thread seemed to mainly be of the opinion that Coinbase wasn't registering the non-Bitcoin crypto, but that the problem was the SEC wasn't giving clear guidance on whether they needed to be.
But I don't understand what ramifications that has. Why didn't Coinbase just register everything non-Bitcoin? Would that have limited/destroyed its business model in the way the quote above suggests?
Edit: thank you so much to all the replies so far! This is incredibly helpful.