> Customers won’t be “investing” in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship.
"Give me money for a fixed period of time and I'll pay a guaranteed return on your principal. No, it's not an "investment", you're just lending it in connection with our existing relationship!"
That's the impression I got from the article, but reading other comments in the thread it doesn't seem like that's an at all relevant definition of the term!
The capital is in theory at risk. The DeFi protocol could get hacked. Coinbase could get hacked. Coinbase could steal your money. Coinbase could go bankrupt.
The fact that their marketing leads reasonable people like you to compare Lend to a savings account with no risk, even in theory, is the choking canary of the mess.
In 2008, the banks failed. They put a gun to the heads of everyone in America and said "bail us out or you lose everything". So the bankers kept all their profits and everyone else lost big.
That is just one of many central bank failures. The only difference from the many small bank system that came before is that instead of a bank here or there failing and everyone else moving on, all banks fail at the same time. Don't count on that FDIC money either. It is setup as if only one or two banks will partially fail at any given time. In massive failures, there's not enough money to secure what they promise to secure (thus the gun to your head).
The real answer is to do away with the fractional reserve lending where a bank gets $100 and then proceeds to loan out $900. That would require banks to have much smaller profit margins and maybe even become not-for-profit entities, but we certainly can't entertain that idea..
I believe the government actually made a profit on the bailouts (the TARP program), probably because they bought while prices were low. Not that there isn’t a lot to criticize about how things went down.
I wouldn’t put too rose-colored-glasses on the pre-central bank era either, we still had financial panics and bank failures and the fact that the world is more globalized/interconnected now is probably true regardless of if we have a central bank or not.
> The real answer is to do away with the fractional reserve lending
I saw an interesting thought experiment related to this a while back.
Say country A is careful about making loans, and B is less careful. Country B takes out 300% more loans, and runs into a huge bad debt problem, and has to write down 20% of the total of all lending. Say people lose 20% of their bank accounts (maybe because the currency depreciates after a bailout).
Which country was more responsible? Country A right?
But if you look at the results, after the write down, country B has 240% as much stuff (housing, infrastructure, etc). And the people there also have 240% as much savings in the bank, since that’s mostly bank credit backed by debt.
The author made the argument that country A resembled Russia and county B resembled China.
Examples like this make me feel that the most responsible way to handle debt (at least at the public policy level) is not really very clear, since even doing things that seem responsible can have huge costs in the end.
For example his video at  is a pretty time efficient introduction to country-level debt dynamics (and it's endorsed by some high level people like the Khan Academy guy), and he also has a free book  that goes into detail for bunch of historical cases.
That is simply not true. It's a fiction (of sorts) told by people who feel fucked by the financial system.
I work hard and get paid $100 for what I did. I then deposit $100.
The bank loans $90 to person X.
Person X gives the money to person Y for some good or service.
Person Y deposits $90 and now there is $190 in the bank.
The bank loans $81 to person X+1.
Person X+1 gives the money to person Y+1 for some good or service.
Person Y+1 deposits $81 and now there is $271 in the bank.
The bank loans $72.90 to person X+1.
The last person deposits and there is now $900 in the bank when only $100 worth of actual work has been done. $900 has been printed out of nothing and the original $100 has been devalued.
I get 0.05% interest off my hard work while the bank gets 5-25% interest off of $900 in imaginary money (future earnings, whatever).
If I printed $900 and loaned it out, I'd be arrested.
Are you claiming that when person x gives $90 to person y for some good or service, no work was done?
It seems to me that there were 3 transactions totalling 271$ in goods or services rendered, and $271 put into the bank.
> If I printed $900 and loaned it out, I'd be arrested.
Yes, because you aren't subject to the various banking regulations. Oftentimes privileges come with responsibilities.
> I get 0.05% interest off my hard work while the bank
Well of course, leaving your money in a savings account is kinda dumb. You too should invest it in a more active way if you want to make a profit.
What you're describing is related to the "velocity of money" and "propensity to save" which are odd concepts but also one of the most direct ways behavior effects the economy.
>> If I printed $900 and loaned it out, I'd be arrested.
The bank didn't print one damn thing in your example. They loaned out money that people gave them as deposits.
> This article explains how the majority of money in the modern economy is created by commercial banks making loans.
> Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
> In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
To completely eliminate fractional reserve lending would be economic suicide. Without fractional reserves, lending gets incredibly expensive. Interest rates would have to be sky high to quickly recuperate money distributed from a loan to be able to fund further loans.
Should we raise the minimum reserve? Maybe. But the 2008 crash was caused just as much by people taking out mortgages they couldn't possibly afford. We really need to teach financial literacy and planning in our high schools to prevent people from being taken advantage of from banks that just want to sell as many loans as possible under the assumption that if a borrower defaults, they'll still come out ahead after foreclosure since real estate is assumed to nearly always appreciate.
but ir the srgument is its a savings account then theres regulatory structures for that which i doubt they are covered either.
people ultimately praise "disruption" itself when half the time its mostly breaking laws that may or may not have grown excessive redtape
Modulo any discernible path to profitability.
It's a margin loan. Which I hope I don't need to say is NOT risk-free.
We dealt with an identity theft issue around the same time that I was conducting some crypto transactions with Coinbase, and the difference in security was stark. My bank hides 2-factor auth behind an obscure account setting. If someone steals your account number, they can start making direct withdrawals immediately just by entering it into an ACH form that doesn't do trial deposits. The bank relies on you keeping an eye on your statements to notice this, and they won't reimburse any fraudulent charges over $1000.
Meanwhile, Coinbase defaults to 2-factor auth. They send you an e-mail if you login from a machine whose IP & browser fingerprint doesn't match one you've logged in before. They do trial deposits for ACH linking. They send you an e-mail whenever someone initiates an ACH deposit or withdrawal from your account. There's a mandatory waiting period (1 week I think) before the funds are available. I suspect they would suck just as much as my bank if you did get hacked (I've heard horror stories), but the proactive security measures give me a lot more confidence than the mainstream financial industry.
Money doesn't appear magically from nowhere. If someone is offering you return for holding your cash, it's not just sitting there. The risk is implicit in whatever they're doing to turn your N money into NM money: there is no way to absolutely guarantee that M is >0.
I wouldn't put my money in a bank that wasn't covered by the FDIC but who am I to tell someone else they shouldn't be allowed to -- especially if interest is better.
Therefore, rates in more ambiguous instruments should be higher than those in more certain ones, no?
 at least short-term
But I guess if you want to offer a "savings account" then you need to be a licensed bank and meet all the requirements and regulations that come with that?
I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.
Best I can tell from my research defi is being used for holder of volitile lower quality coins to exit without triggering a taxable event.
This is based on how all the pools I found had clear lopsided supply of lending and borrowing. Stable coins all had the highest rates, with btc and eth being middling, and a flood of alt coins sitting in pools earning zero returns.
This makes perfect sense. Margin loan volume is too low to explain the lending size. Likewise margin would want to borrow high volatility coins, and never stable coins. And yet stable coins are offering the highest interest precisely because stable coin borrowing is in demand.
Overall defi makes sense if it is about holders of paper gains exiting with debt to avoid taxable events. It does suggest a worrying risk profile I suspect everyone is underesitmating: many borrowers do not care about the coins they put up as collateral.
Oh, you can use "shitcoin" X as collateral for a loan in "stablecoin" Y? Can the borrower then selectively default if the X/Y exchange rate moves in their favor? In which case this is just a funny-looking option.
> holders of paper gains exiting with debt to avoid taxable events
A similar scheme was used to evade income tax in the UK with "loan forgiveness" for a while, but was ruled unlawful. I suppose the more crypto steps you put in the harder it is to trace.
They very much can. For that reason though, the loans are always over collateralized so defaulting involves leaving some money on the table. That money could be less than hypothetical tax payments though..not sure.
But yes, DeFi seems to me mostly zero sum gambling where the risks are shifted around until nobody understands the system any more which naturally means that there is no risk any more.
E.g. if I borrow $1,000 from you to bet on a roulette table, you suffer the downside if I lose and can't pay you back, but it's still in my interest to win.
Why do they think they aren't securities?
Because they obviously meet the Howey test, and while they may have “expected” that they would be regulated by another body (and which and on what basis?), they obviously haven’t done what it would take to make them (for instance) FDIC-insured depository accounts rather than SEC-regulated securities.
FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
Yes, it does.
> If it's not securitized and it's not tradable, it's not a security.
Neither securitization nor marketability are requirements for something to be a security.
> FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
No, it doesn't. The Howey test applies to commercial paper, tradability is inherent. In that sense, the Howey test isn't the only test for a definition of a security...it is a test that applies to anything that is a tradable financial instrument.
If the Howey test was the only test used to define a security, your bank account would be considered a security. But your bank account is absolutely and definitively not a security, and it is regulated by the FDIC, which has no authority over securities.
> I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
This is obviously and demonstrably false. Even if this product was a security, which it is not, the classification of something as a security does not mean that the SEC has authority.
Futures - a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Futures - a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Future Options - a security of a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Howey itself did not concern commercial paper, so if the Howey test only applied to that, it would be nonbinding dicta.
«an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.» 
Even if you are right that tradability is not a requirement of a security, and even if you are right that this meets all of the requirements of a security, I still don't see how the SEC has jurisdiction here. The Securities Exchange Act explicitly exempts bank notes with duration of less than 9 months from SEC regulation. Interest bearing bank accounts have the unique feature that they have no required investment term: you can deposit for a century, or you could deposit for a millisecond...the interest is paid for the duration of the deposit, and the duration is entirely determined by the depositor, and is not a term in the contract. The SEC admits that even short term CD's (undoubtedly an investment contract that passes the Howey Test for a security) do not meet its legal bar for jurisdiction, so why they would try to apply it to a unrestricted withdrawable account (regardless of the underlying asset class) is absurd to me.
No, it is broader than that; it is not limited to bank notes or durations less than 9 months, but to any bank-issued security; but since Coinbase is not a bank as defined in the Securities Exchange Act , the bank-issued securities exception is immaterial.
 to wit, per 15 USC § 77c(a)(2): «any national bank, or banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term “bank” has the same meaning as in the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.]»
It is not required for it to be issued by a bank for it to be exempt.
The whole point of the Howey test is to focus on what the transaction does, not it's form, because it was trying to prevent people from tap-dancing around the regulation, exactly like what Coinbase is attempting to do here.
Do you have a reference for that? Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description (and, of course, the outcome was that they were considered securities).
The Howey case actually refers to them as "investment contracts", which I presume is language from the securities act itself. This seems like better terminology than "securities", if only because it doesn't so obviously conflict with the colloquial meaning. I'm not sure how we got here from there, although the "securities act" naming probably didn't help.
The property sold in Howey was marketable and the service contract was held out to any owner, so while I agree that neither securitization nor marketability are requirements, marketability was present in the Howey arrangement.
"In theory", and in practice, all investments are at risk.
How anyone can look at this gimcrack investment and think it's riskless is beyond me.
If Bitcoin were to drop to 1000 - and given it has no fundamentals and offers no actual services beyond a very volatile value store, why not? - then all of these companies would collapse like a house of cards and all these savings accounts would be worthless.
> So it's more like a savings account than an investment account.
If you recall, plenty of people lost everything they had in their savings account in bank crashes before FDIC insurance existed.
The rule is basically: "If you're giving someone else money in the hope of getting more money back later, it's a security UNLESS it fits into a list of exceptions, or if it meets the criteria to be added as a new exception."
So a savings account would absolutely be a security, unless it fits into one of the recognised exceptions. One of those exceptions is the existence of an "alternative regulatory regime", ie, there being some other framework, other than security laws, to protect people.
For a savings account, the fact that banks are federally regulated, and that deposits are federally insured via FDIC, means they don't count. But Coinbase's Lend program does not seem to be subject to any other regulatory regimes, so...
In fact, the very fact that they went to the SEC to tell them what they were up to and check if it was legal is a bit of a red flag. The SEC enforces security laws. The fact Coinbase couldn't go to the Federal Department of Enforcing Crypto Lending Regulations is a sign that this falls under security laws, because there is no stand alone Crypto Lending Regulations to enforce.
It made me understand that this is all about protecting the customers investment, and, if nobody is protecting it, then it would have to be the SEC who does it, but they can only do this if it is a security. If it isn't a security which has to be protected by the SEC -- like Coinbase is claiming -- then who is protecting it? This appears to be what the SEC wants to have answered. Coinbase instead wants the SEC to tell them what to do about it, but that they don't want to set it up as a security. Yet Coinbase would be happy with just proceeding without any protections in place.
Just like Texas abortion laws, this is not enforced against the US resident, it is against the service providers, which has allowed this framework to persist for 70 years.
The institutions that would want to operate these have the power to run massive advertising campaigns promoting them as the best place to earn money (with a bunch of quick disclaimers just like the various medical ads that people have gotten so used to now).
The people who would be preyed upon by this are not those with the education and experience to tell what's a sound investment and what's a bunch of bullshit, but precisely the opposite.
And though I know that there are many—perhaps you're among them, perhaps not—who would say "anyone who can fall for such a scheme deserves to lose their shirt", personally, I believe that we live in a society and we have a greater duty to care about each other than that.
In practice, it locks them out of scams.
It is horrendously irresponsible to enable practices that we can predict will, with very high probability, result in significantly greater ability for predatory and unscrupulous actors to take advantage of the public, especially if the purpose is merely to allow the wealthy—and it is only the wealthy who can genuinely take advantage of such things; the rest of us simply can't afford to take those risks—to try their hand at high-stakes gambling.
It is an overfitted system that has created more and more compliance in response to rare scams that occurred within the rules of their system anyway! If companies didnt find it too expensive to go public earlier nobody would be trying to have this conversation. People wouldnt be getting ripped off in massive SPAC deals because the target companies would be public already.
"regulated as a security" itself can mean 100 different things, and its not a nuanced enough take to know if a product can be offered at all, to whom it can be offered to, what disclosures are necessary if any, and more
They are expecting Coinbase to show them who is regulating them. If they don't do it, they must be sued.
Coinbase is promising a fixed 4% earning. If they are to be taken serious, 4% does not mean the risk of losing it all, like in a casino.
The whole situation smells of a turf war between regulatory agencies, which is entirely in character for the SEC. They've been doing the same shit for years with the CFTC. You're no longer allowed to trade forex using the same account that you trade stocks with...not because the SEC regulates forex, but because they want to regulate forex, and are trying to strongarm the CFTC into ceding it's jurisdiction by crippling the forex market. This is plainly another turf war play, trying to grab territory that is far more cleanly regulated by FINRA.
> For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA.
Cryptocurrencies are not generally securities, though some may be. To the extent this isn’t limited to securities, it would not be regulated by FINRA.
> their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA.
FDIC doesn’t insure, and therefore regulate, cryptocurrency accounts. I’m reasonably certain Coinbase is aware of this fact. 
> The whole situation smells of a turf war between regulatory agencies,
Which other regulatory agency is asserting authority?
Neither the SEC nor FINRA has stated anything public about this at the moment, but I'm willing to bet FINRA will go to bat for this.
If the SEC says no, FINRA can't say yes, because (to a first approximation) that's their boss.
And just from first principles, I'm not sure that FINRA, an organization largely dominated by traditional broker-dealers would be willing to go to bat for a weirdo newcomer. If they aren't doing the basics of building relationships with the SEC, is Coinbase building relationships with the other companies necessary to get FINRA to go to bat for them? But again, not sure about this, just a bit skeptical.
Coinbase certainly started out with the rogue "Can't touch me, it's crypto" bullshittery, but over the past 6 years they have been one of two exchanges (the other being Gemini) which have actually taken regulatory approval and collaboration seriously. Maybe the SEC's fines and handslaps have made them fear the alternative, who knows. Whether that means that they can really have any influence over FINRA is yet to be seen.
You might come to this conclusion if you think of laws as creating a fine boundary between legal and illegal. In crypto in particular, there are a ton of open legal questions that the SEC has not given explicit guidance about and certainly have no settled legal precedent in court.
The SEC has the ability to write you a get out of jail free card, actually. You write to them and ask them to give you a letter saying they OK'd the thing you're doing as a one-off and that they are not issuing a general rule that that kind of thing is ok (in case they change their minds later).
It sounds like you're saying the banks get a special carve-out to provide this service simply because the regulator is different.
On a fundamental level though, I still don't see the difference.
I do have to disagree with the last paragraph though. Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.
Metaphorically, Coinbase just went to the police department and explained in great detail their intention to sell hard liquor without a liquor license. Under sworn testimony, they explained... 'you see, we are just providing the same product as licensed liquor stores, so it's all good'.
FDIC is a perfect example! There are accounts I know and would expect that but there are times I'm willing to waive that for compensation. Welcome to the land of crypto where nothing is FDIC and the government isn't going to protect anything.
Public opinion matters because it can be the very conversation that gets politicians to challenge the existing laws to be changed.
Where to draw the line?
Who should draw it and by what mechanism?
The democratically elected government seems like a good place to start!
So yes, banks are one of the exemptions, because they have their own regulator (which is one way to get on the white list).
> Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.
No, the red flag is that Coinbase (correctly!) understands that the SEC is the relevant regulator. Your local credit union does not go to the SEC when they want to offer a new type of savings account because the SEC does not regulate credit unions. Which is good, because the SEC is only competent to apply securities law, and securities law doesn't allow savings accounts.
So yes, absolutely you should consult with the relevant regulator, and if the relevant regulator for you is the Office of the Comptroller of the Currency (who regulate banks), they're probably going to cheerfully sign off on your savings account idea; they like savings accounts. But for Coinbase, it's not the relevant regulator, because they're not a bank. Nor do they seem to fall into any of the other many exceptions and regulatory schemes so...
The thing is that this really isn't an investment. An investment looks like this:
- You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money.
A rental looks like this:
- I need a piano for 6 months. You have several pianos. You let me have one, and every month I can either give you $50 or return the piano.
Stock borrowing works that second way, except that instead of a piano, it's a share of AAPL. There is no project involved, but the share of AAPL lives in my house instead of your house, and every month you get $0.04.
Interest is also on that second model, so in that sense it's not different from interest. But neither is the piano rental.
If I put money in your bank-like-thing, expecting to get more back at the end, it's an investment.
> I'm guessing the concept is more like stock lending fees
Those are investments too. Their technical name is "repos", short for "repurchase agreements".
That’s venture capitalism which is just one of the many different types of investing. Buying pianos in order to lend them out is another type of investing.
But the example here is renting out a piano you already have, not obtaining a piano so you can rent it out.
Corporate fixed-coupon bonds are corporate offerings of simple interest-bearing instruments, and are regulated as securities.
I don't understand it nearly well enough to explain it, but the wonderful Matt Levine has given it a shot: https://www.bloomberg.com/news/newsletters/2021-08-09/money-...
The exceptions make the rule.
Especially the big glaring exception for securities maturing in less than 270 days being completely exempt from the act no matter the nature of the transaction.
There is a difference between excepted practice, regulator musings, and using a plain reading of the law no matter what people think.
Protip: the regulator has no idea which part of the law you are using, and legally cant know when your lawyers have all the supporting documents. Make it more expensive for the regulator to find out, so they’ll choose to go after people without lawyers instead, who cant afford their rights. USA
This is false. Commercial paper (not any security) maturing in less than 270 days is exempt from registration. (Like shares in private companies.)
The other provisions of the Securities Act of 1933, as amended, still apply.
Sure, don't start manipulating your market or front running everyone.
But for me that's enough. Everyone can issue to everyone and everyone can trade. That's what we're going for. And if you believe that means the SEC can still police and protect gullible easily swayed people, isn't that what everyone wants? That's a perfect medium.
The act does not mention commercial paper, it is clear that the purpose of the exemption is to not disrupt the trade of rich people in the commercial paper market. Even more reason of ignoring the commercial paper assumption and corroborating musings of the regulator. People are just afraid of challenging it because so much money is involved and they don't want to to take a risk as an issuer which typically requires a relationship with the regulator, and a relationship with the investors, and a way to actually make an attractive enough return. Markets weren't fast enough for that most of the time, now it is. Its ripe for disruption and challenge.
The commercial paper registration exemption exists because the Fed regulates it under the Bank Act. If the Fed won't accept your CP at its discount window, the § 3(a)(2) registration exemption doesn't apply .
And that aside, I personally think the question of whether Lend is a security is a red herring thrown out by Coinbase. According to Coinbase, the SEC said "they consider Lend to involve a security." Not that it is a security.
It is much more likely that Lend crosses over into bank- or broker-dealer-like activity. This hypothesis is strengthened by the SEC warning Coinbase and not Gemini, who are regulated as a trust company by New York, or Kraken, who are regulated as a bank by Wyoming.
> act does not mention commercial paper
The Securities Exchange Act of 1934, which created the SEC, absolutely does, under the section titled "exception for certain bank activities" .
Grewal was a federal (magistrate) judge in SF before he quit to go work at Facebook. Everyone I know that has appeared before him has thought that he was very good. I'd like to give him the benefit of the doubt - his entire legal career has been patents. Perhaps he truly doesn't see how this applies. But you are right, this just seems... off.
EDIT - I've read this a few times, and despite where it says that this is not an investment or note, it sure sounds similar to the unsecured demand notes that some car companies use for their captive finance operations (in day-to-day operations, they are virtually indistinguishable from an interest-bearing checking account). And those are most definitely SEC-registered securities.
No, in this cass (that is, the case of the article under discussion) his job is to act as a PR representative of the company in the course of action it has chosen which is leading to imminent legal conflict with the SEC.
It’s true that he also had the job you discuss, but this article isn't the output of that job; that would be found in confidential internal advisory memos to the board and other executives.
It’s not a binary: Is this legal?
It’s: Can we get away with this?
I'm confused, is patent experience particularly relevant to this case about securities law?
> A "Wells Notice" is a letter sent by a securities regulator to a prospective respondent, notifying him of the substance of charges that the regulator intends to bring against the respondent, and affording the respondent with the opportunity to submit a written statement to the ultimate decision maker.
So did they receive a notice with the charges or didn't they?
To me: "planning" is the key term.
The Wiki article is short and dense. I highly recommend it!
"an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise."
So presumably the logic is, lend is a security because people are "investing" securities in a contract and expecting returns not through their own efforts.
Sec has additional guidance here: https://www.sec.gov/corpfin/framework-investment-contract-an...
This is like accidentally sealing a snail in a bottle of kombucha and making a blog post about how you don’t think it constitutes negligence because you haven’t read Donoghue v Stevenson but you heard it was actually about ginger beer.
Yes, there is.
There is just a cause of action if the variation happens. But, a big point of securities regulation is to protect before money is lost on illegal offerings.
> Coinbase could spend all of the money on JPEGs of my cat and they would still have to pay a 4% return to the people they borrowed the money from.
Well, they would still owe it. They’d also potentially be bankrupt and not have to pay it. Counterparty risk is real risk.
Corporate bonds can be fixed interest. Corporate bonds are definitely regulated securities, even when fixed interest. Therefore, being fixed interest does not suffice to make an investment offer a non-security.
 Right? Counterparty risk!
Bonds are raised from a diverse set of investors. Loans, in securities parlance, are raised from (and syndicated by) regulated banks.
Similar, you can sell shares in your business to your friend or business partner, but if you want to sell to the general public, the SEC is interested.
(I have no clue whether this distinction is the important legal one here.)
A cursory search of "loan vs bond" yields many interesting results. I am sure the variance matters from market to market.
Yes...and? Are you trying to explain why, when other Howey-test factors are present, a fixed-return guarantee does not alter the determination that an offer is a security, or argue against it? Because it seems like you are trying to do the latter while actually doing the former.
There is of course software risk in the smart contract (although I think people underestimate that in conventional finance too).
Which is why I didn't say it. One of the nice features of smart contract platforms is that any two people can quickly set up a transaction where they swap a basket of assets for another basket of assets atomically and without counterparty risk. To get similar guarantees in tradfi requires either an underwriter (that we assume can't go bust) or escrow (with a party we both completely trust).
Smart contract systems are of course infinitely flexible, and some of the most useful kinds of systems you might want to build are not overcollateralized, but those that are can liquidate automatically with no counterparty risk.
Your comment seems to treat 'defi' as just one thing. It's not. There're a huge range of products offered, with risk ranging from lower than lots of traditional products to crazy high.
Of course there is counterparty risk - the contract writer could be adversarial. People dont always audit smart contracts (or may not realistically be able to, especially if the contract writer is attempting to obfuscate a subtle bug they can use for their own advantage). Thats the point of the above comment.
If the traditional world, courts would interpret such a contract as not valid. In the DeFi world, code is law - at least until law enforcement and regulatory agencies catch up to it.
Fair enough, if you consider that to be counterparty risk. I prefer to think of that as an entirely separate kind of risk ('software risk'). This is partly because these contracts can be written by entirely separate parties having nothing to do with the counterparty (and sometimes provided as public infrastructure, since they don't cost the writer anything beyond the initial deployment cost).
I suppose to some extent it depends whether you consider the smart contract itself as a virtual counterparty that could default either through malicious coding or through bugs that allow hackers to steal assets.
I also don't see any problem with combining smart contracts and real legal contracts. If someone scams you in the DeFi world, they're scamming you in the real world too. I know that at least the UK Supreme Court has ruled that digital assets are property at common law.
There is no such thing as overcollateralization. Higher levels of collateral are required against higher levels of risk. If one party is required to post "excess" collateral, that's because the risk is greater than whatever you think it is.
The very fact that certain DeFi projects dealing in things like stablecoins require obscene collateral is proof that there is tremendous risk...and the high levels of collateral are an attempt to mitigate some of that.
No, they are _promising_ you a 4% return - hardly the same thing.
There is a non-zero risk that they'll go out of business. Companies go out of business all the time, sometimes with no warning at all. I worked for a company that was for a short time the largest private company in the world. Within two years, the SEC showed up one morning, and told all the traders to perform an orderly liquidation, because the company was insolvent.
If they go out of business, you might even lose some or all of your principal.
Ask yourself this: when savings rates are around 1%, why do they have to offer 4% if this is riskless?
Surely the efficient market hypothesis means that that extra 3% or so is what they perceive people will want for bearing this extra risk?
No. By that standard, no bonds would qualify as securities.
That being said, loans are not usually considered securities.
Although they are regulated by FINRA.
A bunch of machines and a factory is not a security, but you can package it into a security.
No. Banks are regulated separately and more strenuously than securities firms, much less issuers. If Coinbase wants to offer Lend as an FDIC-insured deposit account, I’m sure the SEC would be fine with it. But Coinbase can’t do that because it doesn’t follow the rules banks must follow.
According to Coinbase, the SEC said "they consider Lend to involve a security." Not that it is a security. The second question is (a) more ambiguous and (b) a red herring from Coinbase.
If Coinbase is taking deposits from customers to engage in securities trading, it's acting as a bank or broker-dealer. It is registered and regulated as neither. Note that Kraken and Gemini have state banking charters. Coinbase is drawing a false equivalence. The entire enterprise stinks of bad faith, possibly fraud.
a) "You can make a plausible legal argument for why Lend is a security."
Their frustration, rather, is that:
b) "The SEC is not doing the same thing for near-identical offerings like Gemini Earn." and
c) "The SEC won't actually tell us what basis they're appealing to or how this relevantly differs from the others."
Agree, it is PR, they know it is a security and they have been able to get away with selling unregistered securities for so long, that they do have a legit reason to question why the SEC is just now starting to do their job.
I wonder if Texas will extend the decentralized 'enforcement' nature of the abortion bill also to those selling unregistered securities?
If you do not have to be directly harmed in order to sue Coinbase for breaking the law, you didn't have to wait for the state to actually enforce the laws that is...
I don't think that is good policy, but if we are going to do it with abortion, why not extend it to money transmission and securities laws?
I would not, for instance, get this conclusion:
<<The notice indicates that the SEC staff has determined it may bring a civil action against a person or firm, and provides the person or firm with the opportunity to provide information as to why the enforcement action should not be brought. The person or firm is generally given 30 days to file this response in the form of a legal brief considering legal and factual arguments as to why no charges should be brought against them.>>
Like all civil matters, a person can negotiate with the (allegedly) aggrieved party, in this case the SEC, and settle the matter with them before a suit is filed.
That's not true.
> They’re civil enforcement so they can only pursue fines and injunctions
A lot of SEC things are both civil and criminal, and while the SEC doesn't file criminal charges, it does send referrals to DOJ. So, yes, though there are more steps before it gets to jail time, disputes with the SEC do carry that risk.
I believe you can file an action seeking a declaratory judgement, but as I understand there is generally little reason: a Wells Notice is not, as I understand it, a “we might sue you if you do X” thing but more of “our staff have determined you have done X and that we should sue you for it on basis Y, but you have an opportunity to submit a legal brief to convince us that our staff are wrong before we approve their recommendation” thing.
A lawyer never assumes what the other side’s argument is, because your rebuttal hinges on exactly how their argument is constructed. Plus you don’t want to give your “opponent” ideas, nor do you want to essentially negotiate against yourself. If you lay out a defense, without a clear thing you are arguing against, the other side could just change their planned argument and say “ok THIS is our actual argument now”. The defense responds, not initiates.
So this article makes sense to me - while Coinbase can clearly guess what the SEC might argue, the fact is the SEC hasn’t told them yet. So there’s nothing to respond to (yet).
The US Dollar isn't a security (it's a currency), but many USD lending platforms in fact offer securities. Bonds can be denominated in USD and they are securities.
My house isn't a security, but when my bank decides to package the house-backed mortgage and sell it as MBS, it's a security.
Personally I've never seen the SEC consider loans as securities before, so it seems reasonable to ask for their reasoning.
Coinbase offering interest bearing assets is taking business away from the banks. Hence, the SEC will be used as guard dogs by the banks to at the very least slow them down.
The rule should be applied across the industry in a standard manner, no matter which direction the SEC rules, and it is apparently not being applied consistently currently.
It feels like your reaction is akin to a group of 5 cars speeding back to back, and the cop picks off the first guy to get a speeding ticket. They're all speeding. It's illegal for everyone. Enforcement resources are limited and they choose one to make an example of. If the others keep speeding they'll get caught afterwards too. Is it unfair the cop grabs the first guy? In a sense. But also so long as it slows everyone down; mission accomplished.
Your analogy isn't very good. Offering a long-term financial product isn't like a one-off instance of speeding where it only last a few minutes. It's more like group A getting ticketed every day for speeding while going with the flow of traffic, and group B never gets ticketed for doing the exact same thing, and, oh, group B makes more donations to the police.
Your reaction is akin to someone who sees that going on, and says it's okay because police don't catch every speeder. "As long there aren't accidents: mission accomplished."
Believe me, I get the concept of not catching everyone. Letting a financial product persist for one company but not another isn't that!
>The SEC didn't say that everyone else could do it.
Yeah ... they did. By not prosecuting the others who have already started doing it, and been doing longer, or clarifying what's different, or at least saying "oh don't worry, they're going down too".
If I'm wrong here, it's for reasons other than not understanding the concept of not catching every violation.
I'm sorry - they know what it is. Any lawyer will tell you exactly what it is. It's the Howey test, it's been the law of the land for 70 years and the SEC issued guidance on how it applies to digital assets.  Literally the first page of the Securities Act of 1933 explains that lending products are securities.
Brian is feigning ignorance on twitter while acting indignant that someone told him no. His lawyers told him no. The SEC told him no. He said I'm gonna do it anyways. They said see you in court. He follows up with a late-night twitter rant, roughly "how could the SEC do this? how could a lending product possibly be a security?!"
 The man literally owns an SEC registered broker-dealer lol.
 Even Preston Byrne from Anderson Kill tweeted today that it was obviously a security. That's the most libertarian cypto-sympathizer attorney on the face of the earth.
> Your reaction is akin to someone who sees that going on, and says it's okay because police don't catch every speeder. "As long there aren't accidents: mission accomplished."
Regulators don't act day 1, legal proceedings take time. You're saying "because they took the usual amount of time everyone should be allowed to do whatever they want - or they should sue them all, all at the same time." Nope. That's not how this game works.
They can't stop everyone at the same time, and they can't jump them on day 1. They're not omnipotent, and they certainly don't have unlimited resources.
What Brian wants isn't to work with regulators, its for regulators to let him do whatever he wants on his terms and on his schedule. That's not the same thing.
Did you miss where I said the issue is that they're being treated differently? I spent at least two paragraphs on the concept. Even if it's "obviously" a security by the Howey test, that doesn't explain why others get a free pass, or why they can't confirm that's their reasoning, or why others aren't being treated the same, or a why they can't confirm they intend to treat others the same.
Repeating the same argument doesn't advance the conversation!
See also this comment: https://news.ycombinator.com/item?id=28459949
>Regulators don't act day 1, legal proceedings take time.
Again, I understand this concept, it's just a red herring. they're on day 180 with Gemini and day -30 with Coinbase. Saying it takes time is just an easy soundbite for you to parrot, not an actual explanation for the discrepancy, just like "we can't catch all speeders" isn't an explanation for the patterns in which you let speeders go.
> Even Preston Byrne from Anderson Kill tweeted today that it was obviously a security lol. That's the most libertarian cypto-sympathizer attorney on the face of the earth.
Which of my arguments is that relevant to?
1. Coinbase Lend is clearly a security.
2. ...because it fails the Howey test.
3. ...for reasons that are clear and self-evident.
4. ...and Coinbase, as a registered broker-dealer would know or be expected to know that in advance.
[note: for 1-4 see Anderson Kill]
5. There's a few people offering similar products.
6. They're all doing crime.
Here's where we seem to disagree.
1. Coinbase should be told by the SEC exactly why it fails the Howey test. No. It clearly fails, and the SEC isn't required to provide their opinion of why outside the court of law. It is up to the SEC and Coinbase to present their arguments to a judge. The resolution will form precedent.
2. Coinbase is being treated differently in some way, and that's bad. The first person charged for anything is obviously being treated differently, until the others are charged. That's not bad, that's bad luck. See the speeding cars anaology.
3. The first person to commit a crime has some obligation to be charged first. No, they don't. Usually police and regulators go after who they have the strongest case against in no particular order. The resolution gives them a weapon they can use against those they have a weaker case against.
4. All criminals committing the same crime should be charged together or at the same time. No, there's no expectation of that, or precedent of that. In fact its usually easier when the cases are separate.
5. This is taking a long time because some other offerings have been on the market for 6 months. The SEC just went after Bitconnect. That was in 2016. The wheels of justice turn slow.
You'll have a point if after Coinbase is convicted the SEC leaves everyone else alone. Until then its safe to assume they're being made an example of, and with that example the SEC is going to come by and knock some heads together.
No, not a point of agreement -- if the SEC is silently accepting a new exception to Howey based on market realities, then what Coinbase is doing isn't a crime. We don't know until they go on record saying what their opinion is. That happens all the time in regulation: they realize, long after the fact that something is technically violating the rules but just grandfather it in since it's become so ubiquitous and issue new clarification. But it helps to know what the case actually is!
That's the problem with stonewalling: You don't know what the other side actually objects to!
You seem to be in some kind of mentality where equality before the law doesn't matter, and if some people are persistently let of off the hook "that's just life, man". No ... that's not how rule of law or ex-3rd world regulation works. Haphazard enforcement isn't just a "fact of life", it actively disrupts the functioning of markets, and you don't look clever with the sage "it is what it is" attitude.
>Coinbase is being treated differently in some way, and that's bad. The first person charged for anything is obviously being treated differently, until the others are charged. That's not bad, that's bad luck.
Wait, really? You're saying that turning a blind eye to persistent violation is "just" "bad luck"?
Okay I just wish you had initially been clearer about your premise of rejecting equality under the law. Then again, that would have made your position more obviously wrong, and your arguments seem less clever, so I can see the tendency to avoid that!
It's probably similar to the reason why you make huge edits to your post long after the fact without noting them.
That's not what they're doing, and yes it is a crime lol. It would work just as well with murder, but you're choosing to look the other way because it's white collar.
> That's the problem with stonewalling: You don't know what the other side actually objects to!
No, that's why I re-stated my assumptions, including any potentially hidden ones, so that you could follow up and respond individually and explain where the gap is. This is a useful tool to resolve conflicts.
> Wait, really? You're saying that turning a blind eye to persistent violation is "just" "bad luck"?
No, I'm saying the wheels of justice turn slow and this shit takes time  and regulators literally have to start somewhere because they have limited resources. So long as it happens within the statute of limitations its explicitly in play.
> Okay I just wish you had initially been clearer about your premise of rejecting equality under the law.
You're obviously either misreading my point or not interested in understanding. You pick one. Get a judgement. Apply that judgement. This is equal treatment.
> It's probably similar to the reason why you make huge edits to your post long after the fact without noting them.
No, I limit my edits to the first two to three minutes after I write a comment, to before anyone can reply. If someone can reply I annotate my edits. This is my workflow.
 My point is it's way too soon to know if you're right or I'm right, we must wait and see a year from now, or two years from now. 180 days is nothing.
The whole point of asking the SEC is to know where they fall, since it's unclear whether they've silently accepted stuff like Gemini, or whether there's a substantively different or whether they will prosecute. Assuming that it's a crime is assuming away the core point of contention!
>>That's the problem with stonewalling: You don't know what the other side actually objects to!
>No, that's why I re-stated my assumptions, including any potentially hidden ones,
I was referring to the SEC's stonewalling there, not your tactics (though they're similarly unproductive).
>No, I'm saying the wheels of justice turn slow and this shit takes time  and regulators literally have to start somewhere because they have limited resources. So long as it happens within the statute of limitations its explicitly in play.
Yes, I heard you say that, and I get that you don't see the similarity; the point was that these are substantively the same thing in that they persistently introduce an unevenness in the playing field; the fact that you can ignore that dynamic doesn't mean it's not a flaw your position or that you aren't effectively endorsing such inequality before the law.
>You're obviously either misreading my point or not interested in understanding. You pick one. Get a judgement. Apply that judgement. This is equal treatment.
And then, learn how judgment is spelled if you're going to use it so often and use confidence and intimidation as a substitute for substantiating your position.
>No, I limit my edits to the first two to three minutes after I write a comment, to before anyone can reply. If someone can reply I annotate my edits. This is my workflow.
No, I saw your comment more than 3 minutes after posting and it had significant un-noted edits, and now you're just mocking me by flooding your comment with .
>My point is it's way too soon to know if you're right or I'm right, we must wait and see a year from now, or two years from now. 180 days is nothing.
No, you've definitely phrased your comments with significantly more (unjustified) confidence than that. See "yes it is a crime lol".
My dude I took your feedback lmao, if you can't assume good faith here this conversations over.
Suing Coinbase first -> "beginning their enforcement actions at Coinbase"
Which exactly fantom argument is 'the first page of the Securities Act of 1933'?
Do I know for a fact they're going to go after everyone else? No, I don't work there, time will tell.
Coinbase may not have known the SEC's opinion on this before they started talking to the SEC since it seemed like the SEC was ok with it happening elsewhere.
I dunno, seems like an obvious interpretation but I could be totally missing it. I could care f.all about the SEC and blockchain coin stuff.
The wheels of justice turn slow but they generally don't stop when they get to ya just because there's a big line of folks behind ya.
Unless either the statute has expired or the SEC issues a written determination that you're in the clear you're not in the clear. And neither is anyone else doing the same thing.
Or you know the SEC is allowed to announce /why/ they are prosecuting. And why they are prosecuting a particular alleged transgressor first as opposed to some other having not done so until now. Seems like a reasonable thing to do to me?
Generally ".. a written determination you're in the clear" is the opposite to how law is kind of meant to work. I haven't got a written determination that I'm not infringing basically any law that I'm aware of and I do _NOT_ expect to be prosecuted for anything either. I genuinely don't understand all the laws I'm subject to in making money to put food on the table, nobody does. I do know that I'm doing things other people do and nobody is getting prosecuted for it. I have other heuristics that I use for this. And so do you, I'm guessing. The great thing is if I get prosecuted I can hire a lawyer and they don't know for sure either and will hedge every statement they make as a part of legal advice about everything while disagreeing with every other lawyer. It's an issue. I don't have a solution for it.
They are, but they don't have to since the law is spelled out.
> And why they are prosecuting a particular alleged transgressor first as opposed to some other having not done so until now.
Gotta start somewhere, and the fact someone else is breaking the law isn't a defense. If it was any two people doing the same crime couldn't ever be charged right? haha.
> I haven't got a written determination that I'm not infringing basically any law that I'm aware of and I do _NOT_ expect to be prosecuted for anything either.
Totally, but the Howey test has been the law of the land for what 70 years? It's prettttty obvious that this is in fact a security. The SEC agrees. Coinbase does not. Ergo, it's up to the judge to decide. This is about as black and white as the rule of law thing gets.
It shouldn’t be a surprise to anyone in this space.
The only other companies that will be able to offer something like that will be mega corps like the big banks, PayPal, etc. If they need to also buy large amounts of Bitcoin as collateral, that’s a win-win for their entire industry (price goes way up).
The name of the game is not user adoption. The name of the game is pump the price, because that’s marketing on its own.
BlockFi's lending product has already been banned by several state regulatory agencies, but if they've been sued or warned by the SEC, I dont think thats been made public.
But when you go public you enter into a whole new level of scrutiny, because regulating public markets is why the SEC even exists.
Kraken offers staking services , which are technically not "lending", but are staking rewards gained from staking assets in proof of stake protocols such as Ethereum 2.0, Polkadot, Kusama, Cosmos, Cardano, Solana, etc. These staking rewards could also be earned directly from the protocols, if users wanted to stake via their own hardware, but Kraken takes a fee in this case due to reducing the hassle for users to need to do this themselves (and some proof of stake protocols have slashing which means users would lose the coins they have staked if their hardware goes down or their connection is interrupted), so there is some reduction of risk as well for the user in that case. However, this also means the staking power is more centralized at the exchange level, which is a downside, but that is a different part of the discussion.
FWIW, Coinbase has staking services as well , but Coinbase Lend, which hadn't even launched yet, was going to be something different. It looks like Coinbase was going to achieve that 4% interest on USDC in Lend via Compound  (which is a DeFi protocol they actually helped launch a few years ago ). Assets can already be lent directly to Compound via users, without Coinbase as an intermediary.
Anyway, my point in bringing this up is there is difference between lending assets and staking assets, and actually both lending and staking can be done directly by users, without any of these exchanges as intermediaries.
6 months is a long time for back and forth to be had. It's not like they dropped this on Brian Armstrong's desk without notice.
Trying to make out like Howey is some obscure precedent from decades ago which the SEC is nitpicking over. The Howey test is the test applied to determine if something is an investment contract.
Why should the decades matter?
Supreme court cases matter...
 Emancipation Proclamation
Quoting your own link:
> [a] form of argument that attempts to establish a claim by showing that the opposite scenario would lead to absurdity or contradiction.
The claim parent is attempting to establish is "how old a law is doesn't matter". The extreme example is ignoring an old law that abolishes the slave trade, and claims it is unimportant because it is decades old, which (parent is claiming) is absurd. Therefore, the original claim is absurd.
Reminds me of the Bloomberg article "Everything Everywhere is Securities Fraud" https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
The SEC doesn't get to know which one, so if they auto-disagree let them waste their budget finding out in court
This will be a decent dip to buy Coinbase stock from paper hand bootlickers
Reversing itself in the 1950s, long after religious and exclusionary states made censorship boards across the republic
It is absolutely possible to create room for introspection for old rulings