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The SEC has told us it wants to sue us over Lend. We don’t know why (coinbase.com)
437 points by jbegley 44 days ago | hide | past | favorite | 415 comments



I actually initially wanted to be on Coinbase’s side here, but after a quick google of “Howey test” and reading even just the introduction on Wikipedia, I cannot imagine how they don’t see the SEC’s reasoning about Lend wrt Howey. If you want to argue that Howey does not apply or fight the decision/lawsuit, then fine. But feigning ignorance of something a (non-legal expert) programmer can connect the dots of instantly just makes me feel like they’re playing a PR game. Seeing as they are already offering APY on staked Ethereum, I don’t see “concern” reflected in their actions. Seems like they are trying to get out to the public before the SEC does to farm some good will.


Agreed, and this line pretty much sums it up:

> 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!"


I'm not an expert here but I read their argument as they don't expect this lending to be regulated as "investment" because the capital is not in theory at risk. So it's more like a savings account than an investment account.

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 not in theory at risk

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.


Sure, they want to rewind to a time when your bank account was unsecured and banks themselves had 0 regulation. Because it's a heck of a lot easier to make money when you can take massive risks with other people's money while lying to them and claiming there's no risk at all.


Central banking is itself insecure.

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..


> So the bankers kept all their profits and everyone else lost big.

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.


Interesting. Remeber where you read the though experiment?


I don't remember where I read that, sorry. On the general topic though I can recommend Ray Dalio (a retired guy who founded the largest hedge fund), who has some pretty good free stuff online that isn't too jargon heavy.

For example his video at [1] 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 [2] that goes into detail for bunch of historical cases.

[1] https://economicprinciples.org/

[2] https://www.principles.com/big-debt-crises/


Your issue is not with the central bank. It is with the social contract a nation state has with its citizens (which is expressed through monetary policy), which can't be solved through code.


The social "contract" is only useful up to the point that it is enforceable. Cryptography can in fact hide much from the state.


>> 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 is simply not true. It's a fiction (of sorts) told by people who feel fucked by the financial system.


It is basically true.

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.


> 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.

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 really complaining about is the bank lending out money. There is no way to know if deposit X+1 is money that was already loaned out. Your accounting of the work done is plain wrong - each of the people in the chain (person Y for example) did some real work and got paid for it (otherwise why did X pay Y at all?). If whomever paid you the $100 got it from a bank, that doesn't invalidate the work you did.

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.


You claim the original $100 has been devalued. But has it? Person X, person X+1, etc. all owe money to the bank to pay back their loan. So it's not like we're all suddenly swimming in cash in this new $1000 economy and nobody cares about your little $100 anymore. When you sum the value in everybody's account, including debts, you still get $100 total. And cash looks pretty desirable to all those debtors.


I think it is more people who are ignorant about how monetary economics works. Try living in an economy without fractional reserve banking. You'll find credit is very hard to come by and interest rates are high.


Fractional reserve banking doesn't apply to the modern economy though, because we no longer use commodity-backed money where the economy is based on shuffling round physical tokens. Money is created by banks lending money when they update your balance.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

> 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.


That link is rather disturbing. They clearly state that money is created when a bank "makes a loan" and simultaneously creates a deposit in your account. In other words, they enter an amount in your account and simultaneously an IOU to themselves to redeem later.


What part of this is not fractional reserve banking?


> The real answer is to do away with the fractional reserve lending where a bank gets $100 and then proceeds to loan out $900.

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.


The inverse take on this is that entrenched rich interests made all their money during such periods and have now used regulation to "pull up the ladder behind them". People who are foolish with their money will always find a way to lose it.


Coinbase is worth $50 billion. I like Brian Armstrong more than I like the typical finance CEO, but his company is definitely an entrenched rich interest, and if we treat them as a scrappy underdog we're going to let them get away with things they probably shouldn't. You should be skeptical on principle when a billionaire tells you that a financial regulator is being unfair to them.


in fact they make a lot of money from institutional investors https://www.theblockcrypto.com/post/116855/inside-coinbases-..., so def not an underdog.


thats basically what uber did to the taxi system and it worked.

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


> thats basically what uber did to the taxi system and it worked.

Modulo any discernible path to profitability.


It's even more obvious when you flip the relationship around. What's it called when your broker lends you money, at a fixed interest rate, for you to then go and invest in risk assets?

It's a margin loan. Which I hope I don't need to say is NOT risk-free.


Fair point, but when you take a margin loan, you also don’t have to register it as a security.


But the broker-dealer who made the margin loan is extremely heavily regulated by the SEC- margin loans are some of the things that they have the longest history with!


I know, just saying it's not a good example to make the point about "risk of loss implies need to register as security".


Those risks apply to the traditional banking system as well. Someone could phish your login and password. Someone could steal your checks. Someone could open a policy with Progressive Insurance, provide a stolen account number, and pay their premiums out of your bank account while conducting progressively larger insurance fraud. Your bank could get hacked. Your bank could go bankrupt.

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.


Account security best practices are orthogonal to how your assets are handled behind the scenes. The SEC isn't regulating securities because someone might log into your account, they regulate them because someone at Coinbase could be deceiving investors or hiding risk.

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.


But with regards to this subthread specifically - the risks that the OP points out are account security best practices, and common to both Coinbase and traditional banks. If you're going to point them out as reasons that your capital is at risk, you also have to point out that your capital is at risk with traditional financial institutions.


That's moot. It's totally reasonable for the SEC to not regulate account security best practices and still regulate the company implementing those practices making off with your cash. A Ponzi scheme whose website has mandatory 2FA is not somehow better. The SEC was never designed to protect against all kinds of risks.


I mean I think they're pretty upfront about that the fact that they're not FDIC insured which is your only real protection from the kinds of events you describe happening at a bank (sans the theft I guess).

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.


I don’t understand how you can make a profit larger than the risk-free rate of return without at least some risk; i.e. any risk free profit should be arbitraged away. If Coinbase has truly found risk-free profit it would be more profitable to sell it as an investment to some hedge fund, not give away free returns to retail.


Answer: Legal ambiguity carries its own risk.

Therefore, rates in more ambiguous instruments should be higher than those in more certain ones, no?


The risk-free rate in this sector is substantially higher than 4%.


If the value of crypto is that it drives down the risk of lending by bringing transparency to the assets of borrowers, then how can the interest rate be higher than in the normal financial system? The fact that there is less risk but interest rates are higher should tell you everything you need to know about why this is a scam.


The question is "Why is there often 20% per year or higher cash-and-carry arbitrage for assets that have near zero carrying cost?" The answer might be that every crypto exchange has a 15% or higher chance of exploding per year and they've all just been extremely lucky, but I wonder if this is really the best explanation we can come up with.


It’s not risk free, US Treasuries are ‘risk-free’ and anything that pays a higher yield has risk. If it didn’t have risk, it would be arbitraged down to the risk-free rate.


And even the risk-free rate on[1] Treasurys is being held down by tremendous Federal Reserve purchases. (The Fed doesn't buy crypto loans, or at least, won't until Goldman Sachs keeps some on their balance sheet.)

[1] at least short-term


You can post that markets are efficient and I'll keep making money from obvious inefficiencies I guess.


> "capital is not in theory at risk. So it's more like a savings account than an investment account."

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?


Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail)

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.


> I don’t understand where DeFi yields come from

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.


> 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.


> Can the borrower then selectively default if the X/Y exchange rate moves in their favor?

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.


They could already be subject to those risks without getting the benefits.

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.


The way to guarantee return on investment is to denominate it in Monopoly money. I can guarantee that I will update your account with 5% more Monopoly coins every week if I have already minted my own trillions of monopoly coins and have them in reserve.


Banks want the deposit insurance to fail because once the government chips in they realized a profit on the bad loans they made. It's a well known moral hazard.


No, they want deposit insurance to kick in and succeed (in your view). If the deposit insurance fails, that'll create a bankrun (because their value proposition, risk-free interest, no longer exists), and they'll go under as well.


Deposit insurance kicks in only after the bank has failed, and cannot be used to realise a profit. At least in the real world.


Privatized gains/socialized losses is a moral hazard, but it doesn't follow that it's in banks' interest for FDIC to fail.

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.


One of those requirements being that you participate in the FDIC/NCUA insurance system, so that end-users really don't have any risk up to the maximum insurable amount per account.


They try to make it sound like they didn't expect Lend to be treated like an investment, but it's clear that's a load of bullshit. If they didn't think the lending program was a security, they wouldn't have gone to the SEC about it.


Theyre a public company (regulated by the SEC), offering SEC-regulated services. Of course they notified the SEC. The twitter thread that got merged with this thread was pretty clear about it: they notified the SEC, but they also notified other regulatory bodies and had the full expectation that the lending accounts would be regulated by another entity because they are not securities.


> the full expectation that the lending accounts would be regulated by another entity because they are not securities.

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.


The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security. You can't trade a lending account...you can either hold it, or liquidate it.

FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.


> The Howey test doesn't apply here.

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.


> The Howey test doesn't apply here.

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.


> The Howey test applies to commercial paper, tradability is inherent.

Howey itself did not concern commercial paper, so if the Howey test only applied to that, it would be nonbinding dicta.


Meant to say investment contracts.


Investment contracts aren't inherently tradeable. They may frequently be tradeable because of market preferences, but it is not inherent in the category.

«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.» [0]

[0] https://www.sec.gov/corpfin/framework-investment-contract-an...


Could you give me an example of an investment contract that is not tradable? You have me straining at the imagination here.

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.


> The Securities Exchange Act explicitly exempts bank notes with duration of less than 9 months from SEC regulation.

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 [0], the bank-issued securities exception is immaterial.

[0] 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.]»


> but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

It is not required for it to be issued by a bank for it to be exempt.


You have taken the Howey test, which defines what is a investment contract (and therefore requires SEC regulation), and replaced it with "if it's not securitized and its not tradeable it's not", which is, strictly as a matter of US law, completely and utterly wrong.

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.


> The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security.

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.


> Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description

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.


> the capital is not in theory at risk.

"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.


If you lose your money when the company goes bankrupt then that sounds like it's "at risk" to me. If not, any investment at all would be considered to not be "at risk".


It's not at risk as in it's FDIC insured?


Securities lending, the repo market, is a large well understood and regulated existing market.


Securities lending is regulated by FINRA, not the SEC.


No, FINRA is an SRO, meaning they effectively police and audit the securities industry. FINRA takes guidance from the SEC and enforces the rules by way of fines, separate from any action of the SEC.


From the information that Coinbase has given, it's no more an investment than a savings account is. More importantly, it's not a security since you can't sell your loan to someone else.


They can't make this argument though because FDIC and Banking regulations are even more restrictive and they arn't (yet) a bank.


Wirecard Bank was up for crabs...


Excuse my ignorance but how is that any different from "interest"?


As in, the interest you might earn on a savings account?

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.


This is such a good explanation.

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.


Which should be a choice for all US residents to participate in, residents who can also go lose their money at casinos if they wanted, but are literally barred from participating in positive expected value financial systems.

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.


Because there is a power and information asymmetry at work, and humans are not perfect rational actors.

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.


But you see how locking people out of risk locks them out of reward right? The interface to regulate should be on the educational front, not on the access front. Instead the regulatory framework we have leads to the accredited class being protected from competition and is a direct antecedent to the neo gilded age landscape we are in now. IMO the want for regulation that "protects" investors on the margin while hurting the majority by locking them out of risk is the wrong approach, and always has been.


In theory, it locks people out of reward.

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.


The current outcome is a mistake, no one specific law, but perpetuated by fear that paycheck to paycheck people will get scammed

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.


Casinos are pretty highly regulated.


at the state level, and the choice is still available to participants to lose their money whether it is plainly obvious or buried in 30 pages of disclaimers


The SEC appears to be arguing that Coinbases product should be regulated as a security.


for you to say that, you missed my point quite far.

"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


I guess they are indirectly saying that if they are not under any other regulation (which they know they aren't), they will have to be treated as a security.

They are expecting Coinbase to show them who is regulating them. If they don't do it, they must be sued.


I mean, maybe? It’s quite clear to most people at casinos that they can lose all their money. Is it just as clear to people who “lend” uninsured money to a company?


A casino is similar to a lottery, you expect to lose some, but also to have the (small) chance to win a lot.

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.


Coinbase's Lend program actually would be subject to other existing regulatory regimes. For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA. The Coinbase CEO notified the SEC, as they would be expected to as a SEC-regulated brokerage and publicly traded company, but their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA.

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.


> Coinbase's Lend program actually would be subject to other existing regulatory regimes.

How?

> 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. [0]

> The whole situation smells of a turf war between regulatory agencies,

Which other regulatory agency is asserting authority?

[0] https://help.coinbase.com/en/coinbase/other-topics/legal-pol....


Your currency accounts at brokerages are regulated by FINRA. This includes your cash accounts at cryptocurrency brokerages and exchanges. Security lending, on both the lending of securities as well as the lending of cash for the purchase of securities, is also regulated by FINRA. This also extends to non-security financial instruments, such as forex and cryptocurrencies.

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.


You seem to be confused about the relationship between FINRA and the SEC. FINRA is not the equal of the SEC, they are subordinate. FINRA is a self-regulatating, non-governmental organization to whom the SEC delegates some regulatory enforcement authority, however the SEC is the government, and the SEC is always the (first level) of appeal if you don't like what FINRA says.

If the SEC says no, FINRA can't say yes, because (to a first approximation) that's their boss.


You're right that FINRA is authorized by the SEC, but that doesn't mean that regulatory powers that FINRA has been authorized to perform can be pulled back on a whim. There is a binding charter in place, and there is plenty of history of FINRA telling the SEC to fuck off when something is clearly within their wheelhouse.


I don't know the ins and outs of the relationship between FINRA and the SEC. I am rather more familiar with the similar relationship between FERC (Federal Government) and NERC (SRO), and in that case NERC really can't say "Fuck off." NERC will occasionally try and push back via public lobbying, using its position as the organization of power producers to speak for them when they- as a collective- don't like some new rules coming out, but if the rule does come out and get finalized, they don't get to say 'no, go away' because the Federal Government gets to make the regulations.

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.


I think that's a really good question. Financial service companies almost unanimously would rather deal with FINRA than with the SEC because FINRA has a form of democratization of control.

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.


> 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.

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).


Very helpful, thanks.

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.


Right, OP is saying that on a fundamental level, there isn't a difference (between LEND and a savings account), except that Coinbase is not a federally regulated FDIC insured bank.

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'.


And it worked! Reading this and reading HN comments I realize I don't want the SEC involved in this. Crypto is more & more bringing to the front of the conversation about how protection should be the default but having the ability to opt out is the choice individuals should have.

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.


FDIC was put in place after The Great Depression, in order to prevent another Great Depression. There is no opt out because when large numbers of people make risky investments without planning for the consequences, it affects the entire economy.


Individual freedom vs. community safety.

Where to draw the line?

Who should draw it and by what mechanism?


> Where to draw the line? Who should draw it and by what mechanism?

The democratically elected government seems like a good place to start!


Not exactly. After many, many decades of frauds, schemes, panics, and crashes, harsh experience has led to a regime where nobody can do anything without a very explicit carve out. In tech terms, it's a default "deny all", with a white list of "things which are not thinly disguised ponzi schemes", not a default "allow all" with a black list of "things which have been shown to be thinly disguised ponzi schemes".

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...


I'm guessing the concept is more like stock lending fees. You short a stock by borrowing shares and selling the borrowed shares. You'd short USDC the same way, if you could borrow them.

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.


This is an investment. "To invest is to allocate money with the expectation of a positive benefit/return in the future."

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".


> 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.

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.


> 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.


> Excuse my ignorance but how is that any different from "interest"?

Corporate fixed-coupon bonds are corporate offerings of simple interest-bearing instruments, and are regulated as securities.


The Howey Test, I believe, is that Coinbase is taking the money being given to it by "account holders" and performing some "thing" to that money to generate value.

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-...


I really hope this is showing up in the next Money Stuff.


Read the securities act for once.

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


> securities maturing in less than 270 days being completely exempt from the act

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.


An exemption from registration is functionally an exemption from most parts of the act.

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.


> exemption from registration is functionally an exemption from most parts of the act

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 [1].

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" [2].

[1] https://media2.mofo.com/documents/faqs-commercial-paper-and-...

[2] https://www.nyse.com/publicdocs/nyse/regulation/nyse/sea34.p...


> I cannot imagine how they don’t see the SEC’s reasoning about Lend wrt Howey. If you want to argue that Howey does not apply or fight the decision/lawsuit, then fine. But feigning ignorance of something a (non-legal expert) programmer can connect the dots of instantly just makes me feel like they’re playing a PR game.

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.

See:

https://www.rightnotes.com

https://www.wsj.com/articles/car-maker-notes-attract-investo...

https://www.ford.com/finance/investor-center/ford-interest-a...


You misunderstand the legal field if you think a lawyer should be given the benefit of the doubt when arguing on behlf of a client. Their job is to use the most persuasive propaganda they can get away with.


In this context, his job is to assess the legality of it before they create the product. Companies don't generally want to invest in building something they aren't legally allowed to market.


> In this context, his job is to assess the legality of it before they create the product.

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.


You’re mixing up what would be asked to the in house lawyers.

It’s not a binary: Is this legal?

It’s: Can we get away with this?


Sometimes people assume that lawyers write contracts with the goal of the contract never being breached. But plenty of times they write contracts with the goal of breaching it being of little significance for their client.


For a counterexample, look at Uber, Lyft, or AirBNB, whose whole business models have consisted of flouting the law and quickly adjusting when caught.


> his entire legal career has been patents

I'm confused, is patent experience particularly relevant to this case about securities law?


No, that's why I'd like to assume that when he says he doesn't know why the SEC has a problem with their plan, he is telling the truth and this isn't just a PR attempt.


Except he says they got a wells notice, first hit for that on google:

> 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?


Good question. I needed to remind myself of the nuance. First sentence from Wiki says: <<A Wells notice is a letter that the U.S. Securities and Exchange Commission (SEC) sends to people or firms when it is planning to bring an enforcement action against them.>>

To me: "planning" is the key term.

Ref: https://en.wikipedia.org/wiki/Wells_notice

The Wiki article is short and dense. I highly recommend it!


From the wikipedia article it seems the Howey test is the legal test if something is a security:

"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...


The funny part is that Howey was about selling parcels of orange grove land to people who would then lease (“Lend”) it back. Howey would then cultivate oranges on the whole block of land, and distribute the profits to the landowners, who would not have to lift a finger. Coinbase is not only satisfying the Howey test, it’s doing almost exactly the same thing as the OG and acting all surprised the SEC considers it a security.

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.


IANAL, but isn't the point of the Howey test that you're making investments with variable returns, where those returns depend on the efforts of others? If Coinbase is _guaranteeing_ you a 4% return, then there is no variability and the efforts of others are irrelevant. 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.


> If Coinbase is _guaranteeing_ you a 4% return, then there is no variability

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.


They're guaranteeing it in the same way that when you buy a corporate bond with a 4% yield, you're guaranteed to get the money[0]. A bond is still a security.

[0] Right? Counterparty risk!


Not all loans are bonds though. How does the law define the difference?


> Not all loans are bonds though. How does the law define the difference?

Bonds are raised from a diverse set of investors. Loans, in securities parlance, are raised from (and syndicated by) regulated banks.


Individuals can loan money to other individuals, no? They can even agree to pay interest if they want, or am I missing something?


When you are giving a loan to your friend or a business partner, you are not engaging with the general public.

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.)


Bonds are also registered investments which strict regulations about marketing (IPO), trading, and settlement. In some markets, "private placement" bonds are possible, but there are still many rules to follow created by financial regulators.

A cursory search of "loan vs bond" yields many interesting results. I am sure the variance matters from market to market.


But all contracts have some element of counterparty risk. Contractual guarantees are just contractual, nobody can give absolute guarantees of anything.


> But all contracts have some element of counterparty risk. Contractual guarantees are just contractual, nobody can give absolute guarantees of anything.

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.


Lots of defi has no counterparty risk. Much of it is over collateralised and managed by smart contacts.

There is of course software risk in the smart contract (although I think people underestimate that in conventional finance too).


What you are saying is totally debunked by the sheer number of Defi hacks,rug pulls and exoloits the previous year resulting in billions of lost money. That defi has no counterparty risk is probably one of thr all time wrong sentences on HN.


> That defi has no counterparty risk is probably one of thr all time wrong sentences on HN

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.


> they swap a basket of assets for another basket of assets atomically and without counterparty risk.

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.


> the contract writer could be adversarial

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.


> Lots of defi has no counterparty risk. Much of it is over collateralised and managed by smart contacts.

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.


The security of the Ethereum network is the counterparty


The network itself? That seems pretty safe to me. Even if other nodes get hacked, you can run your own.


> Lots of defi has no counterparty risk

Euh... https://rekt.news/


Those stories look like they're mainly the software risk I was referring to in my comment.


What's defi without the software?


> If Coinbase is _guaranteeing_ you a 4% return,

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?


> 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.

LTCM?


> isn't the point of the Howey test that you're making investments with variable returns, where those returns depend on the efforts of others?

No. By that standard, no bonds would qualify as securities.


Lend can pay you less than 4%.

That being said, loans are not usually considered securities.

Although they are regulated by FINRA.


Mortgage backed securities are securities even though they are loans under the hood. Bond is also a loan. Same with money market accounts. There are a bunch of debt securities.


You can package almost anything into a security.

A bunch of machines and a factory is not a security, but you can package it into a security.


Yes! These are called ABS: Asset-backed Securities. One of the most famous was David Bowie's bonds to securitise the future cashflow of his record sales.

Ref: https://www.investopedia.com/terms/b/bowie-bond.asp


Once you package it up into a tradable instrument, it becomes a security, which would either be regulated by the SEC (bonds) or the CFTC (swaps or futures). But if it isn't tradable (which a lending account is not), it's not a security. It's likely the jurisdiction of FINRA or the FDIC.


My sweep account on my brokerage is regulated by the SEC. I can’t trade it. Some of the challenger banks are using sweep accounts instead of standard deposit accounts. Just look at the ones with a broker dealer license.


Sweep accounts are not regulated by the SEC, they're regulated by the FDIC and other bank-related regulatory bodies. They may be offered by SEC regulated brokerages, but that doesn't mean that the accounts themselves are regulated by the SEC.

https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...


FDIC insured if the money is stored at a bank. Those are called brokered accounts. Not all sweep accounts use them and use money market funds or other securities. Also brokered accounts are fungible money can and does get transferred around behind the scenes. Some broker dealers will use the cash for overnight lending for income.


I can tell you have staking with Coinbase, first they can change the terms at anytime so you can't trust that you'll get what they say... Second, you'll be lucky to get anything at all. After staking with them for 6 months turns out I didn't get anything because their system was broken and guess what happened when I filed a support request? No response after multiple attempts and 3 months.


When you put your money into a saving account, you're lending the bank your money with an 0.04% interest rate. Is that a security?


> lending the bank your money with an 0.04% interest rate. Is that 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.


And FDIC might not want them.


I agree. It is very unlikely that FDIC would allow it. As I understand, all deposit products, including certificates of deposit, are guaranteed up to a certain amount with FDIC regulated banking institutions. The same is also true of securities brokers, but under a different regulator (SEC?) and different programme.


Might is probably an understatement.


But is Lend a security? As far as I can tell, there's no contract for capital flows that you can trade with others. Lend isn't fungible, the USDC is.


As I understand it, there doesn’t need to be a liquid market for something in order for it to be a security; just an investment of capital with the expectation of return through the efforts of a third party (the Howey test)


Startup stock is a security, despite trade restrictions (e.g. right of first refusal). Same with restricted (i.e. unvested) stock units.


> is Lend a security?

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.


Everyone in the cryptocurrency industry is familiar with the Howey test.


It is. But since it’s issued by a bank it’s largely exempted from the Securities Act[1] along with many other types of securities. For example, a lot of life insurance policies are technically securities, too.

[1]https://www.law.cornell.edu/uscode/text/15/77c


Okay, but in fairness, I don't think Coinbase is disputing that,

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."


They want to try to prevent lawsuits from their customers.

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?


Not a lawyer here, but if I just apply the Howey Test based on my own intuition after reading it on investopedia(1), I haven't availed myself of the full range of arguments that the professionals apply.

I would not, for instance, get this conclusion: https://corpgov.law.harvard.edu/2020/06/14/court-holds-that-...

(1) https://www.investopedia.com/terms/h/howey-test.asp


The entire point of having communications with your regulator is that you get to hear their reasoning. "I checked wikipedia and it seems like it might fit" is not how highly regulated industries work.


Correct me if I'm wrong but the bigger problem here seems to be that there is now way to "fight the decision" other than ignoring it, getting sued and maybe winning in court?


I am repeating myself from an earlier post, but read the Wiki page: https://en.wikipedia.org/wiki/Wells_notice

<<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.[2] 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.>>


Going to court is the “fight”? And at any rate, the SEC, in my experience, is exceedingly reasonable. If you have a cogent argument to put forth they’re more than willing to hear you out. In fact, I’d say they much prefer to hear you out over taking you to court.


But can they fight the decision in court before breaking it and risking fines/jail time?


You’re never risking jail time with the SEC. They’re civil enforcement so they can only pursue fines and injunctions.

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.


> You’re never risking jail time with the SEC.

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 think you misunderstood my question. Let's say the SEC tells you "don't do X or we will sue you" but you believe that the SEC's request is invalid for whatever reason. Is there a way to get a judge to decide on whether you are right, before you do X and get sued?


> Let's say the SEC tells you "don't do X or we will sue you" but you believe that the SEC's request is invalid for whatever reason. Is there a way to get a judge to decide on whether you are right, before you do X and get sued?

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.


Ok thanks, that's more clear.


Maybe they could sue for a declaratory judgment?


Do you have any Real World examples of people using this strategy against a financial regulator? I never heard of such a thing.


Here is our evidence your honor that we don't respond to support requests when customers have legitimate issues and we ignore them. Can you let us know if that is okay when dealing with people's finances, just to ignore them and keep their staking rewards.


At last, my hours of watching lawyer TV shows comes in handy!

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).


Bitcoin isn't a security, so why should a Bitcoin lending platform be one? Assuming that rewards are in Bitcoin and not dollars.


This is absurd. You can make a security out of something that's not a security.

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.


Staked Ethereum is an entirely different sort of thing. You're not loaning money, you're earning it with the equivalent of mining.

Personally I've never seen the SEC consider loans as securities before, so it seems reasonable to ask for their reasoning.


If that were the case, then the SEC should say so. The fact that they are unwilling to suggests that there is more to it than you think.


They are deliberately lying. You can see on their Twitter feed where people have made the same argument to them, which they ignore.


The Howey test generally hasn't applied to loans I don't think. What makes this different than other loans?


In other news today: Facebook starts a payday loan business


But you can only buy their Face(palm)coin for your money.


At the end of the day, the SEC is bought and paid for by the banks. They are essentially an HR department for banking execs. E.g. How many bank execs went to prison after the great recession? And where were the "Howey test" type threats from the SEC when it was actually needed?

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.


How exactly is the SEC "bought and paid for by the banks"?


I'm truly boggled as to how many on this page seem to think the SEC's reasoning makes sense, let alone how the SEC reached this seemingly narrow-minded or lazy conclusion in the first place.


Brian's concern in the tweet thread is that a lot of other companies are already providing lending services without SEC action, putting Coinbase at a disadvantage.

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.


"We think others should be sued too" is quite a different argument from "we don't know why we're being sued". In fact it strongly suggests the opposite.


They don't know why they're being sued because everyone else is doing it and not getting sued. Makes sense from that point of view. Coinbase technically should only be sued if the others doing were sued too, but they're not... Compound this with the fact that no explanation was given to them why they're being sued - when it is very much necessary in light of their competitors not getting sued and you can start understanding their confusion.


"But mom everyone else is doing crime, why cant I do crime? Not doing crime puts me at a major disadvantage with respect to my criminal peers." - Brian Armstrong, TLDR


You really don't see anything wrong with, "It's illegal for you to do this but not your identical competitors with an identical product"?


The SEC didn't say that everyone else could do it. They said the action itself is illegal and they're beginning their enforcement actions at Coinbase. Nobody is allowed to do it, and a judgement in their favor here will allow them to expeditiously stop everyone else with the explicit precedent they form. That's almost certainly why they're pushing ahead.

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.


No, it feels like my reaction is akin to basic government accountability and asking why enforcement is so inconsistent. Coinbase isn't complaining that the law exists -- as in the Twitter thread, they're happy to comply with the law, so long as they know what it is!

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!

And:

>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.


> No, it feels like my reaction is akin to basic government accountability and asking why enforcement is so inconsistent. Coinbase isn't complaining that the law exists -- as in the Twitter thread, they're happy to comply with the law, so long as they know what it is!

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. [1] 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?!"

[edit] The man literally owns an SEC registered broker-dealer lol.

[edit] 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.

[1] https://www.sec.gov/files/dlt-framework.pdf


>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.

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.

>[edit] 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?


We may be talking past eachother so let's re-state our points of alignment.

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.


>They're all doing crime.

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.


> [edit] 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.

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 [edit] 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.

[edit] 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.


>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.

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 [edit] 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 [edit].

>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".


> 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 [edit].

My dude I took your feedback lmao, if you can't assume good faith here this conversations over.


"They said the action itself is illegal and they're beginning their enforcement actions at Coinbase" - they said no such thing, stop guessing out of your backside to try to strengthen phantom arguments.


Uh... "I'm going to sue you" -> "they are saying the action is illegal"

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.


I don't think the argument is that. It's that Coinbase asked if they could, SEC said "no, I'll sue you" and Coinbase is like "WTF dude, all these other platforms aren't being sued for doing exactly this."

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.


It's their attorney's job to find out. This is why the have general counsel.


Something tells me courts wont be too sympathetic to the "but other people are criming as well" argument.


How about the SEC has repeatedly refused to prosecute for X in the past showing they, like us and multiple other parties doing business in this space, do not believe X is a crime. Given they've shown they don't think it's a crime and we and we agree and also don't think X is as crime, we have no idea why they're prosecuting us?

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.


Have they refused to prosecute X or have they not gotten around to prosecuting X? Gotta start somewhere and the statute of limitations is ticking so...

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.


yeah sure.

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.


> Or you know the SEC is allowed to announce /why/ they are prosecuting.

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.


I agree 100% with your last paragraph. And, I was surprised by the age of this judgement! Wiki says: Decided May 27, 1946

Ref: https://en.wikipedia.org/wiki/SEC_v._W._J._Howey_Co.


Stealth edit on the grandparent of this comment. Why do that? It make me go from the assumption of good faith to the other thing.


Did I change something material? If so my bad, I usually only edit for clarity, and add an edit block if I add something. My bad if so!


That's not true at all? There is a ton of precedent for courts striking down selectively-enforced laws. Equality before the law is extremely important to how courts rule in the US.


The SEC intentionally does “regulation by selective enforcement”, as shown by their actions following the 2017 ICO bubble:

https://corpgov.law.harvard.edu/2019/11/21/regulation-by-sel...

It shouldn’t be a surprise to anyone in this space.


It’s a good way to shut down your competitors and get certain legislation in place where only your mega corp can meet the standards. They bought a lot of Bitcoin recently, which could be decent enough collateral to offer a SEC-sanctified lending product. The other low-end Bitcoin companies may not be able to play at a poker table with that high of a buy in.

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.


Are the other companies already providing lending services public? Public companies get orders of magnitude more scrutiny from SEC relative to private companies.


Other US companies providing similar products include Gemini, Kraken, and BlockFi. I dont think any of them are public.

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.


Right. My point is that many federal agencies have mandates that dictate where they focus. For instance the SEC may come after any privately-owned startup, after the fact, if there’s overwhelming evidence of fraud (see: Theranos).

But when you go public you enter into a whole new level of scrutiny, because regulating public markets is why the SEC even exists.


There is a difference between lending assets and staking assets. Of the ones you mentioned, I've only used Gemini and Kraken. Gemini Earn offers similar lending products to Coinbase Lend (a % return is given when certain assets are lent) [1][2].

Kraken offers staking services [3], 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 [4], 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 [5] (which is a DeFi protocol they actually helped launch a few years ago [6]). 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.

[1] https://www.gemini.com/earn

[2] https://www.coinbase.com/lend

[3] https://www.kraken.com/en-us/features/staking-coins

[4] https://www.coinbase.com/staking

[5] https://blockworks.co/coinbase-compound-labs-launch-usdc-hig...

[6] https://techcrunch.com/2018/05/16/cryptocurrency-compound-in...


The SEC has limited resources. I applaud their decision to go after (potential) bad actors operating at scale.

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.


> They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves ... These two cases are from 1946 and 1990.

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.


It's also like saying - I can't believe they're not letting us operate an Atlantic Slave Trade - because of some supreme court cases from decades ago.

Why should the decades matter?

Supreme court cases matter...


Or the US constitution, centuries old.


That's a very poor analogy. It's inflammatory and disrespectful to put a trivial disagreement over investment classification on the same footing as the slave trade, and it's not factual either. Slave trade was not abolished by the Supreme Court, but by an act of Congress [0] and later by presidential decree [1].

[0] https://www.history.com/this-day-in-history/congress-abolish...

[1] Emancipation Proclamation


Nit: the Emancipation Proclamation only freed slaves in states rebelling against the union. Slavery was perfectly legal in Kentucky until December 18, 1865.


That is just a nit, as you say. The point is that the Supreme Court had nothing to do with ending the slave trade.


During and after civil war the Supreme Court was problematic and the Republicans solved the problem in part by packing it.


Reductio ad absurdum is a valid argument.


That's not reduction ad absurdum. [0]

[0] https://en.wikipedia.org/wiki/Reductio_ad_absurdum


That's exactly reductio ad absurdum.

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.


Nobody cares because we understood the point.


The Howey Test is absurdly broad. Two kids pooling their pocket money to buy the extra large bag of candy with a plan sell the extra gummy worms meets all four parts of the Howey Test and is unlicensed securities creation.

Reminds me of the Bloomberg article "Everything Everywhere is Securities Fraud" https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...


I don't see how that passes "effort of others". They're clearly working in the sales and distribution business at that point. Now, if they then went around the school and said to everyone, give us $1 and we'll pay you back by splitting half of the profits from our sale, then yes, that sounds very much like a security.


Your example very clearly doesn’t meet the Howey test though?


Eating half the bag of candy is a loss though. You'd have to sell the other half for twice the price just to break even and if you promised the other kid that he gets back more than he spent then it is pretty damn close to a security.


I am going to guess the article is PR to Coinbase going ahead with plans and getting sued, in the hopes they set a new precedent. I am cautiously hopeful for cryptocurrency in general, but this genuinely seems like it would be an easy lay up for the SEC.


There are plenty of exemptions for Coinbase to lean on

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


And Reves is the Court doubling down on Howey and saying, yes, our decision from 1946 totally still works 50 years later, here's us restating it for you if you're still confused.


The Supreme Court of 1910 declared “motion pictures” to not be covered by the first amendment

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


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