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.
> 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 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.
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.
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.
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.
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.
> 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.
> 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.
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.
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!
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.
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.)
> "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.
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.
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.
> If it's not securitized and it's not tradable, it's not a security.
Neither securitization nor marketability are requirements for something to be a security.
> FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
No, it doesn't. The Howey test applies to commercial paper, tradability is inherent. In that sense, the Howey test isn't the only test for a definition of a security...it is a test that applies to anything that is a tradable financial instrument.
If the Howey test was the only test used to define a security, your bank account would be considered a security. But your bank account is absolutely and definitively not a security, and it is regulated by the FDIC, which has no authority over securities.
> I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
This is obviously and demonstrably false. Even if this product was a security, which it is not, the classification of something as a security does not mean that the SEC has authority.
Futures - a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Futures - a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Future Options - a security of a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
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]
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.
"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".
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.
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.
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.
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.
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
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?
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.
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).
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.
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.
> 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.
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.
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
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].
> 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.
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.
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.
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.>>
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
> 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.
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.
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)
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.
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.
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.
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?
<<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.
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.
> 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.
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).
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.
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.
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
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.
>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!
>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.
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.
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.
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.
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.
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.
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.
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.
> 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.
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].
Nit: the Emancipation Proclamation only freed slaves in states rebelling against the union. Slavery was perfectly legal in Kentucky until December 18, 1865.
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.
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.
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.
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.
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.
“We have no idea why the SEC intends to sue us! It is a complete mystery.”
(Later in the post…)
“All we’ve done is create a thing that people can trade which we are moving towards selling to investors against specific SEC advice to the contrary, but it is definitely not a security and as a result it is completely fine even though we have not complied with SEC regulations in any way with respect to it.”
Coinbase wants to know the legal rationale as to why it's a security, but SEC is stonewalling them and goading them to get into a legal fight. The opposite of "talk to us, come in" that the SEC claims the crypto industry refuses to do.
It is clear from their own blog post that they have communicated with the SEC in considerable detail, and the SEC has told them in no uncertain terms not to proceed. It sounds to me like the SEC welcomed the discussion, it’s just that Coinbase doesn’t like the answer they got.
They repeatedly refer to lengthy sets of questions they received from the SEC, both in person and in writing. If you don’t think that is the SEC communicating their “rationale” for a decision and offering insight into what acceptable alternatives might look like then you obviously haven’t dealt with the SEC, nor do you understand what it is that they do. (I actually do have some relevant experience here - I was a partner at an alternative investment manager for 12 years.)
> Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem. Rather they have now told us that if we launch Lend they intend to sue. Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused.
Plain as day!
And as to experience, I was CTO of the first company to settle with the SEC for an ICO:
> …all of the SEC’s questions in writing and then again in person… They asked for documents and written responses…
Plain as day!
And since you have so much experience dealing with the SEC, you surely understand that the specific questions they ask will typically reveal precisely their rationale for taking the (extraordinary) step of an enforcement action, just as a prosecutor’s investigatory questions reveals their legal theory of a crime.
The SEC doesn’t go around issuing Wells notices every day, and they typically don’t issue them without giving recipients the opportunity to choose a different path. We’re only hearing one side of this story, and even that one side contains so many hints of willful obtuseness that you have to be a blind partisan to take Coinbase’s “shock” at face value.
The SEC can and does provide candid advice. I know entrepreneurs who have had lengthy calls with both state and federal SEC reps who will give straight talk.
This is not that. This is preparation to make a court case to use as precedent to attack the industry.
I feel the SEC is being a bad actor - stifling innovation rather than encouraging it.
Over the last 10 years the HN chattering class has dismissed crypto endlessly. I laugh all the way to the bank and its rise has been inevitable to anyone who understands software and finance. I look forward to the court case.
No admission of wrongdoing, all money returned to investors, and IMO we didn't do anything wrong despite the SEC's opinion. I laugh to the bank because I've been in crypto for a decade!
Because it's money that counts above all else, right?
Edit: It seems like your former company has still been operating in a shady manner since your departure [1], making it that much harder for me to take anything you say in good faith.
Hence my use of the phrase, "former employer". I'm simply observing a pattern at your former employer, whose co-founder remained there through June of this year; a pattern which makes it hard for me to believe that it was acting in good faith during your time there.
> No admission of wrongdoing (…) IMO we didn't do anything wrong despite the SEC's opinion
No admission of wrongdoing is always a red flag, implying there was definite wrongdoing. It’s good that your opinion matters less than the SEC’s “opinion”. Atleast your investors got their money back, I guess…
I personally look forward to the SEC handing it to Coinbase hard. After having Coinbase ignore multiple support requests for over 3 months where they weren't giving me my staking rewards, I can only assume they decided to just up and keep them for themselves. Coinbase will always be considered a joke to me when they can't even respond to their customers.
Why do people constantly cite legal fees to make a point or pour a foundation for another argument? That’s not the first time I’ve read a statement like that and it’s just a baffling thing to say. I’ve never heard “I’ve paid a lot of doctors so you should hear me out on ...”, oh, wait, yes I have.
“My attorney will be in touch,” too, like, you want to generate billable time for yourself to effectuate a threat to threaten me? Never understood it. Cool?
Tactically, the SEC is doing the right thing. The law is Howey, not whatever justification for prosecution the SEC offers. Coinbase is trying to solicit from the SEC a different legal standard from Howey that Coinbase then can then divide by half, quibble over, nitpick, or whatever, all for the purpose of undermining the regulator and hamstringing the prosecution. It's a silly lawyer trick to gain ... American football analogy ... a step in a footrace with the regulator ... which might allow Coinbase to delay or blunt the complete spectrum of consequences that would follow from a wilfull, knowing, and intentional violation of securities law.
It's chess, and a version that lawyers generally don't play on such a large and open stage. The fact that Coinbase has chosen to do so looks like a 'caution' flag raising the question in my mind of why they would feel the need to do this. And to some extent I'm speculating.
Presumably this has been explained. Threatening a lawsuit is not an action the SEC takes lightly. Coinbase will have plenty of opportunity to contest it in court.
It was a PR post written to rile a user base without knowledge of the financial system or securities law.
Unfortunately, it made it into regulatory and political channels and is backfiring massively. (If the general counsel and CEO of a $70bn exchange pretend to be this clueless, there are almost certainly deeper problems at the company.)
It's there for me. Copied below if people are still having trouble seeing it.
The SEC has told us it wants to sue us over Lend. We don’t know why.
By Paul Grewal, Chief Legal Officer
Last Wednesday, after months of effort by Coinbase to engage productively, the SEC gave us what’s called a Wells notice about our planned Coinbase Lend program. A Wells notice is the official way a regulator tells a company that it intends to sue the company in court. As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it.
Background
Coinbase has been proactively engaging with the SEC about Lend for nearly six months. We’ve been eager to hear their perspective as we explore innovative ways for our customers to gain more financial empowerment on Coinbase. Specifically for Lend, we’re seeking to allow eligible customers to earn interest on select assets on Coinbase, starting with 4% APY on USD Coin (USDC). We could have simply launched the product but we chose not to. This is far from the norm in our industry. Other crypto companies have had lending products on the market for years, and new lending products continue to launch as recently as last month. But Coinbase believes in the value of open and substantive dialogue with our regulators. So we took Lend to the SEC first.
What we’ve provided to the SEC
Coinbase’s Lend program doesn’t qualify as a security — or to use more specific legal terms, it’s not an investment contract or a note. 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. And although Lend customers will earn interest from their participation in the program, we have an obligation to pay this interest regardless of Coinbase’s broader business activities. What’s more, participating customers’ principal is secure and we’re obligated to repay their USDC on request.
We shared this view and the details of Lend with the SEC. After our initial meeting, we answered all of the SEC’s questions in writing and then again in person. But we didn’t get much of a response. The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion. Rather than get discouraged, we chose to continue taking things slowly. In June, we announced our Lend program publicly and opened a waitlist but did not set a public launch date. But once again, we got no explanation from the SEC. Instead, they opened a formal investigation. They asked for documents and written responses, and we willingly provided them. They also asked for us to provide a corporate witness to give sworn testimony about the program. As a result, one of our employees spent a full day in August providing complete and transparent testimony about Lend. They also asked for the name and contact information of every single person on our Lend waitlist. We have not agreed to provide that because we take a very cautious approach to requests for customers’ personal information. We also don’t believe it is relevant to any particular questions the SEC might have about Lend involving a security, especially when the SEC won’t share any of those questions with us.
State of play & next steps
Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem. Rather they have now told us that if we launch Lend they intend to sue. Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused. 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. The SEC won’t share the assessment itself, only the fact that they have done it. These two cases are from 1946 and 1990. Formal guidance from the SEC about how they intend to apply Howey and Reves tests to products like Lend would be a big help to regulating our industry in a responsible way. Instead, last week’s Wells notice tells us that the SEC would rather skip those basic regulatory steps and go right to litigation. They’ve offered us the chance to submit a written defense of Lend, but that would be futile when we don’t know the reasons behind the SEC’s concerns.
The SEC has repeatedly asked our industry to “talk to us, come in.” We did that here. But today all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued. A healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation.
The net result of all this is that we will not be launching Lend until at least October. Coinbase continues to welcome additional regulatory clarity; mystery and ambiguity only serve to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver.
We will keep our customers informed at every step as things progress.
And Coinbase has a market cap of $70B. I'm scared of investing in a company valued at that much that facilitates trading what are essentially digital trading cards with a chief legal officer with such a poor read on the SEC.
> 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
Nobody seriously makes the argument that Howey is outdated, so why is the year being called out here? It's written to get people up in arms, and as such I wouldn't count on anything written there to represent how Grewal actually feels.
Real question (zero trolling): What are the rules around here (implicit or explicit) about reposting / quoting? Sometimes, I am bit nervous to repost the whole thing. I don't see it often on HN. Maybe @dang can provide some insight.
You shouldn’t paste large blobs of an article here in general. https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que... (There are more recent instances of dang repeating the rule; can’t find them at the moment.) Also, @dang doesn’t do anything; if you have a question, send an email.
I certainly wouldn't post a news article from behind a paywall. But this is essentially a press release intended for wide distribution, and people are having trouble accessing it for technical reasons, so I see no issue reposting it as a temporary fix to the problem.
Just a few months ago, I posted a similar thing regarding SEC suing the Decentralized Content Platform LBRY Over $11M in Token Sales. The SEC said LBRY sold unregistered securities:
Which from that tweet thread from Brian Armstrong:
> Ok - seems strange, how can lending be a security?
I mean, in general, loans can definitely be considered securities sometimes, this is a thing? As you can easily find out googling? Either this is disingenuous, or the business has really bad legal/accounting advice.
I read the thread on my iphone. I assume it's still cached. Does anyone know of a simple way to pull the safari cache and re-display it before it's lost? Not for this specific case but for others where people failed to snag a copy first.
Its called a f**ing bond. Its probably the largest and most important piece of the global securities market. Coinbase is shocked that their bond-in-a-trenchcoat is going to be regulated like a bond?
I don't think there's any confusion at all to anyone remotely familiar with finance why it would be regulated this way. Crypto likes to rebrand decades old ideas and pretend they're new to confuse people who don't know better.
For cryptocurrency to flourish, the end goal would be to have everyone as a stakeholder (not intended as an indictment), so additions/changes to the laws that are favorable to the industry have public support.
As others point out, Coinbase must know the current legality of the lending offering. The likely objective of this piece is to gain support of those invested in the industry, and for them to push their legislators to reformulate laws.
Maybe they should have asked Brett Redfearn (former SEC director working at Coinbase) about the SECs reasoning. He left Coinbase in July? I guess the revolving door corruption failed (and/or he figured out where the wind is blowing)...
This is really all too transparent and obvious. A risk-free investment with 4% APY. What-aboutism about other exchanges (which are unregulated and off-shore). Not "understanding" the problems the "SEC" has (even though they have all the money to buy even former SEC directors knowledge about SEC procceses).
Do you know why it was risk free (to you)? Because of government regulations and government guarantees. There’s no such thing as a risk-free investment. Your investment risk was borne by your state and federal government.
It's not about the exact percentage, it's about it being significantly higher than the risk-free interest offered elsewhere in the market (which is <1%). That's a big red flag that it's not actually risk-free.
This is misleading. Different people asses risks differently. I have extremely little insight into the existing financial system: does my bank really have good security over their servers? Do they practice recovery on a regular basis so that there’s confidence my money will still be there when failures do happen? Will the IRS make a typo that results in my bank assets being frozen?
I have zero insight into that. A lot of people seem to take it foregranted that existing bank systems are infallible. I have no way to assess that beyond the test of time (which is still worth something).
Cryptocurrency lending platforms have similar types of risk: what’s the feasibility of the thing being hacked. For most of these, I can actually do a very rough assessment because the code is public, the team is usually public (and has a track record) and there are probably some security audits by groups who either are or aren’t yet reputable. I have more tools for assessing risk.
So yes, some people will judge the risk of the 0.1% system to be lower than the 4% system. Some people will judge the risk to be the reverse (more practical if you substitute Compound/Aave for the 4% system). But you can’t separate the risk of a system from the users of that system so cleanly. There’s a very large subjective component to it.
Everything you mentioned (servers failing, hacks, etc) is operational risk, and that isn't what I'm talking about here. The point here is financial risk: things like a counterparty defaulting on their loan, the intermediary (a bank, Coinbase or their insurer) going insolvent when that happens too often, and you losing your "guaranteed" money.
The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate.
The consumer primarily cares "what's my expected return, and what's the variance". Operational risk surely affects that, so what's the justification in ignoring it?
> The US government is generally regarded as the worlds most reliable debtor, and thus US government-backed securities (such as FDIC-guaranteed bank deposits), are seen as the lowest attainable risk and called "risk-free". Anyone offering higher interest rates must do something that incurs more risk to get the returns necessary to be able to pay that higher interest rate.
Look at your wording here: "generally regarded". This is the point I'm after: risk assessment is a thing done by individual actors. Yes, they'll outsource much of this to 3rd parties, but at the end of the day, it's a subjective thing. People with political ties with the US may be more likely to view US banking as a low-risk activity; the disenfranchised or the people with weaker US ties might view it as higher risk. It can be simultaneously true that Alice's risk-adjusted return through Lend is more than her risk-adjusted return through traditional banking, while Bob's risk-adjusted return through Lend is less than through traditional banking. That's not necessarily a contradiction.
Inflation and growth was higher back then. My guess is that most of the growth is simply happening outside the developed world.
It's somehow in human nature to not share work. The bean counters will tell you how stupid it is to manufacture in the US and that you should move absolutely everything to Asia.
Is the interest in case of lend actually risk free? The savings account was heavily regulated and insured so that even if the bank went out of business you would get your money back (up to a certain amount). What kind of emergency measures are in place to ensure that Lend costumers see their money again if coinbase goes out of business?
This definitely seems fishy. I don't see how this is possible unless if their position isn't levered. However, if they aren't levered, then why can't they just lend USDC themselves?
It appears that Coinbase was going to achieve that 4% interest on USDC in Lend via Compound [1], which is a DeFi protocol they helped launch a few years ago [2]. However, it is not clear why they said "Your principal is guaranteed", since they didn't say how, and that is a pretty big claim. I'm guessing, since they didn't really specify, but assets lent in Compound (and other DeFi protocols) are generally over-collateralized [3][4], to protect loss of funds, so maybe they were relying on that. However, even with that, funds in DeFi protocols could still be affected by things like impermanent loss [5]. That said, maybe they were just relying on some insurance thing.
Coinbase isn't making a return via leveraged treasury bonds or something. They are lending the money out presumably to crypto traders, DeFi schemes, etc. If someone thinks they they can make a 100% return on borrowed money, they absolutely should borrow at 10% (or whatever Coinbase's target is for their risk-adjusted cut after paying 4% to their not-investors). The whole space is so opaque and unregulated that it seems fairly clear that people with big accounts can, and do make market moving trades frequently.
You might ask, why would someone want to pay huge interest on stablecoins when money is so cheap to borrow from traditional finance now? Answer: the exchanges that do most of the action are offshore and probably nearly unbankable. FTX getting 1B of Tether several times in a week is business as usual for them (happened this past week), but its almost certainly impossible for them to get any Bank to do a 1B USD transfer without paperwork they cant provide.
Someone correct me if I’m wrong, but I don’t believe banks are allowed to lever at the multiples necessary to offer a 4% interest rate (the collateral requirements are prohibitively too high).
Coinbase is not a bank and doesn’t have to play by these rules.
>we’re seeking to allow eligible customers to earn interest on select assets on Coinbase, starting with 4% APY on USD Coin (USDC)
My uneducated view of the Howie test is an investment qualifies as a security if you invest, do nothing, and expect a return. That’s my dumbed down definition that makes sense to me, a non lawyer. I do think Coinbase has painted a target on their back, the govt sees crypto as a threat to stability, and this lawsuit is an attempt to create stability.
Why do some in the crypto community think that technology magically changes the fundamental tenets of a given activity?
Nobody would argue that it's impossible to commit wire fraud with a cellphone because it's wireless. And it's similarly disingenuous to argue the Howey test is irrelevant because it's decades old.
Is the First Amendment just some dusty old law that doesn't apply anymore because the Founding Fathers didn't have TikTok?
Did Uber not fundamentally change the taxi and limousine laws? Did AirBnB not fundamentally change hotel and rental law? Did file sharing not fundamentally change copyright enforcement? Did Internet pornography not fundamentally end obscenity laws? Does delta-8 not fundamentally change cannabis prohibition?
The point is that technology very often can and does magically change the tenets of an activity. This is just a fact of legal realism. The law can say whatever it works, but if the government is no longer capable of enforcing it, because tech moves faster and is more agile, then for most intents and purposes the law has fundamentally changed.
The price of a NYC taxi medallion fell from $1 million in 2014 to under $50,000. How else do you explain that besides the disruption caused by Uber. You might point and stammer "but, but, the rules written in the book still say the same thing!" But that's not how legal realism works.
Law is not some magical words in a special book. Law is the way that the legal system shapes human society. Would any neutral third party anywhere claim with a straight face that the New York City ride share system is not a fundamentally different regime than what it was 10 years ago?
> Internet pornography ending obscenity laws? What in the hell are you on about? Those laws changed before the Internet and not because of technology
As an aside, this is straight up factually wrong. The Ashcroft DOJ tried to actively bring obscenity charges against Internet pornographers:
I mean why not go after Coinbase? The argument that everyone else is doing it why not go after them doesn't hold much water. Sometimes it makes sense to go after the biggest fish first.
Also, is Coinbase saying Lend isn't an investment contract? It sure sounds like one to me. Lend my crypto to Coinbase and I get a 4% return? I like the idea but it sure sounds like an investment contract to me.
To me it sounds like banks can’t compete and just keep the 4%, so now they have the SEC go after their competition that can.
I don’t see the difference at all between a USD that makes (pitiful) interest in a bank savings account and a peg to USD that makes awesome interest in a Coinbase savings account. When I invest my USD with Wells Fargo bank they are converted to Wells Fargo Bucks that are tied to how efficient and generous the bank is (they aren’t) and my interest received is tied to that common enterprise. Those Wells Fargo Bucks aren’t classified as securities. The $1 portion will always be $1.
No one invests in Tether or USD hoping their investment increases in value, that is absurd. It’s always a $1, so it is always losing value unfortunately.
The difference is that the Bank has really tight regulatory requirements on how much collateral they need to have for each dollar in a savings account. There are much more regulatory requirements on banks that limit how effectively they can invest your savings account money. This all to ensure that the bank does not accidentally lose your money / cause a bank run.
Bank accounts count as a security. But they are regulated more tightly by bank-account rules, so they are exempt from the less stringent Security rules.
Meanwhile Coinbase is much free-er to do with your money as they like. If they play it too risky and go bankrupt, that is your money gone. To offset this risk, securities law requires they register as a security and make the required disclosures and limit speculative statements etc.
So "banks can't compete on interest" is maybe true, but not a fair comparison since banks also have to be much more careful with your money.
Your "Wells Fargo Bucks" aren't classified as securities because Wells Fargo is a regulated bank (with all of the restrictions and protections that come with that). Coinbase is not a bank. It is as simple as that. This is really more like buying a corporate bond (which is a security) rather than putting a money in a savings account.
It seems pretty apparent that there are two options for a company that wants to offer this product:
- Offer it as a bank, while complying with the regulations for being a bank, OR
- Offer it as a security, while complying with the regulations for offering securities.
My read on this blog post is that Coinbase is trying to get out of the securities option by kinda pretending to be the banking option, but without actually complying with or falling under the jurisdiction of banking regulations. Is that about right?
To everyone saying "Well it's just obviously a security", you may well be right. But securities law and the Howey test are actually pretty complicated. If the SEC has a rationale for why this product is a security, that's great, they should share it.
It's possible Brian is being dishonest in his presentation of their interaction. It's possible the SEC did give him a rationale and he just didn't like it. But if we take what he's saying at face value, the SEC's behavior here is unacceptable for a regulator, regardless of what you think of the crypto industry.
"Last Wednesday, after months of effort by Coinbase to engage productively, the SEC gave us what’s called a Wells notice about our planned Coinbase Lend program. A Wells notice is the official way a regulator tells a company that it intends to sue the company in court. As surprised as we were at the SEC’s threat to sue without ever telling us why, we want to be transparent with you about the course of events leading up to it. Background Coinbase has been proactively engaging with the SEC about Lend for nearly six months. We’ve been eager to hear their perspective as we explore innovative ways for our customers ... "
(And it does a redirect to medium.com not an error message, perhaps the Medium app doesn't have the feature of redirection and the blog post is still there, can't curl b/c of Cloudflare)
When I interviewed with Coinbase in 2018, it seemed that their core competency was strong relationships with regulators (not tech). And now they're picking a fight with the SEC? What's going on inside COIN? Office politics must be tense: unanimous support for this PR move seems unlikely.
This article seems to play into a trend I think I'm seeing more and more: caring more about the court of public opinion than the court of law.
At least that's the impression I got from phrases such as "engage productively", "proactively engaging", "eager to hear", and others that seem to say that Coinbase has good intentions and is trying their best, while at the same time seeming to portray the SEC as uncooperative and antagonistic, through phrases such as "SEC still won’t explain", "wouldn’t say why or how they’d reached that conclusion", and others.
The one that hits me the most and makes me think this is more about trying to align with the public will and not the current law is the following: "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."
AFAIK, a decades-old Supreme Court case is still considered valid law, and such an appeal I would imagine would fall pretty flat in a court of law, but seems to work well in a public sphere.
I'm open to being off on this, I guess I just feel a bit unsure how to proceed in this internet age, when I get the impression that people are skirting the courts of law more and more.
@RustyConsul, I have no idea why you were downvoted so much and frankly I feel annoyed about it. I liked your comment and wanted to continue the discussion but because some people downvoted you so much, I can't reply to your comment. I hope you see this one and realize not everyone wanted to shut down the discussion.
...How childish is for someone in an executive position to start whining on Medium in the name of the company about something as serious as legal issues? Did they start hiring 12 year olds after the recent mass exodus?
It's not childish. It can easily be a strategy to convince (retail) investors and users that Coinbase is in the right thus they shouldn't worry about this going too bad for them.
Again, the reasoning behind it is likely for convincing investors/users they are in the right and as far as I can tell it is working - I see a lot of tweets of people buying Coinbase's response and raging against the SEC and people like balajis retweeting them.
As a customer of Coinbase for a long time (since 2013), I'm happy they tell the public what's going on, even if it's bad or good. Their customer support is abysmal, so any updates from their own back office is good to me.
Coinbase is even shifter then PayPal. It took several months and numerous support tickets before they clarified that they take a percentage of all ACH withdrawals regardless if it is cash you deposited or proceeds of a crypto sale. If you take money out you pay them a percentage. They try really to hide that in their pricing matrix. Every time I asked about it I would either get a form letter pointing me to the pricing matrix, or a form letter explaining my bank may charge a fee for ACH. If I asked in a way that was clear that I had read the matrix already and verified my bank charged no ACH fees - they would stop responding. I think some manager was closing stale tickets and they gave me the exact answer.
Coinbase Pro [1] definitely has free ACH deposits and withdrawals, i.e. see the Fiat Deposit (Add Cash) and Withdrawal Fees table here [2]. That said I have heard that Coinbase does need to get their support in order, although that is surprising that with Coinbase.com (I'm guessing that's what you used) they would charge you to withdrawal cash.
When buying or selling crypto on Coinbase.com vs Coinbase Pro, the trading fees are for sure lower on Coinbase Pro. However, this applies to crypto exchanges in general when you don't use their "advanced" interfaces (which are basically more like brokerage accounts with market / limit / stop orders, vs just simple buy / sell interfaces). Gemini is another offender in that regard, i.e. if you don't use their ActiveTrader interface, their fees are quite a bit higher [3].
Support in order = they ignore support tickets for months or just delete them. They are acting like a bank essentially. Imagine going to or calling your bank and no one being home for months.
I have to say I'm getting tired of all these 'new economy' (is it still new?) companies, trying to get around established regulations which usually have been put into place for a good reason and using PR to create a narrative/pressure to say that regulations/regulators are hindering innovation and are not acting in good faith. Instead it seems to usually be the case that they are trying to do exactly what the regulation is trying to prevent. Just because because they come out of a "move fast and break things" culture, doesn't mean rules don't apply to them. Fortunately more and more people are seeing through these shenanigans.
> I want open banking ... What I do not want is that lots of people lose money due to fraud or high volatility
That's a bit like saying you want open source without the bugs, drama, forks or the ability for people to see the code you're publishing.
Things come with tradeoffs. Open banking comes with the tradeoff that fraud and loosing your funds become easier, but it also means that it's easier for people without access to banks to have something to store value in.
I honestly am tired of the idea of a store of value.
99% of the time people talk about some sort of commodity (gold) or pseudo commodity (Bitcoin).
1% of the time they talk about bonds and fiat that is backed by bonds (via government or banks).
The idea of storing value in a non degrading commodity is a fallacy. Gold is special because it doesn't degrade. Yet when you sell grain to buy gold there is no guarantee that you can buy grain in the future. Why? Because unconsumed grains simply rot away. So when you decided to save for your retirement by piling up gold you simply assumed that the pile of grains is still there, hoping that someone else started farming and maintained the pile for you. There is a mismatch between the supply of gold and grains.
The debt system is slightly better. There is now an obligation to deliver a pile of grains. There is a different problem though. People are obligated to work, but you get to choose when. The problem you run into isn't whether the pile of grains is still there because that part is guaranteed, the next problem is whether there are enough workers to start farming. There is a mismatch between the supply of fiat and labor.
When you consider this, then the reason why our pension systems are unsustainable is simply because we let the "good" years of population growth take care of the problem for us. The thought of planning 50 years ahead never occurred to us.
The moral of the story is that storing value is more complex than putting your dollars somewhere. The dollars are only worth something because there is a big machine (our society) that is running the economy, yet we believe we can isolate ourselves from that machine when it is failing. Financial independence really is just a different form of dependence.
No, that is not what open banking is about at all. It just means that your financial data is not held in a prison by your banking provider. It means you have control over who you share that data with so that you can get value added services using your data.
I normally don't like the idea of an institution which aims to protect people from their own poor decisions...
But in our current, highly artificial, manipulated, money-printing economy, I think the SEC should just go ahead and shut down all the big crypto projects. If a crypto project can be shut down easily, it should be shut down. The SEC should also try to shut down all these so called 'Decentralized Exchanges'; if a DEX can be shut down, then it means that the DEX was not decentralized enough.
There are projects in existence today which are truly decentralized and would be impossible to shut down but they are not getting any attention because these huge crypto projects are hoarding all the newly printed money which they claim to be fighting against.
As dangerous as it sounds for the industry, this article tells us they’ve discussed with the SEC without telling us what was said on their side. It’s difficult to share their confusion if we don’t know what they have fed the regulator.
Common sense makes it sound like Lend is clearly not about securities, but the SEC has generally been looking for settlements or discussion instead of straight litigation. Why the change of motus operandi? Is it because Coinbase is big and it would make an example, or maybe somewhere in Lend there’s a business model that makes the product act like a security? Who knows at this point?
More information from Coinbase would help us empathize.
I think it comes down to one simple thing: Is there sufficient securities and disclosures in place for the financial vehicle (which looks a LOT like a bond). Saying "hey why can't we do what all those other (unregulated) exchanges are doing!!" is not a valid argument in the eyes of a regulator. I don't think any of coinbase's current clientele would be using coinbase if it wasn't a regulated compliant solution. You make your bed and you sleep in it.
Well, this is a crock of shit. These guys want to discredit the regulator so that future money grabbers such as these will find it easier. I hope they get roasted over coals by the SEC.
Brian, this is "Regulation via Litigation". They aren't capable of working through this themselves and are afraid of making mistakes in doing so. They they leave it to the lawyers. Just the people you don't want impacting the new technologies. You have to go on the offensive
The problem for Coinbase is the SEC understands it all too well. This is an investment, very much like a certificate of deposit, which happens to be regulated so that investors don’t get screwed.
Pretty hard to believe when Conibase's raison d'etre is to be the US-regulatory-regime-compliant face of the cryptocurrency industry, and when they are presumably represented by a law firm that has had previous clients subject to Howey test enforcement actions.
Although I'm not a fan of the SEC or regulators in general, I can appreciate how this falls under their purview. However, "Lend" is probably the least concerning thing about Coinbase in my view.
The process by which they list or decline to list altcoins on their platform is more troubling.
USDC IS A BASKET OF SECURITIES. It’s literally cash plus treasuries. I don’t think Coinbase is acting in good faith when they say they don’t understand why they are getting blasted by the SEC. This is the exact same issue with the original libra coin.
My guess; Coinbase want their day in court to argue that Lend isn’t what the SEC thinks it is and this will allow them to build products with more leverage and complexity (and profit for Coinbase) in the future.
The whole defi/ico/staking space is so mired in fraudian distortion fields that people who've come too close are no longer able to perceive ordinary reality anymore.
I'm confused. Isn't it Coinbase's responsibility to be GAAP compliant now that they are a public company? These would be standard things a CFO should understand....
As a non US citizen who knows very little about these things, could someone ELI5 what the implications would be if the Coinbase Lend program is successfully classified as a security?
I would like to think that even the most crypto-skeptical here, those who wish the entire ecosystem would collapse in flames, would agree that the SEC and other regulatory bodies need to operate with transparent rules, making it clear when and why a company is violating the law. Operating short of that is not, by conventional definition, operating under the rule of law.
It seems pretty clear that the SEC is not currently meeting those standards, and that needs to be fixed. Whether or not the target is one we are currently sympathetic towards.
The SEC is not under obligation to sue offenders in a chronological order of market entry.
They may have been looking at this space for a while, and Coinbase’s size made them act to stop the proposed product where a smaller actor’s existing product wasn’t weighty enough to sue yet.
And in crypto SEC is usually late to enforce. They only last week cracked down on the Bitconnect ponzi, which collapsed in January 2018 (that's an eternity in crypto)
I think part of the confusion is, if the product is what they claim it is, it already exists with a multitude of other companies.
There’s a US company named Celsius in NY that already offers fixed interest for crypto and loans. Ethereum has a dozen different defi options for lending out crypto. This isn’t some new thing that the SEC has never seen before.
It seems weird that if the SEC intends to use that ruling that they haven’t yet applied it to any of the existing products on the market or at the very least released a guidance.
Existence of prior rule breakers doesn't mean that it is not forbidden. In reality SEC does try to pursue lots of crypto businesses and in general goes in the order of size rather than chronology.
I actually agree with you. I think it is fair to say crypto is hard to get right — on the one hand there are lots of scams, on the other hand there is a large amount of investment in non-scams.
I can't believe anyone hosts their stuff on Medium. It's an increasingly trash platform; you go to some website.com and then get n announcement that you've viewed too many medium stories this month. That didn't happen with this specific story, but the fact that Coindesk a relying on someone else to host their blog creates a poor impression - why would I trust their security or anything else, before I get near their financial products? Strange decision.
Incidentally, I do think the SEC owes people clarity in matters of legal reasoning, but am not sure Coinbase is being fully forthright with readers here based on various other observations in the thread.
They know why they are being sued. This is just a cry for help from pro-crypto consumers and crypto-adjacent business for whom coinbase has been paving the way.
