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.
[0] Right? Counterparty risk!
Bonds are raised from a diverse set of investors. Loans, in securities parlance, are raised from (and syndicated by) regulated banks.
Similar, you can sell shares in your business to your friend or business partner, but if you want to sell to the general public, the SEC is interested.
(I have no clue whether this distinction is the important legal one here.)
A cursory search of "loan vs bond" yields many interesting results. I am sure the variance matters from market to market.
Yes...and? Are you trying to explain why, when other Howey-test factors are present, a fixed-return guarantee does not alter the determination that an offer is a security, or argue against it? Because it seems like you are trying to do the latter while actually doing the former.
There is of course software risk in the smart contract (although I think people underestimate that in conventional finance too).
Which is why I didn't say it. One of the nice features of smart contract platforms is that any two people can quickly set up a transaction where they swap a basket of assets for another basket of assets atomically and without counterparty risk. To get similar guarantees in tradfi requires either an underwriter (that we assume can't go bust) or escrow (with a party we both completely trust).
Smart contract systems are of course infinitely flexible, and some of the most useful kinds of systems you might want to build are not overcollateralized, but those that are can liquidate automatically with no counterparty risk.
Your comment seems to treat 'defi' as just one thing. It's not. There're a huge range of products offered, with risk ranging from lower than lots of traditional products to crazy high.
Of course there is counterparty risk - the contract writer could be adversarial. People dont always audit smart contracts (or may not realistically be able to, especially if the contract writer is attempting to obfuscate a subtle bug they can use for their own advantage). Thats the point of the above comment.
If the traditional world, courts would interpret such a contract as not valid. In the DeFi world, code is law - at least until law enforcement and regulatory agencies catch up to it.
Fair enough, if you consider that to be counterparty risk. I prefer to think of that as an entirely separate kind of risk ('software risk'). This is partly because these contracts can be written by entirely separate parties having nothing to do with the counterparty (and sometimes provided as public infrastructure, since they don't cost the writer anything beyond the initial deployment cost).
I suppose to some extent it depends whether you consider the smart contract itself as a virtual counterparty that could default either through malicious coding or through bugs that allow hackers to steal assets.
I also don't see any problem with combining smart contracts and real legal contracts. If someone scams you in the DeFi world, they're scamming you in the real world too. I know that at least the UK Supreme Court has ruled that digital assets are property at common law.
There is no such thing as overcollateralization. Higher levels of collateral are required against higher levels of risk. If one party is required to post "excess" collateral, that's because the risk is greater than whatever you think it is.
The very fact that certain DeFi projects dealing in things like stablecoins require obscene collateral is proof that there is tremendous risk...and the high levels of collateral are an attempt to mitigate some of that.
Euh... https://rekt.news/
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?
LTCM?
No. By that standard, no bonds would qualify as securities.
That being said, loans are not usually considered securities.
Although they are regulated by FINRA.
A bunch of machines and a factory is not a security, but you can package it into a security.
https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...