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

The rule is basically: "If you're giving someone else money in the hope of getting more money back later, it's a security UNLESS it fits into a list of exceptions, or if it meets the criteria to be added as a new exception."

So a savings account would absolutely be a security, unless it fits into one of the recognised exceptions. One of those exceptions is the existence of an "alternative regulatory regime", ie, there being some other framework, other than security laws, to protect people.

For a savings account, the fact that banks are federally regulated, and that deposits are federally insured via FDIC, means they don't count. But Coinbase's Lend program does not seem to be subject to any other regulatory regimes, so...

In fact, the very fact that they went to the SEC to tell them what they were up to and check if it was legal is a bit of a red flag. The SEC enforces security laws. The fact Coinbase couldn't go to the Federal Department of Enforcing Crypto Lending Regulations is a sign that this falls under security laws, because there is no stand alone Crypto Lending Regulations to enforce.

This is such a good explanation.

It made me understand that this is all about protecting the customers investment, and, if nobody is protecting it, then it would have to be the SEC who does it, but they can only do this if it is a security. If it isn't a security which has to be protected by the SEC -- like Coinbase is claiming -- then who is protecting it? This appears to be what the SEC wants to have answered. Coinbase instead wants the SEC to tell them what to do about it, but that they don't want to set it up as a security. Yet Coinbase would be happy with just proceeding without any protections in place.

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

Just like Texas abortion laws, this is not enforced against the US resident, it is against the service providers, which has allowed this framework to persist for 70 years.

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

The institutions that would want to operate these have the power to run massive advertising campaigns promoting them as the best place to earn money (with a bunch of quick disclaimers just like the various medical ads that people have gotten so used to now).

The people who would be preyed upon by this are not those with the education and experience to tell what's a sound investment and what's a bunch of bullshit, but precisely the opposite.

And though I know that there are many—perhaps you're among them, perhaps not—who would say "anyone who can fall for such a scheme deserves to lose their shirt", personally, I believe that we live in a society and we have a greater duty to care about each other than that.

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

In theory, it locks people out of reward.

In practice, it locks them out of scams.

It is horrendously irresponsible to enable practices that we can predict will, with very high probability, result in significantly greater ability for predatory and unscrupulous actors to take advantage of the public, especially if the purpose is merely to allow the wealthy—and it is only the wealthy who can genuinely take advantage of such things; the rest of us simply can't afford to take those risks—to try their hand at high-stakes gambling.

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

It is an overfitted system that has created more and more compliance in response to rare scams that occurred within the rules of their system anyway! If companies didnt find it too expensive to go public earlier nobody would be trying to have this conversation. People wouldnt be getting ripped off in massive SPAC deals because the target companies would be public already.

Casinos are pretty highly regulated.

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

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

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

"regulated as a security" itself can mean 100 different things, and its not a nuanced enough take to know if a product can be offered at all, to whom it can be offered to, what disclosures are necessary if any, and more

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

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

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

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

Coinbase is promising a fixed 4% earning. If they are to be taken serious, 4% does not mean the risk of losing it all, like in a casino.

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

The whole situation smells of a turf war between regulatory agencies, which is entirely in character for the SEC. They've been doing the same shit for years with the CFTC. You're no longer allowed to trade forex using the same account that you trade stocks with...not because the SEC regulates forex, but because they want to regulate forex, and are trying to strongarm the CFTC into ceding it's jurisdiction by crippling the forex market. This is plainly another turf war play, trying to grab territory that is far more cleanly regulated by FINRA.

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

How?

> For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA.

Cryptocurrencies are not generally securities, though some may be. To the extent this isn’t limited to securities, it would not be regulated by FINRA.

> their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA.

FDIC doesn’t insure, and therefore regulate, cryptocurrency accounts. I’m reasonably certain Coinbase is aware of this fact. [0]

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

Which other regulatory agency is asserting authority?

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

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

Neither the SEC nor FINRA has stated anything public about this at the moment, but I'm willing to bet FINRA will go to bat for this.

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

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

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

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

And just from first principles, I'm not sure that FINRA, an organization largely dominated by traditional broker-dealers would be willing to go to bat for a weirdo newcomer. If they aren't doing the basics of building relationships with the SEC, is Coinbase building relationships with the other companies necessary to get FINRA to go to bat for them? But again, not sure about this, just a bit skeptical.

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

Coinbase certainly started out with the rogue "Can't touch me, it's crypto" bullshittery, but over the past 6 years they have been one of two exchanges (the other being Gemini) which have actually taken regulatory approval and collaboration seriously. Maybe the SEC's fines and handslaps have made them fear the alternative, who knows. Whether that means that they can really have any influence over FINRA is yet to be seen.

> In fact, the very fact that they went to the SEC to tell them what they were up to and check if it was legal is a bit of a red flag.

You might come to this conclusion if you think of laws as creating a fine boundary between legal and illegal. In crypto in particular, there are a ton of open legal questions that the SEC has not given explicit guidance about and certainly have no settled legal precedent in court.

The SEC has the ability to write you a get out of jail free card, actually. You write to them and ask them to give you a letter saying they OK'd the thing you're doing as a one-off and that they are not issuing a general rule that that kind of thing is ok (in case they change their minds later).

Very helpful, thanks.

It sounds like you're saying the banks get a special carve-out to provide this service simply because the regulator is different.

On a fundamental level though, I still don't see the difference.

I do have to disagree with the last paragraph though. Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.

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

Metaphorically, Coinbase just went to the police department and explained in great detail their intention to sell hard liquor without a liquor license. Under sworn testimony, they explained... 'you see, we are just providing the same product as licensed liquor stores, so it's all good'.

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

FDIC is a perfect example! There are accounts I know and would expect that but there are times I'm willing to waive that for compensation. Welcome to the land of crypto where nothing is FDIC and the government isn't going to protect anything.

Public opinion matters because it can be the very conversation that gets politicians to challenge the existing laws to be changed.

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

Individual freedom vs. community safety.

Where to draw the line?

Who should draw it and by what mechanism?

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

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

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

So yes, banks are one of the exemptions, because they have their own regulator (which is one way to get on the white list).

> Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.

No, the red flag is that Coinbase (correctly!) understands that the SEC is the relevant regulator. Your local credit union does not go to the SEC when they want to offer a new type of savings account because the SEC does not regulate credit unions. Which is good, because the SEC is only competent to apply securities law, and securities law doesn't allow savings accounts.

So yes, absolutely you should consult with the relevant regulator, and if the relevant regulator for you is the Office of the Comptroller of the Currency (who regulate banks), they're probably going to cheerfully sign off on your savings account idea; they like savings accounts. But for Coinbase, it's not the relevant regulator, because they're not a bank. Nor do they seem to fall into any of the other many exceptions and regulatory schemes so...

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

The thing is that this really isn't an investment. An investment looks like this:

- You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money.

A rental looks like this:

- I need a piano for 6 months. You have several pianos. You let me have one, and every month I can either give you $50 or return the piano.

Stock borrowing works that second way, except that instead of a piano, it's a share of AAPL. There is no project involved, but the share of AAPL lives in my house instead of your house, and every month you get $0.04.

Interest is also on that second model, so in that sense it's not different from interest. But neither is the piano rental.

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

If I put money in your bank-like-thing, expecting to get more back at the end, it's an investment.

> I'm guessing the concept is more like stock lending fees

Those are investments too. Their technical name is "repos", short for "repurchase agreements".

> You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money.

That’s venture capitalism which is just one of the many different types of investing. Buying pianos in order to lend them out is another type of investing.

> Buying pianos in order to lend them out is another type of investing.

But the example here is renting out a piano you already have, not obtaining a piano so you can rent it out.

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

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

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

I don't understand it nearly well enough to explain it, but the wonderful Matt Levine has given it a shot: https://www.bloomberg.com/news/newsletters/2021-08-09/money-...

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