There's literal decades of case law about what is and isn't a security. If Coinbase is too cheap or stupid to figure that out, they deserve what they get.

Take a moment to look into it. Coinbase has hired the top legal team in the world on exactly that topic. They know the case law. The SEC has consistently refused to respond to any queries for clarification on what Coinbase can do to ensure compliance.

So, Coinbase wanted to convince the SEC they are not a securotoes exchange. The SEC didn't buy it. Instead of going forward and properly register, Coinbase choose to continue operating under their own interpretation of the law. Now the SEC sued, tool them long enough, and we will find out who of those two is right.

If I had any money with Coinbase or Binance, I pull it out ASAP.

Coinbase hired a top legal team to avoid regulation. You're parroting the story that those expensive lawyers have concocted as justification for their efforts to avoid enforcement while the company was busy selling unregistered securities.

Or Coinbase hired the best legal team in the world to seed confusion because they never wanted or intended to register, but needed a hypothetical position to defend against journalists and skeptics.

Obviously a wild conspiracy claim. But then again we're talking about fintech.

They have hired the top legal team in the world with the specific remit of "get us the answers that are easiest and cheapest for Coinbase".

That is entirely tangential, if not orthogonal to the subject of "define securities".

I mean from Coinbase's own filing. "The SEC has stated that digital tokens are securities. We disagree..."

and "registration under the current rules is, for many market participants, either not possible or not economically viable given the associated and unnecessary compliance burdens"

It's not that Coinbase disagrees that they're securities, as such. It's that they say it's too much work or cost to do so.

Those decades of case law still don’t clarify the rules, they only clarify what isn’t allowed. The actual rules have yet to be published, for good reason, because it would limit the SEC’s cartel. By NOT having rules, they can claim something is “illegal” and have the weight of the US federal government to bully with. By defining what is legal and what is not will allow smarter folks to game the SEC to their advantage. Coming up with securities that meet the definition but are different than what the SEC is aware of. This is all about knowledge and power. Keeping it in the SEC’s court. Keeping it in the SEC’s control.

Well then it’s known risk.

If it was known risk that the alleged perpetrators didn’t accurately account for, that’s on them isn’t it?

I agree with the general complaints about unconstitutional power, but when you know the SEC operates a certain way, and you try to get around that by throwing massive amount of money/lawyers at the problem, are you really a victim?

Please read the actual Petition for Rulemaking Coinbase filed in July 2022. It is extensively footnoted about how the "decades of case law" don't apply to this new thing that has only existed for 1.3 decades and was designed around the existing laws on purpose.

That is, read it if you actually want to understand the situation.

(PDF) https://assets.ctfassets.net/c5bd0wqjc7v0/5NRidtW8lvwVEfSHpn...

I skimmed the document to go directly to the questions Coinbase is asking, and really, the first question is:

> Are the Howey and Reves tests the appropriate tests for determining whether digital assets are securities?

Which makes it pretty clear to me that a) Coinbase is aware that the Howey test applies to cryptocurrencies, b) Coinbase is aware that many cryptocurrencies are likely to be classified as securities requiring registration by the Howey test, and c) they want the SEC to change its regulatory position so that is not the case. Skimming many of the remaining questions, it is striking that Coinbase isn't complaining about a lack of clarity in the current regulations, they're complaining about what the current regulations require them to do.

So...just going to skip the part about actually reading the footnotes? I just want to be clear on whether to consider you to be someone who has taken the time to inform themselves about the matter.

Coinbase's opinion on the matter is pretty irrelevant to determining what is and isn't a security. The fact that they tried to get the SEC to tell them what they were doing was or wasn't allowed (never mind the fact the SEC likely had an ongoing investigation that prevented them from commenting in the first place) is wholly irrelevant to the fact they were actively breaking the law.

At your behest, I did go to the footnotes. And my read of the footnotes is not that they're an extensive citation of case law to justify their points. (There's just 5 cases cited). Most of the footnotes are citations to various other exhortations that essentially amount to "we think existing financial regulations are too onerous for cryptocurrency companies, please loosen them." Again, there's very little "we think the regulations are unclear," but rather a lot of "we can't do what we want to do under these regulations, please loosen them."

This is peak HN. A casual commentor in a thread who thinks they know more about the law than an entire legal team at a public company.

The facts are the SEC thinks Coinbase ran afoul of the laws and regulations around securities. Coinbase has been trying to get the SEC to either explicitly or implicitly allow Coinbase's operations, and the SEC declined to do so.

They probably went through several legal teams before they found one that could be willing to try some wild strategy, or they were willing to take the Uber approach and break the law and cash the checks, hoping to outrun law enforcement and lobby for the laws to change.

Yeah, I can see they're trading in unregistered securities, and they're going to have the book thrown at them for it. Anyone that's not a crypto fanboy can see they were trading in unregistered securities.

And you think you know more than the SEC

No, the OP thinks the SEC is not operating in good faith.

But we should assume the opposite is true of Coinbase?

I'm not sure what that means in this context.

This is what courts are for! Is Coinbase acting in bad faith? Is the SEC? Who knows. They will have to put up or shut up in a courtroom.

Not that uncommon, I'm afraid. Check out the GDPR threads: there is a huge difference between the people who discussed implementing it with lawyers and the general public.

And there is a huge difference between the people who 'discussed implementing it with [american] lawyers' and people who actually worked with EU watchdogs and implemented changes.

No idea about that, as I am in the EU. What kind of advice did you hear from American lawyers?

Disputing the claims that a self-interested party makes doesn't mean you think you're smarter than them. It's okay to disagree with people; even lawyers and rich people.

Yeah, the whole “we tried to get them to tell us how to do it!” thing is a very weak defense.

Yeah, but it was their best option. If they got lucky or bribed the right people they could have got their assets listed as non securities due to a technicality.

Coinbase Staking, the specific service that the SEC is going after here, is obviously not a security. It's a hosted custodial wallet, and Coinbase provides delegated staking. IMO Coinbase lawyers are about to eat the SEC alive.

This is one of the things at issue, but far from the only one.

And Coinbase does not provide delegated staking in the way that Kraken did, for example, where funds were pooled and rewards distributed proportionally.

The difference is technical and detailed, but very important.

Yes, the way Kraken was doing it was super sketchy. Basically you give them your money, and they give you some regular APY. Very reminiscent of a ponzi scheme.

Coinbase did it right, structuring it as a staking service. Staking is something that anyone can do, but it's a pain in the ass. Coinbase make it easy by letting you stake assets, and they run/monitor the staking nodes for you, and as service fees, they take a cut of the rewards (which fluctuate moment to moment).

The Howey test sets out four points:

* An investment of money - check (into the staking pool)

* In a common enterprise - check (the staking pool)

* With the expectation of profit - check (obviously)

* To be derived from the efforts of others - check (the manager of the pool)

It's a security.

Does my putting money in a certified deposit at a bank count as a security? Note that that one is interesting, as their are brokered cds, and those are definitely treated as securities. And then their are plain interest bearing savings accounts, and those are not? (Or are they all, nowadays?)

(And yes, this is no different than a loan that you give out not being a security, but loans can be wrapped up in forms that are considered securities.)

I suppose you can argue it is one of scale? If I loan money to some friends in the condition that they pay me back with interest, nobody cares. If I set up an exchange so that many people can do this, it gets interesting.

From Coinbase's page about staking:

> Staking requires assets to be locked on the protocol in order to earn rewards.

This is not true for my savings account.

As for loans, Reves v. Ernst & Young established that "a note is presumed to be a security unless it bears a strong resemblance, determined by examining four specified factors, to one of a judicially crafted list of categories of instrument that are not securities". That list of exemptions includes mortgages.

But non-brokered CDs are also locked, and are not considered securities.

You have Marine Bank v. Weaver (and FDIC insurance) to thank for that.

> We see, therefore, important differences between a certificate of deposit purchased from a federally regulated bank and other long-term debt obligations. The Court of Appeals failed to give appropriate weight to the important fact that the purchaser of a certificate of deposit is virtually guaranteed payment in full, whereas the holder of an ordinary long-term debt obligation assumes the risk of the borrower's insolvency. The definition of "security" in the 1934 Act provides that an instrument which seems to fall within the broad sweep of the Act is not to be considered a security if the context otherwise requires. It is unnecessary to subject issuers of bank certificates of deposit to liability under the antifraud provisions of the federal securities laws, since the holders of bank certificates of deposit are abundantly protected under the federal banking laws. We therefore hold that the certificate of deposit purchased by the Weavers is not a security.

Doesn't this just show that the "easy 4 question test" is not sufficient?

Or is that largely considered a mistake in interpretation nowadays?

That's where the 'decades of caselaw' bit comes in.

The "decades of caselaw" specifically includes instruments that "failed" the test but were still judged to be non-securities. So, it makes sense to push for a legislative/regulatory judgement.

The test still applies. So do the exemptions to it (some established by Congress, others by judicial action). There's no exemption for cryptocurrency staking pools.

Perhaps Coinbase's eventual appeals will establish one, but I doubt it.

This feels very hand wavy, to me. The test applies. Except where it was challenged and exemptions were codified.

Is the argument that it did apply in those situations before the exemptions?

> This feels very hand wavy, to me.

This is how the system works. "Code is law" does not apply to actual law; it's a long history of interpretation, wiggle room, precedent, legislative intent, and common sense being applied in various amounts. It works pretty well, all things considered; far more than trying to explicitly write down every little edge case.

Ah, completely agreed. But we can't lean on "it is easy, the Howey test explains all" without a huge caveat.

I will note that this particular path is treading on the "lets write down every edge case." As such, it would be better to have a slightly stronger guideline than that. Specifically, when the law is "this test, except for specific carve outs that all fail the test", that is a pretty bad law. Unless there is some unification of the carve outs other than "we decided these don't apply."

> This is not true for my savings account.

I'd say that "locked on the protocol" is functionally equivalent to having money in a bank account, so yeah it is true for your savings account. You can still take it out (aka "unlock" it) at any time. The staking/unstaking process is just an on-chain event that requires the staker to have custody over the ETH. No different from a deposit or withdrawal from a bank account.

This is different than a lot of other DeFi which does not require any external custody.

> In a common enterprise - check (the staking pool)

I'd take issue with this one. Is the "common enterprise" here supposed to be Coinbase, or the Ethereum network itself?

The Ethereum network offers financial incentives for supporting the distributed infrastructure. In order to ensure good behavior, an amount of "stake" is required to keep people honest, such that dishonest people get their stake slashed. Coinbase provides a nice handy UX where Ethereum holders can stake their assets using validator nodes operated and maintained by Coinbase for a small cut of the staking rewards.

> Is the "common enterprise" here supposed to be Coinbase, or the Ethereum network itself?

Coinbase, and Coinbase's pool(s). As you cite, "using validator nodes operated and maintained by Coinbase". Coinbase and the staking users are engaged in a common enterprise for mutual profit.

The problem is their business model is illegal.

The idea that they need “guidance” is another way of saying if we follow the clear law what we want to do is impossible so can you help us with that.

The SEC answer has been yeah no we can’t solve that problem for you.

It’s all on the first few pages of the linked complaint, they didn’t register as a dealer, broker, clearing house, and so on, because the would instantly be on the wrong side of all sorts of regulations for what those institutions are allowed to do.

They don’t want clarity. They wanted waivers. They wanted the SEC to say crypto is different so you don’t have to do XYZ.

The SEC said no.

Yes, it would be like a married man asking his wife for a list of things that count as cheating so that he can be sure to avoid doing anything she wouldn't approve of.

Very few women would respond, "here is the list, if I forgot anything it is totally my fault and not your fault for doing something that is technically not on the list"

That metaphor is a start.

More accurately it would be like a married man asking his wife for a list of things that count as cheating while openly fucking prostitutes and fathering multiple children and bragging about it.

Except that marriage is a voluntary relationship of mutual cooperation and trust. Regulation is an involuntary relationship of coercion and enforcement. The least the coerced party may as for is to know what it is going to be punished for, what are the rules of the game. And if us, and always have been, the "fault" of the legislature and law enforcement if somebody does something lawful but they didn't like it. That's how law works in a legal culture we used to have - whatever is "technically" on the list, is not legal, all the rest is legal, and ghe burden oc proof is on the state. You would not like the alternative.

Except the USA is a democracy. If a Orange reality tv star can be elected president, a crypto person could be as well. But most people don't want "code is law".

I guess this is a five-star effort in the category of "make any discussion about Trump because I can't talk about anything else". Any on topic comments to follow?

No, this is the same point I've been making since 2010. Having libertarian ideas like "code is law" and "money should be decentralized and permissionless" sound nice in theory, but in the real world they don't work very well.

You are seeing this now with the fact that we have not elected anti-regulation people over the past 13 years. And people have preferred to stay with more traditional financial products. So crypto isn't working out in the real world.

Well, if US regulators can destroy any company in crypto space in a couple of days, and are willing to do so, then it's hard for it to "work out in a real world". If the regulations are "just don't do anything bad, and we'll tell you what's bad after you do it and invest billions in it" then it's hard for it to "work out". If the users are asked to invest into assets that can be wiped out of existence by regulators at any minute, then it's hard for it to "work out".

Yes, the government is part of the real world.

If you created a nuclear power plant in your basement that you feel is totally safe, that is great, but a good chunk of the rest of the country wouldn't be comfortable with that and they would expect the government to shut down your nuclear power plant.

You could disagree with them and the government, but it wouldn't work out well for you to invest all your money into your basement nuclear reactor.

That would not mean "nuclear power does not work". That would mean "people do not want it, whether it works or not". Except here it's not "the rest of the country" but a bunch of unelected bureaucrats which 99% of the country doesn't even know exist, and certainly didn't ask them to do anything.

You started with claiming it "does not work", but ended with "it's bad investment because the government would destroy you". These are wildly different claims.

Bitcoin was created specifically to prevent the government from controlling money supply, by creating an alternate form of money. The idea that it isn't succeeding because unnamed bureaucrats is misleading. The SEC and other regulatory frameworks exist today because of laws created over decades. Those laws were created to protect people, after many people were scammed.

https://en.wikipedia.org/wiki/Blue_sky_law https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_C...

People generally don't want to get scammed, which is why crypto is failing. Obviously we are not talking about the software here. I'm sure plenty of Web3 "software" works just fine, what doesn't work is selling unregulated securities to investors who lose all the money.

> The idea that it isn't succeeding because unnamed bureaucrats is misleading.

You use two distinct definitions of success here. As a means to transfer value beyond governmental control, Bitcoin has succeeded. You can do it any time, provided you are fine with your value stored in Bitcoins.

The other definition is "anybody can use it without the fear of ever being scammed and the regulators can not make using it inconvenient or legally dangerous". This is obviously impossible - the regulators can declare anything they want to be illegal (even the Constitution is only a weak impediment, and it does not have any barriers preventing financial regulation, and as long as people do transactions, they could scam each other. This is absolutely unrealistic and non-sensical definition of "success" - nobody ever could deliver on this, including every existing payment system, where people get absolutely scammed all the time.