Some key takeaways: For historical reasons as well as practical ones (who would you sue) BTC and ETH are probably considered commodities. Most of the rest are very similar to ICOs which were securities and rife with fraud. But you can't really go after the issuers very easily for a lot of reasons. But there are two parts to the SECs laws. One part is the issuance of secuirties, the second part is the brokers (or in this case exchanges). FTX, Binance, Coinbase, do things that would be illegal to do with securities (conflicts, lack of disclosure etc.). The SEC is just pointing out that most coins are securities and what they are doing is illegal under current law.

https://news.bloomberglaw.com/mergers-and-acquisitions/matt-...

They crowdfunded $18M and used that to develop and issue tokens. It was clearly under their control at the time.

Again, I don't know anything about the creators of ETH, but they may have a better defense of their actions then-- say -- Sam Bankman Freid.

Coinbase wouldn't be the one to register the security - the company offering the security would be the one registering it. Coinbase may have some securities of its own - but it is unlikely that it would be able to provide the necessary information for much of them or take on the necessary responsibilities for providing the auditing.

https://www.investor.gov/introduction-investing/investing-ba...

    The registration forms a company files with the SEC provide significant information, including:

    A description of the company's properties and business;
    A description of the security to be offered for sale;
    Information about the management of the company; and
    Financial statements certified by independent accountants.

> In order to register a security under the Securities Act, a company must file a registration statement with the SEC. Typically the type of registration statement used for an initial public offering will be a Form S-1 Registration Statement (Form S-1). A Form S-1 includes two parts (Part I and Part II). Part I is the prospectus, the legal offering or “selling” document. In the prospectus, the “issuer” of the securities must describe in the prospectus important facts about its business operations, financial condition, results of operations, risk factors, and management. It must also include audited financial statements. The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities. Part II contains additional information that an issuer does not have to deliver to investors but must file with the SEC, such as copies of material contracts, signatures of management and other representations.

Most organizations providing cryptocurrency based securities are unable or unwilling to provide the required information.

Little outdated (2020) but: https://screenrant.com/lootbox-gambling-microtransactions-il...

[actually the history of pinball and other arcade games is fraught with legal action, there were a few iterations of payout before we got to the harmless, kid-friendly machines of today, really good podcast about it, interviewing the guy who heads the Pacific Pinball Museum: https://art19.com/shows/the-madecast/episodes/6753c3e6-e12d-...]

"Kid-friendly" but really kid-robbing, though - AFAIK most of arcade games that let you win something, e.g. a toy, have subprograms that can override your victory, making it look like you've lost; those are triggered randomly, based on venue-configurable parameters like "max winning rate" and "daily wins threshold". This is designed to ensure the venue always makes a profit, by turning what's advertised as games of skill into games of luck.

What really angers me about this is not even that the nature of these machines isn't advertised to, or generally known by, parents and children, but that the way those overrides are implemented, they're quite literally gaslighting children (and for kids playing on such machines way too much, it's likely ruining their hand-eye coordination). There are many slow-motion / high-framerate YouTube videos demonstrating how these arcade games will fake input delays to turn perfectly timed win into what seems like split-second loss. And don't get me started on the fuckery that goes on with those "toy claw" games.

I feel there's something deeply corrupted about screwing up with children like that. I mean, when my kid starts playing a game and thinks she got good at it, and wants to show me how good she is, and then the software override kicks in and the game lies to her that she lost, what am I supposed to say? Gaslight her further by saying it was bad luck or still big enough of a challenge - when I know perfectly well the real reason is a bunch of greedy adults with broken moral compass adding a biased RNG to what they advertise as pure game of skill?

I worked in an arcade growing up, and you're not wrong about a lot of them--but pinball doesn't fall into that bucket. Every pinball machine I've ever seen is played pretty straight. Sometimes they have nasty game mechanics, but they don't have the issues you describe here (which is much more in the pseudogambling, Dave and Buster's style of games).

Of course the gap between these is closing by the introduction of lootboxes and similar mechanics. I do think these should be regulated as it aligns the incentives to get people addicted to your game, which is a fairly basic variation on preying on the vulnerable. In addition I -- and I assume most people -- do not like getting treated as a money piñata.

The organizations that created the assets have to register them as securities.

A broker-dealer (a securities exchange) can only trade registered securities, broker-dealers have to register to exist. So even if Coinbase went through the process of registering as a broker dealer (to be a securities exchange), they could not trade unregistered crypto securities, and cannot unilaterally register things they didn't create as securities.

Registered crypto securities are a mixture of non-existent, or not the things people want to trade. There are zero popular registered crypto securities.

Those organizations with those "unregistered securities" quote on quote, also don't believe they are creating securities at all, just digital products, cryptoassets. A distinct asset class. This should be possible to do, but it is also not clear how to do so.

Regardless, those organizations have not been approached by the SEC saying "hey you created unregistered securities and sold them, we're suing you".

The SEC has indeed tried a couple of those cases against different crypto assets and their creators and had mixed results, the well funded ones are dragging the SEC through court for half a decade now, for a single case. While the number of crypto assets continues to balloon every single day.

So the SEC changed its strategy recently and started suing exchanges using circular logic, claiming assets that they never said were securities to be securities and saying "these are unregistered securities and you are trading them in violation of Federal Securities laws", having never proved in court that these were securities.

You're describing the procedure of proving in court that they're securities.

The SEC claims they are, sues someone over it, and they fight it out with them in court. The court decides who proved what.

After getting an agreeing verdict on that they would go to the promoters and exchanges and sue them too

Now they're skipping that and going straight to the exchanges, because the SEC wasn't exactly winning

There are defenses to the SEC’s approach as it has nothing to do with the remoteness of some issuers, it has to do with the shaky legal ground and symbiosis that the SEC has relied upon. The SEC’s standard can be equally applied to anyone that purchased a baseball card hoping to flip it, where that unilaterally makes all shops and ebay to be unregistered securities exchanges in violation of Federal Securities laws no matter what the baseball card company did to ensure otherwise. Either all consumer product industries and intermediaries are affected, or most crypto tokens aren't at all. Or there is a clear way to make a crypto token that fits into the consumer product framework exclusively, but the SEC wont say and says “its always been clear”. Thats pretty much where we are, based on the SEC’s own logic used in this very case.

No; the baseball card market fails various bits of the Howey test. If you sold shares in a baseball card collection, that might be a security.

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

> When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an "Active Participant" or "AP") provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.

In the baseball card market, the card manufacturer could cease to exist without the success of the enterprise being impacted. (This is why BTC and ETH are currently being treated by the SEC as non-securities; the original creators of both could vanish without impacting the market for the coins, which is much less true for most coins.)

while a promoter, sponsor, or other third party could pop up at any time.

it says nothing about manufacturer or issuer for that prong of the howey test.

and the same is true for all of the tokens listed in the case against Coinbase.

I guess your argument is based on looking for differences to support your worldview instead of looking for similarities, and its not clear if you're aware of the similarities.

The "manufacturer" disappearing from tokens makes them more scarce in many cases. Their functionality remains the same.

another thing you might not be aware of is that the SEC is aware of this. Other commissioners - specifically Hester Pierce - and enforcement division personnel has made this observation, the people calling the shots in the enforcement division and the head commission are avoiding this because it breaks their whole framework if the courts really feel compelled to break this down more holistically. Thats why their approach to unilaterally calling things "evidence" when they haven't even proved they are evidence is a weak evolution of their practice. Prolonging an inevitable challenge to their authority and aspects of their existence.

It exists, in theory. Many people have tried, nothing has progressed even an inch. It's not even a matter of the SEC putting out a list of clear conditions that people deem unacceptable. Instead, the applications just seem to be mired in bureaucracy.

As I understand, there is deliberate gaslighting from the SEC and Gary Gensler.

Gary keeps telling the media "the law is clear" and "companies should come and register", but then never answer's even congress' own questions on what constitutes a security, and makes it impossible for crypto projects to register.

It has similar vibes as the US law which only allows accredited investors to invest in fast growing startups... 'To protect mom and pop investors' yeah right. Is there even a single person in the entire country who actually believes that?

For some reason, people seem to think an ITO should change all the rules, and that first you sell to the general public, and then you figure everything else out (assuming you don’t just take the money and run). This is IMO nonsense.

It's the legal advice and accounting specialists required to produce an adequate prospectus that's the big cost. But again: if you're raising millions, it seems not unreasonable to front some of that, even as personal debt, in order to prove "skin in the game" and that it's not a scam.

EOS raised $4.2 billion dollars. You're telling me they can't front 60k?

Keep in mind certain crowd-funding is legal in US.

Uber seems to be successful despite clearly (IIUC) breaking laws that regulate taxi services.

If it worked for Uber, I can see why other businesses might have similar hopes.

If it's the speed of it, I can agree that the government is slow, but it's generally accepted as the cost of doing business in a regulated sector that you wait for regulatory approval before processing. There's work to be done making things more efficient, but in the meantime everyone still needs to play by the rules.

If it's missing information that the SEC is demanding, that information is required for a reason. If it doesn't apply to your token, maybe your token is broken by design?

Everything about this screams "system working as designed to protect the public".

Would you kindly point out a company that tried and failed to register an ICO? I have done a little research and been unable to find any that even went through the motions. Perhaps the specifics matter.

This is, quite simply, zeitgeisty prejudice. Most well-funded cryptocurrency companies have passed audits. I've worked for or with four crypto companies and three of them were audited (also all of them still exist).

You aren't allowed to count "fraud cryptobros from miami creating an ICO" if you don't count "fraud fratbros from harvard/yale creating a hedge fund". And if you do count both, then you'll notice that the proportion of fraud is roughly the same everywhere, we just allow ourselves to notice it in some places more than others.

> Why should the SEC bend over backwards to create new rules

Because you don't apply old rules to new contexts if you're a responsible government, especially if you're claiming jurisdiction over those new contexts. Registration and filing processes created for the paper era simply don't cut it for regulating self-executing financial instruments. Why doesn't the SEC have a registration smart contract? It is the SEC's responsibility to adapt to the times.

> Would you kindly point out a company that tried and failed to register an ICO

What do you not understand about "there is not process"? I've been a part of two companies who have tried. We have had "conversations", aka we try to reach out and a different attorney occasionally gets back in touch with us and rehashes the same conversation every six months. The longest effort went nowhere in four years. There is no registration, there is no process, there are no boxes we can check on the existing forms which govern what we do.

This is true in practice but untrue in spirit. Any nonsense project can pass an audit by hiring an equally nonsense auditor.

> You aren't allowed to count "fraud cryptobros from miami creating an ICO" if you don't count "fraud fratbros from harvard/yale creating a hedge fund". And if you do count both, then you'll notice that the proportion of fraud is roughly the same everywhere, we just allow ourselves to notice it in some places more than others.

This is blatantly untrue. Yes, there are plenty of forms of fraud which occur in hedge funds, but the public is shielded from many of these, because the most obvious forms of fraud were recognized and regulated decades ago. There's practically no such protections around crypto, and as a result, a whole host of obvious scams have flourished.

If you talk to almost any crypto investor, most of them have been scammed at some point. The same is not true of investors in traditional markets.

You can absolutely legally register your cryptocurrency as a security. The requirements just make it a non-starter.

There's is nothing inherently different between cryptocurrencies and securities. The accounting is irrelevant. If you promise people that their money will increase in value if they invest, then you need to register as a security if you want to sell to retail customers. You can continue selling the unregistered securities all you want to professional traders.

Disclaimer: I work on STX and its blockchain

There is mountains upon mountains of evidence that show that the SEC is biased towards crypto and that killing it will be done by way of confusion and corruption through dumb lawsuits.

Is there a blog somewhere put out by one of these companies with their back-and-forth? It would be informative reasoning.

Disclaimer: I work on STX and its blockchain

[1] https://www.sec.gov/Archives/edgar/data/1693656/000110465919...

So they did make token sales, and complied with the "accredited investor" rule.

Yes there is. You register them as securities. STX[1] did this. Other projects need to suck it up and do it legally.

[1] disclaimer: I work on the Stacks blockchain (STX)

and...

> The previous HN thread seemed to mainly be of the opinion that Coinbase wasn't registering the non-Bitcoin crypto, but that the problem was the SEC wasn't giving clear guidance on whether they needed to be.

See, this is why we need regulation. It's to deal with people like the HN crowd who will go up to the limit of the law with no consideration for ethics whatsoever.

A normal, ethical person would never run into the problem Coinbase has here. They'd see that the differing parts of their business had conflicts of interest which were pitting them against their own customers, and they'd do the right thing by splitting them up so that their customers are served. The law never has to get involved, because good people don't need the law to tell them to do the right thing.

But contrary to the end-stage capitalist beliefs of HN, corporations are not good people. Capitalism doesn't result in the best service for the lowest cost. If there's any way at all that corporations can make a profit by screwing over other people and getting away with it, they will, or someone else will. Without regulation to limit this, bad people bubble to the top. Coinbase has plenty of smart people who could have noticed the ethical problems here, but they didn't, because they didn't care. Coinbase has been successful monetarily because when they had a choice to do what's right or what's profitable, they chose to do what's profitable.

And as is typical of HN, the top comment identifies with the bad guys. The problem, in your eyes, isn't that what Coinbase did caused conflicts of interest which harm consumers. The problem, in your eyes, is that regulation wasn't clear enough for Coinbase to know exactly which conflicts of interest they could get away with. Like Coinbase, you're unconcerned with ethics, instead blaming regulators for getting in the way of the only thing you care about: profits.

This place has a serious problem.