No. Coinbase’s complaint is that the SEC has been clear, but that they don’t like the clear answer.
https://assets.ctfassets.net/c5bd0wqjc7v0/5NRidtW8lvwVEfSHpn...
> Rather than initiate new rulemaking, Chair Gensler has repeatedly stated through speeches and testimony that the vast majority of digital tokens are securities, and has asked issuers and exchanges that offer, sell, and trade them to come in and register. We disagree that the majority of digital assets are securities. For those digital assets that are securities, registration under the current rules is, for many market participants, either not possible or not economically viable given the associated and unnecessary compliance burdens.
(I’m not the expert to hire for this, but https://www.investopedia.com/terms/s/sec-form-8-a.asp looks promising.)
Coinbase doesn't care if it can offer its customers shares of AAPL or TSLA. They care whether they can start brokering the types of securities that are found on public ledgers.
In practice this just means it's de-facto impossible for any centralized exchange to carry crypto securities.
Similarly, they won’t help you figure out how to insider trade, no matter how nicely you ask.
“Please make our illegal business legal, the rules don’t allow it” gets a predictable reception.
If an entire country can't use a piece of accounting software that's gaining worldwide relevance, that's the country's problem.
Companies like Coinbase and a16z have publicly stated their intentions to establish international arms to hedge against the US regulatory environment, and there's no reason my portfolio can't follow their lead.
One less vain primate spewing mountain man gibberish is fine with me. Don’t let the door hit you on the way out.
Fwiw; It would implode “my” nest egg as well, but I actually know how to hunt and grow food and build real things, along with play the civic life game of accumulate ephemeral points (fiat wealth).
Good luck, player! Like you idgaf about obligations to you
So you have to ask yourself... why isn't Coinbase making that argument?
Coinbase has (obviously) always been a strong advocate of distributed ledger technology, is constantly warning of the ramifications of this software being de-facto banned in the US, and has publicly stated that they have contingencies in place for moving offshore if it's economically unviable to be headquartered in and/or serve the US market.
They've been making that argument since 2012.
They should go. Crypto has a niche outside major economies and developed countries with the rule of law.
If you go back to the 1930s, bankers said the same (as they did again in the late 90s). Turns out freewheeling fraud isn’t a determinant for financial centrality. Worst case we can revisit if London or Singapore find a way to make this work, given they’re rapidly approaching being the only major economies who will stomach this nonsense.
Accounting software have tons of local adaptations.
Countries change laws to give their citizens access to important products. It's not about the company.
The USA didn't decide to rewrite existing telephony laws for VOIP in the 90s because they wanted to give Skype a handout, they did it because they understood the potential benefits of internet telephony for the populous.
> Accounting software have tons of local adaptations.
You can't locally adapt a ledger that is globally shared across all the other countries. Either you allow the ledger in your country or you don't.
And Congress was lobbied to do that and they declined. Is your argument that 'they should have done it' means 'the SEC isn't allowed to enforce existing regulations'?
Then you can't be licensed. Simple. "But I really really really want to be licensed" "..."
Coinbase and a16z have already publicly stated that they have plans to set up international arms to hedge against US regulatory risk.
So your statement "then you can't be licensed, simple", comes with the corollary of "the USA's strong fintech industry may move entirely offshore within the next decade." If everyone is cool with that, then yeah, go ahead and blanket ban all US residents from trading any financial instrument that's recorded on a public digital ledger.
Licensed in this discussion obiviously meant the US.
"Coinbase and a16z have already publicly stated that they have plans to set up international arms to hedge against US regulatory risk."
Which is great for them I guess.
"the USA's strong fintech industry"
A tiny, and some might argue irrelevant, part of the US fintech industry is moving offshore.
Crypto to me feels like fusion, it's super relevant, and you just wait some time, you'll see! and then there is another year and another decade and it is still not relevant.
You'd better be very sure of its irrelevancy before sending it all to the UK, where they're embracing it with a clear regulatory framework. If you are right, the US pushes a small ("irrelevant") amount of crime offshore. But in the off chance you are wrong, the USA risks losing their position as the world's financial superpower. This is not a gamble you want to take if there's even a very small chance that this technology could catch on.
> Crypto to me feels like fusion, it's super relevant, and you just wait some time, you'll see! and then there is another year and another decade and it is still not relevant.
It gets discussed multiple times per week on Hacker News. It's talked about constantly in congress. It's beginning to polarize people so much that it creates single issue voters in both directions. The word "NFT" has been etched into the public's consciousness as a meme. Banks and central governments are issuing bonds and other paper on public blockchains. The US is itself planning a version of the US dollar with a design inspired by distributed ledger technology. More than 1 in 5 Americans own cryptocurrency now. I don't know what measure of "relevant" you are using, but it's obviously very different from mine.
I also own crypto somewhere. I don't use it, I don't sell it, I don't care.
Why?
> the USA risks losing their position as the world's financial superpower
Wat.
> US is itself planning a version of the US dollar with a design inspired by distributed ledger technology
This project, thankfully, was dropped by the Fed after preliminary study.
The USA is the world's finance hub because it has the most reliable systems for trading financial assets, and because it has the most reliable currency. But Ethereum network transactions are pretty damn reliable too, even more reliable than wire transfers in some ways (if a bit costly at the moment). Trading on Uniswap is generally more reliable than trading stocks in my brokerage account, and I like how I can bundle multiple trades, borrows and sends together so that they execute atomically, a feature that my brokerage account doesn't support and probably never will. I like that with DeFi, I get to choose my asset-backed loan underwriter separately from my custodian, rather than them both having to be my broker (many of which charge way above market rates for margin loans). Trade settlement happens within seconds, not days. And there has been a cambrian explosion of stablecoin designs, some of them unreliable, some of them quite a bit more reliable than most government currencies.
Is any of it truly better than the current way stocks and currency are traded and held? Maybe, maybe not, but the stakes are much higher than I think most people understand. Distributed ledgers certainly offer some specific advantages that people really sleep on.
> This project, thankfully, was dropped by the Fed after preliminary study.
Nope.
https://www.whitehouse.gov/wp-content/uploads/2022/09/09-202...
https://en.wikipedia.org/wiki/History_of_CBDCs_by_country#Un...
We had the largest consumer market which underwrote a deep financial system. That depth and breadth, together with a rules-based system, is what fuels American financial hegemony. Between political volatility, sanctions and our archaic payment system, we do not hold out reliability as a selling point. (You have to go out to the 1910s to see American financial infrastructure being at the forefront.)
There are definitely lessons to be ported from crypto to our system. But they can come from academia and non-commercial hobbyists or be copied once demonstrated in e.g. London.
> Nope
Yes. You’re citing Q3 ‘22 materials. The programme lost the support it was limping on after Silvergate, SVB and Signatures’ failures. FedNow makes more sense anyway. (We probably wouldn’t have it without crypto.)
Because there is regulation. You seem to get cause and effect mixed up.
The whole point of regulations is to make various business models impossible.
The job of the SEC is to enforce the existing regulations and the job of lawmakers to (maybe) change the regulations if they think it's important to make this type of business possible in the US. In doing so they have to weigh potential benefits and harms caused by doing so.
The guiding priciples behind the SEC's current mandate and the current regulatory enforcement framework in the US Securities Laws are 1)investor protection, 2)fair, efficient and orderly markets and 3)capital formation[1]. In making changes to the securities laws, lawmakers would have to decide whether these changes would compromise these principles and whether the benefit of doing so might outweigh the downsides.
An impartial observer might look at the crypto markets thus far and decide that they are not (in the main) fair, orderly and efficient and that investors have suffered significant losses due to fraud and other malpractise and decide that it wasn't worth the risk to make changes to facilitate these businesses. That said, the crypto industry has spent a very significant amount lobbying lawmakers so they may decide otherwise.
Either way, it's not the job of the SEC (Securities regulator) to decide coinbase gets a free pass to ignore securities regulation in this case because the existing regulations make their business model impossible.
I guess that's the job of congress, then. I think the SEC Stabilization Act is an excellent start. There's nothing unreasonable about wanting to broker securities on a public ledger.
I don't think it's the "public ledger" part of this that causes the regulatory issue frankly.
Myself I think that's precisely the issue the SEC is hung up on, but we could argue endlessly about what is probably causing the regulatory issue with the SEC and what they are probably okay and probably not okay with. Meanwhile, the UK just laid out a clear framework for crypto securities exchange in their new bill, which gives an unambiguous regulatory green light to any companies who want to relocate there.
Yes, same as the others. What doesn’t exist is registration per Coinbase’s model of integrated broker, custodian and exchange. We specifically outlawed that in 1934 because it did precisely what crypto did in almost exactly the same time frame in the period stretching from 1918 (post-WWI) through the 20s’ boom years into 1933.
"Here is how we interpret the Howey test in relation to cryptocurrencies, and here is a ten step process for how we determine whether each particular cryptocurrency is a security" is clarity.
Can you imagine if, back when the SEC first formed in 1934, they put out a press release saying "the vast majority of stocks are securities and need to come register, but not The Bank Of New York, their stock is not a security". Imagine that the SEC didn't elaborate on why they didn't consider that one stock to not be a security, and they didn't elaborate on the reasoning process that led them to that decision.
That's what's happening right now, but with cryptocurrencies.
The 2023 SEC is very different from the 1934 SEC.
This is basically what happened. Mortgage loans and certificates of deposit, for example, aren’t securities by judicial clarification, not definition in the law. (See: Marine Bank v. Weaver)
The Howey test isn’t that complicated, and Coinbase Earn ticked all four boxes.
Still, Earn may well be a security, but that's a product that will fit very cleanly into current securities law when it reaches the court, and it concerns a company's product rather than an entire new asset class, so it's not so egregious that the SEC doesn't provide clarity on it.
The big problem is with their lack of clarity on the cryptocurrencies themselves.
Anyone: "Okay then, is [insert ANY crypto here other than BTC] a security?"
SEC: "We decline to answer, or give a hint, but the vast majority of digital tokens are securities!"
I really don't care what happens, or how it got to this point, but this state of affairs is absolutely and unequivocally ridiculous and absurd.
SEC: “No. Stop playing games. You have to register.”
Coinbase lists less than 300 of the tens of thousands of cryptocurrencies out there - indeed a tiny minority of them, and they do have some kind of legal review process, so while that claim may well be untrue, it's not absurd on its face.
The first step of effective regulation is to state exactly what is out of compliance, which they finally did only a few days ago by listing which particular coins are the ones that put Coinbase out of compliance.
The second step is to explain why those particular coins cause them to be non-compliant and why other coins (Bitcoin) are exempt, in such a way that Coinbase has rules they can apply to determine whether a particular new coin is compliant or not. That clarity is the part we're still waiting for.
Nah, the alternative is why cops get away with everything via qualified immunity. Conmen don’t get given a pat list of what is and isn’t allowed; no one wants to play the “but you saaaaaaid!” game that results.
Yes, they do. Civil courts are full of almost nothing besides "but you said" games. You're just describing the status quo of how law works.
Same with securities. The Howey test exists. The courts and Congress occasionally find a tweak that needs making, but they aren’t likely to be impressed by shenanigans like “oh it isn’t a shared enterprise because of this cute quirky thing”.
https://www.axios.com/2022/06/28/bitcoin-is-the-only-coin-th...
> Elsewhere in the speech, Hinman explained: "If the network on which [a] token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract."
Eth is fairly uniquely complicated by the fact that it probably went from security to commodity before they could get smacked for the security period.
With only BTC Coinbase would not be an exchange but a wallet.
Like I said, I don't care what happens - but as an outside observer - it's ridiculous.
If you'd like to provide a rebuttal to that, be my guest. But childish swipes that don't address the point being made are just that... childish.
"Please don't post comments that don't contribute anything to the discussion."
as highly relevant to the discussion.
Your comment is not only pointless and petty, it's wrong.
If you don't understand something, the easiest thing is to condemn it and call the person who made the comment stupid.
"It" here would have to be the situation/article, right?
The thing they don't care about is what will happen to Coinbase in the future. They're not reading that.
Even if we assume Coinbase is in the wrong here, a hypothetical exchange with better vetting could also list dozens of coins and be entirely legit with no securities.
The SEC has been super clear for most crypto except Bitcoin and Ether.
Yes. Start with the SEC’s complaint against Coinbase: SOL, ADA, MATIC and ten others [1].
Beyond that, ask a securities lawyer or ask the SEC. Coinbase did. The SEC answered. Coinbase didn’t like the answer, and focussed its messaging on irrelevant statements (or a lack thereof) by Gensler about Bitcoin and Ether. If someone only cash traded those two, they would have a legitimate argument against the SEC’s ambiguity. But practically nobody does: instead they operate unlicensed and illegally-configured securities outfits.
[1] https://www.sec.gov/litigation/complaints/2023/comp-pr2023-1... 114
That attitude started aroind the time Uber got big. Maybe even with AirBnB. In a sense, crypto is exactly the tech eco system we deserve. Good that there is finally some enforcement of rules that apply tp basically everyone else.
Sometimes the court system decides the agency’s rules exceed the authority granted to them by Congress.
Other times Congress uses the Congressional Review Act or new legislation to say “that’s not what we meant”.
The Howey test exists because the SEC enforced said new-ish regulations against someone, and the court agreed with them, holding Howey liable for violations of the '33 Act as implemented by regulators at the SEC.
All this makes the statement "No, Congress creates the rules" upthread inaccurate.
The violations the SEC describes in its complaint (¶ 8) are not nitty gritty. It's all bare-boned Exchange Act malfeasance.
What? The laws Coinbase is being charged with violating are creatures of the Congress and courts, not the administrative state. This is not a case of "the agency that enforces the rules is also charged with creating them" [1].
Again, the point is that both Congress and the SEC make "the rules" around securities. Congress defined securities and gave the SEC the ability to write the rules for securities, with some specific requirements. The SEC's rules can't violate the various Acts of Congress, but they've still got quite a bit of rule-making power delegated to them.
Right. Like choosing what's important and what's not. (It's also a totally dishonest framing by Coinbase. Their business model, a unified broker, exchange and custodian, is fundamentally in violation of the '34 Act. They're asking the SEC to break the law.)
What makes no sense to me is the stupidity of fighting the case. I understand Coinbase's PR rallying the crypto base before. They were making a lobbying push to change the law. And the base would throw money at them. But now? Either management has reason to believe they can run out the clock on the SEC before Congress changes the rules. Or they're as delusional as the base.
We all know that before the crypto bust, a lot of people would've been starting a witch hunt if the SEC had tried to enforce the law. Congress, for starters.
Gensler is being opportunistic now because that's the reality they have to work with.
The wealthy and powerful in this country take it on themselves to personally ruin public servants who get in their way sometimes.
The SEC decides when, what, and for whom it enforces rules?
Would you agree that each library can't have every book ever written, and do you think there is a distinction between not selecting a book and "banning" it?
As if there is a system that catches, charges, prosecutes and/or convicts everyone who breaks the law.
A library can't have every book in the world. This doesn't mean that not selecting a book is exactly the same as "banning" it. It does mean the issue is nuanced.
Oh poor former banker worth $100 million, getting push back when he robs people's right to invest their money how they wang.
The SEC has brought zero enforcement action that turns on Bitcoin or Ether being securities. Somewhat hilariously, these complaints are an industry endemic with bullshitters flipping out about Gensler being able to say “I don’t know.”
"Some of them did securities offerings, but by the time the SEC noticed they were too entrenched and decentralized and it would have been a pain for the SEC to go after them. Ethereum, most notably, very very clearly did an ICO in 2014, raising about $18.3 million by selling ETH tokens. If they did that today, or in late 2017, the SEC would have some serious questions. But by the time the SEC got around to cracking down on ICOs in 2017, Ethereum was big and decentralized and the SEC would have had a hard time, practically and legally, challenging its 2014 ICO. And so everyone sort of grudgingly concedes that ETH is not a security."
The article isn't saying crypto is harmful like heroin at all -- it's just using heroin as an arbitrary example of something illegal. It's clear to everyone that selling heroin is illegal, in a way that e.g. insider trading perhaps isn't.
So it's not alarmist nonsense, it's just a vivid analogy.
And, given this discussion, it vividly illustrates the point.
The number of people who literally can't entertain even the vague possibility that Coinbase might be doing something illegal (as in illegal like heroin) and thus can ONLY interpret the analogy as Coinbase is bad (as in bad like heroin).
Uhhh… about that… https://en.m.wikipedia.org/wiki/Illicit_activities_of_North_...
> Coinbase, as with most crypto platforms, has decided it wants to simultaneously operate as an exchange, broker-dealer, and clearing agency. These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them. Coinbase would need to fundamentally change its business model in order to separate these functions, and thus far seems unwilling to do so.
Coinbase's real complaint is that it wants regulation to change so that Coinbase is in compliance, rather than Coinbase changing so that it is in compliance. The lack of "clarity" isn't that it's unclear whether or not Coinbase is compliant, but that it's unclear how Coinbase can become compliant without changing foundational aspects of how it's structured. To honestly argue why regulation should change, you would need to explain why a currently-noncompliant policy should be compliant. In other words, why does an apparent conflict of interest in "traditional" finance not actually exist for the crypto industry (or at least why we should be okay with it existing).
The SEC messed up for years but not protecting consumers against fraud. Now they’re trying to prove their reason existence / gov funding.
In one of the (I think MIT lectures 2018) videos, btw? Gensler stated that [probably all crypto except Bitcoin, but including Ether, are moody moody most likely securities].
However, the SEC fails to to provide any guidance and doesn’t have any official position. The reason is that if they make a small mistake or missed sleeping, they might’ve given a free pass.
Edit - MIT open courseware 2018
Coinbase's PR machine wants you to believe they want clarity. Their actual legal documents instead indicate that they're aware that they're probably violating regulations. Take their petition to the SEC for example--it starts by asking not "are cryptocurrencies securities under the Howey test" but "should cryptocurrencies be considered securities". For a document that's supposedly Coinbase's grand we're-going-to-make-the-SEC-clarify-regulation strategy, it's very long on asking for changes to the regulatory regime and very short on asking for clarifications on the application of regulation to cryptocurrencies. Which strongly suggests that they in fact know how the regulations apply to cryptocurrencies, they just don't like it.
It also helps when one of your former execs came from Goldman Sachs, and were backed by VC including YC and the Stanford mafia--Balaji's buy out of 21 and being placed as CTO confirmed all my suspicions I had during thier mining days.
Honestly, and I say this with all the malice in the World if you are reading this, Armstrong: I hope we can finally get rid of you and that cancer that is Coinbase and all the BS it has wrought us once and for all, even if it crashes the market for a while.
The fact that they hold that much BTC is a huge issue, but what is at the core of this is more to do with the real problem with this is centralized systems with directly conflicting ideals to the overall community operates with so much weight in an otherwise decentralized network: they were unfit to be in this ecosystem and they exploited a very clear window with their immense access to resources and VC money and while they made the most of it, it seems the tide has finally turned on them.
I can forgive Mark and MTGOX, that was a case of what happens when gross incompetence and unforeseen immense growth intersect; he paid a price for that, spent time in a Japanese prison and had his entire life ruined in the process.
Brian Armstrong has spent a decade being the bane of the Bitcoin ecosystem and sold scams to unwitting customers with no remorse, sided with the FUDsters during USAF etc... this is the typical corpo with no scruples trying to act innocent when he is finally subjected to the same regulatory body who leave the rest of us in the dark: those who I will remind you he sided with all along because it benefited him.
I honestly wish he gets the Charlie Schrem treatment and gets humbled in the same way.
As recently as 2 months ago Gensler declined to say whether or not Ether is a security in front of congress.
Whether Ether is a security is irrelevant to this case, based on an investigation which pre-dates Gensler’s term at the SEC, which is about whether Coinbase is required to register and operate as a securities exchange on account of having traded e.g. Solana. The entire argument obsessing over his refusing to come to conclusions until facts are established reminds me of creationists picking a tiny, side element of scientists’ arguments and then spending their entire time arguing with themselves over a point with zero germaneness.
False condition. The SEC has made it clear that various crypto, e.g. Solana, are securities. If you want to trade those, you must register. Again, if you just want to cash trade Bitcoin and Ether, the SEC has shown zero inclination of messing with you.
Before that afaik the only cryptocurrency the sec had explicitly said was a security was XRP which coinbase delisted
If you want to know whether something is legal or not, you talk to a lawyer or (less reliably) law enforcement. When Coinbase asked the SEC if it needed to register, without—to my knowledge—exception, it said yes.
[1] https://www.sec.gov/litigation/investreport/34-81207.pdf
"Blockchain isn't the-- we don't have regulation because of blockchain, and we don't necessarily need a new set of regulations." https://youtu.be/l0vD_FBWk0g?t=1976
Discussion about SAFT / utility etc: https://youtu.be/iWpQpPbo7rM?t=994
XRP is a security, but "what I believe.. is just that, it's a believe". https://youtu.be/7EXcHqLg7BI?t=2767
Bitcoin is a commodity https://youtu.be/KHBi3n0hUSU?t=3591
"So we already know in the US and in many other jurisdictions that 3/4 of the market are not ICOs or not what would be called securities, even in the US, Canada, and Taiwan, the three jurisdictions that follow something similar to the Howey Test that we've talked about. 3/4 of the market is non-securities. It's just a commodity, a cash crypto. So you'll hear debates about initial coin offerings. And what's a security? And what's not a security? Relevant-- relevant and important debate, but for 3/4 of the market, it's not particularly relevant as a legal matter, as a regulatory matter. "
Here's one for Paxos.[2] They asked for permission to run a small-scale blockchain-based clearing operation without registered as a clearing house. No more than 7 institutional customers, a limited list of stocks, and a time limit. They got it.
Somehow, Coinbase doesn't seem to be on the list there. It's a public record.
[1] https://www.sec.gov/divisions/marketreg/mr-noaction
[2] https://www.sec.gov/divisions/marketreg/mr-noaction/2020/fin...
This doesn't appear to be what the SEC is suing Coinbase for though, and is actually far more applicable to the question "then why were they allowed to go public?"
It's possible (likely even) there are nuances I don't grok, but sued for selling unregistred securities is not the same as requiring structural separation.
QUESTION 17: “Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." -- TidewaterVirginia
Alesia: All right. Question 17. "Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." This is from TidewaterVirginia. Thank you so much for this question.
Alesia: So it's true. On our retail side, we operate a full broker that includes the retail brokerage piece, as well as custody embedded in that retail trading experience. On the institutional side, we operate an exchange, a broker, and then a custodian. What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict. We do not proprietarily trade against our clients. What this means is that we're only executing orders on our customer's behalf and seeking for the best execution on those customer's’ orders.
Alesia: So when an institutional customer engages with our broker, for example, we're routing that order across multiple liquidity venues; many trades on our own exchange, but oftentimes it trades outside of Coinbase as well, wherever the best price may be for that customer. In doing this, it is an agents-only model. There's no conflict of interest for us operating both the exchange and the broker, because we are ensuring that we're acting in our client's best interest at every point in the transaction.
---
The issue isn't so much that they're doing this, but what the corresponding implications of it when related to unregistered securities.
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-1...
> The Coinbase Platform merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies. Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets. All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.
It's that they are unregistered as any of those things.
> 8. By engaging in the conduct set forth in this Complaint, Coinbase has acted as an exchange, a broker, and a clearing agency, without registering as an exchange, broker, or clearing agency, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)(1)], and for purposes of Coinbase’s violations of the Exchange Act, CGI was a control person of Coinbase under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)]. In addition, through its Staking Program, Coinbase has offered and sold securities without registering its offers and sales, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
We have illegal weapons but what is special with us, we won't use them. So it's not illegal.
Coinbase isn't being sued because it's trading Eth. It's being sued because it's trading a lot of things that aren't BTC or Eth.
Which the SEC was also refusing to rule on, even though it would have been easy and consumer-protective to get that done within a month or two of the coins gaining popularity.
If I don't treat that as uncertainty, I guess I have to assign significantly worse motivations...
The SEC doesn't rule on things. They make rules (not laws), but they don't decide those things. That is the domain of the judicial branch - not the SEC.
The SEC can say "I consider X to be a security" but it's the judges that apply those rules and decide if the proper regulations are followed.
You will note that its a judge demanding that the SEC respond to Coinbase (U.S. Court Tells SEC to Respond to Coinbase's Rulemaking Petition Within a Week - https://www.coindesk.com/policy/2023/06/07/us-court-tells-se... ).
The SEC, as part of the legislative branch makes the rules to follow under its creation as part of the Securities and Exchange Act of 1934. It can bring things to be enforced or decided to the judicial branch - it isn't the judge or jury.
It would be improper for the SEC to make claims that haven't been decided by judicial branch. The SEC can say "we consider digital assets that can gain value by actions of others to be securities" but its consider - saying "yes, ETH is a security" is something for a judge to decide, not the SEC. The way that is done is for the SEC to take a company that is trading what it considers to be an unregistered security to retail customers to court.
The SEC does not approve IPOs. This is made abundantly clear in the law and rules, it is hammered into every first-year securities candidate as part of their licensing and it is front and centre on every S-1.
They don't need to make "merit-based judgements" to do the same security analysis they'd do after the IPO.
I said the exact opposite of that. Please look at the second sentence again.
I want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more.
Investment banks would love this. It’s pro bono legal advice.
If this is important, require a legal opinion or no-action letter prior to investing in the IPO. Coinbase didn’t secure those and investors didn’t demand it. Here we are.
Also there is potential fine revenue.
But for big enough companies, some amount of taxpayer-paid analysis makes sense. It ultimately benefits consumers.
Isn't analyzing the S1 "pro bono legal advice" to begin with?
And they did have legal opinions, just not from the SEC that is still almost entirely refusing to evaluate crypto tokens. Would a no action letter have been feasible?
Probably not, given the integrated broker-exchange-custodian model. But that’s the point. We specifically outlawed that in 1934. Coinbase was counting on rules being changed in the midst of regulatory inertia.
No, it's asking an agency to clarify its own rules.
If I, as a ham radio enthusiast, find an unclear section of the FCC rules I expect to be able to contact someone and ask what the agency's understanding of it is. They wrote it after all.
For example, if they wrote 5-15Mhz, I might wonder if they mean inclusively. Does that cover 15Mhz, or just 14.9999?
I'm not expecting them to preemptively rule on all legal cases which depend on this, just on their interpretation of their own words.
Why? That’s investors’ jobs. Coinbase disclosed the risk that their entire operations may be illegal.
In traditional finance a "securities exchange" is like, the New York Stock Exchange. A big centralized thing of which there are barely a dozen in the whole country and most people would have trouble to name three. There are many stocks that are only registered on one exchange. That wants to be separated from other functions because otherwise it would become an abusive monopoly.
Nobody has anything like a monopoly on trading Bitcoins so that doesn't really apply.
If a company went to the FDA and said “hello, we’d like to start selling
heroin to the public for recreational use”, and the FDA said “no, you can’t
do that”, the company could loudly complain that the FDA was not giving them
a path to compliance. People would probably laugh at them.
The company could decide the FDA was wrong, demand that they and/or Congress
write new rules to allow for this innovative new heroin business that would
bolster American capital markets, and decide that in the meantime they were
going to sell heroin anyway. People might not be terribly sympathetic when
it didn’t end well for them.Still don't understand how the analogy applies to cryptocurrency.
>The company could decide the FDA was wrong...
But why would they decide this? Since Heroin is, again, illegal.
The style of argument is akin to Reductio ad Absurdum, taking an absurd position to it's logical conclusion. The "absurd position" here is a company wanting to sell heroin on the open market, and she takes that to the logical conclusion.
She could have said "meth", "nuclear weapons", or "dead infants", or whatever instead of heroin to make her point. If you read that as a comparison to Coinbase being a heroin dealer than you're the one editorializing her effort.
Here's another reductio ad absurdum argument:
Let's assume the earth is flat. Either the surface of the earth must go to infinity or people must be walking off the edge of it somewhere.
Same goes for weapons in some of the countries with the most restrictions on gun sales and ownership, it is still perfectly legal to sell military grade weapons to the military in those countries.
Funny, how HN seems to qctively failing to understand how regulations and compliance works as soon as they themselves, or one of theirs, is negatively affected by them...
Coinbase also writes in great detail in the S-1 about
the risk that the SEC might bring a lawsuit exactly like
the one they just have:
[W]e could be subject to legal or regulatory action in the event the
SEC, a foreign regulatory authority, or a court were to determine that a supported crypto asset
currently offered, sold, or traded on our platform is a “security” under applicable laws… [W]e could
be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in
compliance with the registration requirements, or for acting as a broker, dealer, or national
securities exchange without appropriate registration.
[T]here is regulatory uncertainty regarding the status of our staking activities under the U.S.
federal securities laws.
Imagine if a company was selling "ground human meat" (see the movie "Soylent Green"). And they did it, well, because the market for ground human meat was suddenly exploding! I mean, in their S1 they might say "Sure this might be illegal, the FDA might take regulatory action against us." But also "Ground human meat is one hot market right now, you don't want to be left out on this rocket that's going straight to the moon!"
For example, police officers will regularly sit by the side of the road with a speed gun. They'll make no attempt to stop you driving at 150mph on the motorway but, in the UK, you'll receive a court summons through your door after the fact (and probably lose your license).
Statements like this create a pretty clear case that you haven’t read or shown any real interest in the SEC investigation and litigation related to crypto.
However:
> Even with a favorable ruling, a taxpayer has no absolute guarantee of the tax consequences, since the IRS can modify or revoke a previously issued private letter ruling if it is later determined that the ruling was incorrect or inconsistent with the current position of the IRS.
So even with a PLR, you have no guarantees.
1. Firstly, if the law isn't settled, then no they wouldn't.
2. The SEC weren't being asked by Congress, they were being asked by Coinbase.
So no, your attempt to torture the analogy doesn't work at all.
I don't understand how anyone can believe these people act in good faith.
> The head of the SEC was asked by congress if Eth was a security, and true to form he refused to answer.
So what you're saying is that the Head of the SEC refused to answer a question they're not qualified to. Because it's an unsettled area of law that they're now challenging through enforcement action.
> I don't understand how anyone can believe these people act in good faith.
I could ask the same of you.
Opiates! Prescribed opiates!
Honestly this should be a core mission of all regulatory agencies and the fact that it isn't is a disgrace.
I don't want to press too far, because I don't think you actually meant it, but...it's like you're advocating for socialized lawyers. Which is definitely an interesting idea!
Isn't this the exact same burden it would be for that person to hire a lawyer? All it would do is require the government to internalize the cost of regulatory compliance, which would increase efficiency by aligning the incentives of the government with reducing compliance costs.
> If you're not sure how to follow the law, get an expert in the law! That's why there's a regulated profession that explicitly provides expert advice on following the law.
Except that they don't actually have the authority to tell you if you're following the law. If you hire a lawyer and they tell you that the law is ambiguous and there isn't any relevant caselaw yet, you still have no idea if you're following the law or not. Meanwhile no one with the authority to make a binding determination will give you an answer.
Generally so, if a company works in, or close, to a highly regulated industry it is up to that company to do so in a compliant way. Or generally compliant, there isba tendency of start-ups in Germany complaining about how taxes apply to them as well. If said company is not comoliant, it is on them. And does happen all over the place, to all companies, all the time. For stuff ranging from export, to taxes, to anti-trust and corruption. Only that, say, Lockheed isn't getting any slack when it comes to creative sales techniques.
And compliance costs are costs of doing business. If you cheap out on that, well, ypu deserve what ever is coming your way.
Authorities are the ones who create the rules. If they tell you what the rule means, that's what the rule means, because it's their rule. That's the point of having them be the one to tell you.
Some people defend themselves by saying they didn't take the action they're accused of, others can cop to the action they took, and argue that the law doesn't apply because x, y, z.
So, like, that's why case law is a whole thing, it extends "the rules" to "here's how the rules have been interpreted in these situations"
The Securities Act of '33, Exchange Act of '34 and Howey Test were not created by the SEC.
Then you have a couple of choices with various outcomes. One of which is exactly what is happening to Coinbase right now. You can either 100% unambiguously follow the law, or you can push your luck and adhere to what you think either is or should be the law. In the latter case you may become said case law, whether you are able to continue your current ambiguously legal business practices or not!
That's how it's been done for the past two centuries. Why change now?
Because the public through its government is what created the grey area, so it should cover the cost of its lack of clarity, as a disincentive for causing it.
> Why can't it be part of Coinbase's business strategy to remain on the correct side of the law and then lobby congress for changes to those laws?
The entire point is that nobody will say whether they're allowed to do this, so they can't even know if they're on the correct side of the law. How dumb is it that the only way to find out if you can legally do something is to do it without knowing whether you're allowed to?
> That's how it's been done for the past two centuries. Why change now?
The best time to change a bad rule is two centuries ago. The second best time is immediately.
Isn't that the point of hiring an attorney, or if you're Coinbase, a large team of lawyers? We don't know what Coinbase's lawyers said to them (attorney client privilege). But this could just be a legal ruse, right? Raise doubt? Even though Coinbase knew they were in a shady area and raised it in their S1 filing?
Or do you think Coinbase was really this stupid and naive?
You want to turn corporate law to the public sector?
About time that reality checks happen.
> These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them.
She is saying it is like Heroin.
>> >The company could decide the FDA was wrong...
> But why would they decide this? Since Heroin is, again, illegal.
She is pointing out how absurb it is that Coinbase has decided the SEC is wrong (about the separation of roles) since - as you point out - not having the separation of roles is illegal.
Let's find out how the Ripple lawsuit is going to end, there is good chance to win it.
The woke up one day and they "hey this crypto is a threat to our dollar'. Gensler said "we don't need any more digital currencies, we have USD, EUR, YEN". And that for centuries there was no need to transfer value through more than one medium. That can explain their views clearly.
No, this is specifically addressed by securities law. It's not impossible, but you have to do it properly.
Inconceivable!
Reading the comment, you'd think the comparison was on harm or lethality.
Which is damn smart given we let regulated persons manufacture and distribute opiates. In this analogy, Coinbase is upset its heroin sales are illegal when a licensed pharmacist can sell a similar product.
If someone is having a strong emotional reaction, substitute any regulated product—jumbo jets, vodka, legal advice—and move on.
In this analogy Coinbase' story seems to be that they asked how to apply to become a licensed pharmacist, but never got an answer. While the SEC suggests they never tried.
This gets confusing when the crime is phrased as unregistered heroin sales.
They got an answer they didn't like: they'd have to change how they did business. (Also, what they list. The SEC issued The DAO Report in 2017.) We enacted the '34 Exchange Act in part to segregate the broker, exchange and custodial functions of securities trading. Coinbase was asking how to become a licensed pharmacist without having to check prescriptions.
> gets confusing when the crime is phrased as unregistered heroin sales
Try "opiate." Coinbase thought they found something new, and asked if it was okay. They didn't think they got a clear answer and proceeded. Now they're crying foul at the lack of prior guidance, or that someone else does have a license. The author's point is that these arguments don't make sense. There may be other arguments that do, but these aren't among them.
Using a much more extreme example to make the point (that companies don't automatically have a right to a path to compliance) obvious.
A: You say “Z is true of X”, and I respond “Z is false for thing-like-X”, implying “Z is likely false for X”.
B: You say “Z is true”, and I respond “Z is false for Y”, implying not “Y is like X therefore Z is likely false”, but “Z is sometimes false, so we need to actually evaluate whether it’s true of X”.
I think people who use this reasoning would do well to make it more explicit.
(Here, Z is “there must be a path to compliance”, X is Coinbase, and Y – not, I believe, thing-like-X – is heroin.)
Coinbase doing an IPO (and them using this argument against SEC) is not being compared to heroin.
The comparison is that Coinbase would go to SEC and ask "hey we want to sell these bitcoin futures and securities, is it okay?" and SEC says "nope it isn't" and Coinbase just says "okay we'll sell it anyways", which is exactly what they did.
They knew the law existed and applied to crypto, yet they decided to go against it anyways because they thought they could get away with interpretation shenaningans.
The Coinbase S1 admits this explicitly: they explicitly list the risk of their business model being contested by the SEC later in the document that the SEC approved.
The SEC doesn't approve IPOs. In bold among Coinbase's S-1's cover pages: "Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense."
https://investor.coinbase.com/financials/sec-filings/sec-fil...
"The government’s view is that cryptoassets and the activities underpinning their use should follow the standards expected of other similar financial services activities, commensurate to the risks they pose, while harnessing potential benefits of the technology behind them."
...
"HM Treasury proposes to capture cryptoasset activities provided in or to the United Kingdom."
...
"For cryptoasset issuance and disclosures, the government proposes to follow a similar approach to that for securities and apply regulation when the asset is admitted to trading on a regulated cryptoasset trading venue and therefore becomes exchangeable for fiat currency, or subject to a public offer."
...
"The government considers public offers of cryptoassets – including ICOs where a fund raiser creates new tokens and sells them to investors – may meet the definition of a security offering"
...
"In practice many cryptoasset exchanges play a central role in the cryptoasset ecosystem – conducting many more activities than solely operating a trading venue (e.g. custody, post-trade activities, proprietary trading, lending and admission of cryptoassets to a platform). Some venues may also issue their own native cryptoasset or act as intermediaries for the distribution of stablecoins. This is sometimes referred to as “vertical integration” or “agglomeration”. Accordingly, the government expects, as a minimum, that these entities follow rules covering all of these activities – not just those relevant for operating a trading venue. To illustrate, a major cryptoasset exchange would be required to comply with the issuance and disclosure rules for assets that they admit for trading (Chapter 5), the rules relating to the operation of a trading venue (Chapter 6) and certain surveillance and reporting requirements to detect and prevent market abuse (Chapter 9). Additionally, and depending on the sorts of activities they undertake, they would also need to comply with rules for market intermediaries (Chapter 7), cryptoasset custody rules for cryptoassets which they safeguard or safeguard and administer (Chapter 8) and rules for operating a cryptoasset lending platform (Chapter 10)."
All this is close to what the SEC requires. If it works like a security, a broker, or an exchange, it's regulated like a security, a broker, or an exchange.
This is probably more "clarity" than Coinbase wants.
[1] https://assets.publishing.service.gov.uk/government/uploads/...
> All this is close to what the SEC requires.
No, the SEC requires cryptoassets to slot perfectly into existing regulation, making it de-facto impossible for any public-ledger-based-securities exchange to operate. I cover that in my comment here:
https://news.ycombinator.com/item?id=36303345
Contrast that with the proposed UK law, which applies existing regulations in a commonsense way while realizing ones and zeroes in a public ledger behave fundamentally differently than the legal contracts they're used to regulating, and that those ones and zeroes absolutely, categorically cannot do certain things that 1930s laws might ask of them.
> This is probably more "clarity" than Coinbase wants.
Two months after the crypto bill was proposed, Brian Armstrong publicly stated (at a conference in London) that the UK's system is better for Coinbase than the US's system in the sense that there is one regulator providing clear guidelines (FCA) rather than two regulators squabbling over jurisdiction (SEC and CFTC).
He said: "You don't have this unfortunate thing happening where the CFTC and the SEC are having a turf battle. We actually have contradictory statements from the heads of the CFTC and the SEC coming out almost every few weeks. How's a business going to operate in that environment? We just want a clear rulebook."
So Coinbase has come out explicitly, emphatically, saying that the UK's crypto bill is exactly the level of clarity that they want.
Crypto was advertised as decentralized and unregulated.
Most arguments I had with cryptobros were some sudo arguments about this stuff instead of just omitting that it's all about speculations.
I agree that it's reasonable to apply existing securities laws to cryptocurrency, and I agree that "but they let us go public" is a bad argument, but Gensler's SEC has also been intentionally obtuse about how those securities laws should apply to cryptocurrency. It's not a company's job to go to court over ambiguous regulations, it's the SEC's job to actually research what they are regulating and put out a comprehensive framework for how they make their regulatory determinations, because the Howey Test is so subjective that it's leaving companies guessing on the cutting edge of public programmable assets.
Look at the UK's upcoming crypto bills for an example of commonsense regulation that protects consumers and is in everyone's best interest. The contrast between it and the US's approach is striking.