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I actually initially wanted to be on Coinbase’s side here, but after a quick google of “Howey test” and reading even just the introduction on Wikipedia, I canno

I actually initially wanted to be on Coinbase’s side here, but after a quick google of “Howey test” and reading even just the introduction on Wikipedia, I cannot imagine how they don’t see the SEC’s reasoning about Lend wrt Howey. If you want to argue that Howey does not apply or fight the decision/lawsuit, then fine. But feigning ignorance of something a (non-legal expert) programmer can connect the dots of instantly just makes me feel like they’re playing a PR game. Seeing as they are already offering APY on staked Ethereum, I don’t see “concern” reflected in their actions. Seems like they are trying to get out to the public before the SEC does to farm some good will.

bpodgursky 5y ago
Brian's concern in the tweet thread is that a lot of other companies are already providing lending services without SEC action, putting Coinbase at a disadvantage. The rule should be applied across the industry in a standard manner, no matter which direction the SEC rules, and it is apparently not being applied consistently currently.
- seehafer 5y ago
  Are the other companies already providing lending services public? Public companies get orders of magnitude more scrutiny from SEC relative to private companies.
  - ac29 5y ago
    Other US companies providing similar products include Gemini, Kraken, and BlockFi. I dont think any of them are public. BlockFi's lending product has already been banned by several state regulatory agencies, but if they've been sued or warned by the SEC, I dont think thats been made public.
    - seehafer 5y ago
      Right. My point is that many federal agencies have mandates that dictate where they focus. For instance the SEC may come after any privately-owned startup, after the fact, if there’s overwhelming evidence of fraud (see: Theranos). But when you go public you enter into a whole new level of scrutiny, because regulating public markets is why the SEC even exists.
    - hackingforfun 5y ago
      There is a difference between lending assets and staking assets. Of the ones you mentioned, I've only used Gemini and Kraken. Gemini Earn offers similar lending products to Coinbase Lend (a % return is given when certain assets are lent) [1][2]. Kraken offers staking services [3], which are technically not "lending", but are staking rewards gained from staking assets in proof of stake protocols such as Ethereum 2.0, Polkadot, Kusama, Cosmos, Cardano, Solana, etc. These staking rewards could also be earned directly from the protocols, if users wanted to stake via their own hardware, but Kraken takes a fee in this case due to reducing the hassle for users to need to do this themselves (and some proof of stake protocols have slashing which means users would lose the coins they have staked if their hardware goes down or their connection is interrupted), so there is some reduction of risk as well for the user in that case. However, this also means the staking power is more centralized at the exchange level, which is a downside, but that is a different part of the discussion. FWIW, Coinbase has staking services as well [4], but Coinbase Lend, which hadn't even launched yet, was going to be something different. It looks like Coinbase was going to achieve that 4% interest on USDC in Lend via Compound [5] (which is a DeFi protocol they actually helped launch a few years ago [6]). Assets can already be lent directly to Compound via users, without Coinbase as an intermediary. Anyway, my point in bringing this up is there is difference between lending assets and staking assets, and actually both lending and staking can be done directly by users, without any of these exchanges as intermediaries. [1] https://www.gemini.com/earn https://www.gemini.com/earn [2] https://www.coinbase.com/lend https://www.coinbase.com/lend [3] https://www.kraken.com/en-us/features/staking-coins https://www.kraken.com/en-us/features/staking-coins [4] https://www.coinbase.com/staking https://www.coinbase.com/staking [5] https://blockworks.co/coinbase-compound-labs-launch-usdc-high-yield-accounts/ https://blockworks.co/coinbase-compound-labs-launch-usdc-hig... [6] https://techcrunch.com/2018/05/16/cryptocurrency-compound-interest/ https://techcrunch.com/2018/05/16/cryptocurrency-compound-in...
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- dataflow 5y ago
  "We think others should be sued too" is quite a different argument from "we don't know why we're being sued". In fact it strongly suggests the opposite.
  - kobasa 5y ago
    They don't know why they're being sued because everyone else is doing it and not getting sued. Makes sense from that point of view. Coinbase technically should only be sued if the others doing were sued too, but they're not... Compound this with the fact that no explanation was given to them why they're being sued - when it is very much necessary in light of their competitors not getting sued and you can start understanding their confusion.
- ac29 5y ago
  Something tells me courts wont be too sympathetic to the "but other people are criming as well" argument.
  - bpodgursky 5y ago
    That's not true at all? There is a ton of precedent for courts striking down selectively-enforced laws. Equality before the law is extremely important to how courts rule in the US.
    - pavlov 5y ago
      The SEC intentionally does “regulation by selective enforcement”, as shown by their actions following the 2017 ICO bubble: https://corpgov.law.harvard.edu/2019/11/21/regulation-by-selective-enforcement-the-sec-and-initial-coin-offerings/ https://corpgov.law.harvard.edu/2019/11/21/regulation-by-sel... It shouldn’t be a surprise to anyone in this space.
      - twirlock 5y ago
        No one said anything about what's a "surprise" in a ~space~.
  - runawaybottle 5y ago
    It’s a good way to shut down your competitors and get certain legislation in place where only your mega corp can meet the standards. They bought a lot of Bitcoin recently, which could be decent enough collateral to offer a SEC-sanctified lending product. The other low-end Bitcoin companies may not be able to play at a poker table with that high of a buy in. The only other companies that will be able to offer something like that will be mega corps like the big banks, PayPal, etc. If they need to also buy large amounts of Bitcoin as collateral, that’s a win-win for their entire industry (price goes way up). The name of the game is not user adoption. The name of the game is pump the price, because that’s marketing on its own.
  - harry8 5y ago
    How about the SEC has repeatedly refused to prosecute for X in the past showing they, like us and multiple other parties doing business in this space, do not believe X is a crime. Given they've shown they don't think it's a crime and we and we agree and also don't think X is as crime, we have no idea why they're prosecuting us? I dunno, seems like an obvious interpretation but I could be totally missing it. I could care f.all about the SEC and blockchain coin stuff.
- arcticbull 5y ago
  "But mom everyone else is doing crime, why cant I do crime? Not doing crime puts me at a major disadvantage with respect to my criminal peers." - Brian Armstrong, TLDR
  - madamelic 5y ago
    I don't think the argument is that. It's that Coinbase asked if they could, SEC said "no, I'll sue you" and Coinbase is like "WTF dude, all these other platforms aren't being sued for doing exactly this." Coinbase may not have known the SEC's opinion on this before they started talking to the SEC since it seemed like the SEC was ok with it happening elsewhere.
    - arcticbull 5y ago
      It's their attorney's job to find out. This is why the have general counsel.
  - SilasX 5y ago
    You really don't see anything wrong with, "It's illegal for you to do this but not your identical competitors with an identical product"?
    - arcticbull 5y ago
      The SEC didn't say that everyone else could do it. They said the action itself is illegal and they're beginning their enforcement actions at Coinbase. Nobody is allowed to do it, and a judgement in their favor here will allow them to expeditiously stop everyone else with the explicit precedent they form. That's almost certainly why they're pushing ahead. It feels like your reaction is akin to a group of 5 cars speeding back to back, and the cop picks off the first guy to get a speeding ticket. They're all speeding. It's illegal for everyone. Enforcement resources are limited and they choose one to make an example of. If the others keep speeding they'll get caught afterwards too. Is it unfair the cop grabs the first guy? In a sense. But also so long as it slows everyone down; mission accomplished.
- chitowneats 5y ago
  The SEC has limited resources. I applaud their decision to go after (potential) bad actors operating at scale. 6 months is a long time for back and forth to be had. It's not like they dropped this on Brian Armstrong's desk without notice.
darig 5y ago
Upon my personal reading of even just the basics of capitalism, allowing the fed to reverse repo trillions of dollars on a nightly basis, and allowing partner banks to lend out 10x the money they actually have control of, is patently egregious. ETFs, Short manipulation, Options in general all beside... America is broken. Capitalism is broken. It's all a joke.
OldHand2018 5y ago
> I cannot imagine how they don’t see the SEC’s reasoning about Lend wrt Howey. If you want to argue that Howey does not apply or fight the decision/lawsuit, then fine. But feigning ignorance of something a (non-legal expert) programmer can connect the dots of instantly just makes me feel like they’re playing a PR game. Grewal was a federal (magistrate) judge in SF before he quit to go work at Facebook. Everyone I know that has appeared before him has thought that he was very good. I'd like to give him the benefit of the doubt - his entire legal career has been patents. Perhaps he truly doesn't see how this applies. But you are right, this just seems... off. EDIT - I've read this a few times, and despite where it says that this is not an investment or note, it sure sounds similar to the unsecured demand notes that some car companies use for their captive finance operations (in day-to-day operations, they are virtually indistinguishable from an interest-bearing checking account). And those are most definitely SEC-registered securities. See: https://www.rightnotes.com https://www.rightnotes.com https://www.wsj.com/articles/car-maker-notes-attract-investors-seeking-short-term-yield-11605781801 https://www.wsj.com/articles/car-maker-notes-attract-investo... https://www.ford.com/finance/investor-center/ford-interest-advantage https://www.ford.com/finance/investor-center/ford-interest-a...
- dataflow 5y ago
  > his entire legal career has been patents I'm confused, is patent experience particularly relevant to this case about securities law?
  - OldHand2018 5y ago
    No, that's why I'd like to assume that when he says he doesn't know why the SEC has a problem with their plan, he is telling the truth and this isn't just a PR attempt.
    - josefx 5y ago
      Except he says they got a wells notice, first hit for that on google: > A "Wells Notice" is a letter sent by a securities regulator to a prospective respondent, notifying him of the substance of charges that the regulator intends to bring against the respondent, and affording the respondent with the opportunity to submit a written statement to the ultimate decision maker. So did they receive a notice with the charges or didn't they?
dustintrex 5y ago
Agreed, and this line pretty much sums it up: > Customers won’t be “investing” in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship. "Give me money for a fixed period of time and I'll pay a guaranteed return on your principal. No, it's not an "investment", you're just lending it in connection with our existing relationship!"
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- justincormack 5y ago
  Securities lending, the repo market, is a large well understood and regulated existing market.
  - darksaints 5y ago
    Securities lending is regulated by FINRA, not the SEC.
    - chews 5y ago
      No, FINRA is an SRO, meaning they effectively police and audit the securities industry. FINRA takes guidance from the SEC and enforces the rules by way of fines, separate from any action of the SEC.
- mthoms 5y ago
  Excuse my ignorance but how is that any different from "interest"?
  - TameAntelope 5y ago
    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-stuff-the-sec-has-some-crypto-complaints https://www.bloomberg.com/news/newsletters/2021-08-09/money-...
baybal2 5y ago
In other news today: Facebook starts a payday loan business
- classified 5y ago
  But you can only buy their Face(palm)coin for your money.
rjknight 5y ago
IANAL, but isn't the point of the Howey test that you're making investments with variable returns, where those returns depend on the efforts of others? If Coinbase is _guaranteeing_ you a 4% return, then there is no variability and the efforts of others are irrelevant. Coinbase could spend all of the money on JPEGs of my cat and they would still have to pay a 4% return to the people they borrowed the money from.
- onlyrealcuzzo 5y ago
  Lend can pay you less than 4%. That being said, loans are not usually considered securities. Although they are regulated by FINRA.
  - adrr 5y ago
    Mortgage backed securities are securities even though they are loans under the hood. Bond is also a loan. Same with money market accounts. There are a bunch of debt securities.
    - darksaints 5y ago
      Once you package it up into a tradable instrument, it becomes a security, which would either be regulated by the SEC (bonds) or the CFTC (swaps or futures). But if it isn't tradable (which a lending account is not), it's not a security. It's likely the jurisdiction of FINRA or the FDIC.
      - adrr 5y ago
        My sweep account on my brokerage is regulated by the SEC. I can’t trade it. Some of the challenger banks are using sweep accounts instead of standard deposit accounts. Just look at the ones with a broker dealer license.
        darksaints 5y ago
        Sweep accounts are not regulated by the SEC, they're regulated by the FDIC and other bank-related regulatory bodies. They may be offered by SEC regulated brokerages, but that doesn't mean that the accounts themselves are regulated by the SEC. https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksweep.html https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...
asperous 5y ago
From the wikipedia article it seems the Howey test is the legal test if something is a security: "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise." So presumably the logic is, lend is a security because people are "investing" securities in a contract and expecting returns not through their own efforts. Sec has additional guidance here: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets https://www.sec.gov/corpfin/framework-investment-contract-an...
- cormacrelf 5y ago
  The funny part is that Howey was about selling parcels of orange grove land to people who would then lease (“Lend”) it back. Howey would then cultivate oranges on the whole block of land, and distribute the profits to the landowners, who would not have to lift a finger. Coinbase is not only satisfying the Howey test, it’s doing almost exactly the same thing as the OG and acting all surprised the SEC considers it a security. This is like accidentally sealing a snail in a bottle of kombucha and making a blog post about how you don’t think it constitutes negligence because you haven’t read Donoghue v Stevenson but you heard it was actually about ginger beer.
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gnee 5y ago
When you put your money into a saving account, you're lending the bank your money with an 0.04% interest rate. Is that a security?
- JumpCrisscross 5y ago
  > lending the bank your money with an 0.04% interest rate. Is that a security? No. Banks are regulated separately and more strenuously than securities firms, much less issuers. If Coinbase wants to offer Lend as an FDIC-insured deposit account, I’m sure the SEC would be fine with it. But Coinbase can’t do that because it doesn’t follow the rules banks must follow.
  - eru 5y ago
    And FDIC might not want them.
    - illgenr 5y ago
      Might is probably an understatement.
    - throwaway2037 5y ago
      I agree. It is very unlikely that FDIC would allow it. As I understand, all deposit products, including certificates of deposit, are guaranteed up to a certain amount with FDIC regulated banking institutions. The same is also true of securities brokers, but under a different regulator (SEC?) and different programme.
  - davedx 5y ago
    But is Lend a security? As far as I can tell, there's no contract for capital flows that you can trade with others. Lend isn't fungible, the USDC is.
    - ketzo 5y ago
      As I understand it, there doesn’t need to be a liquid market for something in order for it to be a security; just an investment of capital with the expectation of return through the efforts of a third party (the Howey test)
olalonde 5y ago
Correct me if I'm wrong but the bigger problem here seems to be that there is now way to "fight the decision" other than ignoring it, getting sued and maybe winning in court?
- klodolph 5y ago
  Maybe they could sue for a declaratory judgment?
  - encryptluks2 5y ago
    Here is our evidence your honor that we don't respond to support requests when customers have legitimate issues and we ignore them. Can you let us know if that is okay when dealing with people's finances, just to ignore them and keep their staking rewards.
  - throwaway2037 5y ago
    Do you have any Real World examples of people using this strategy against a financial regulator? I never heard of such a thing.
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- throwaway2037 5y ago
  I am repeating myself from an earlier post, but read the Wiki page: https://en.wikipedia.org/wiki/Wells_notice https://en.wikipedia.org/wiki/Wells_notice <<The notice indicates that the SEC staff has determined it may bring a civil action against a person or firm, and provides the person or firm with the opportunity to provide information as to why the enforcement action should not be brought.[2] The person or firm is generally given 30 days to file this response in the form of a legal brief considering legal and factual arguments as to why no charges should be brought against them.>>
- elliekelly 5y ago
  Going to court is the “fight”? And at any rate, the SEC, in my experience, is exceedingly reasonable. If you have a cogent argument to put forth they’re more than willing to hear you out. In fact, I’d say they much prefer to hear you out over taking you to court.
throwaway224466 5y ago
At the end of the day, the SEC is bought and paid for by the banks. They are essentially an HR department for banking execs. E.g. How many bank execs went to prison after the great recession? And where were the "Howey test" type threats from the SEC when it was actually needed? Coinbase offering interest bearing assets is taking business away from the banks. Hence, the SEC will be used as guard dogs by the banks to at the very least slow them down.
- miobrien 5y ago
  How exactly is the SEC "bought and paid for by the banks"?
Glyptodon 5y ago
The Howey test generally hasn't applied to loans I don't think. What makes this different than other loans?
darawk 5y ago
If that were the case, then the SEC should say so. The fact that they are unwilling to suggests that there is more to it than you think.
TomSwirly 5y ago
They are deliberately lying. You can see on their Twitter feed where people have made the same argument to them, which they ignore.
xtat 5y ago
I'm truly boggled as to how many on this page seem to think the SEC's reasoning makes sense, let alone how the SEC reached this seemingly narrow-minded or lazy conclusion in the first place.
DennisP 5y ago
Staked Ethereum is an entirely different sort of thing. You're not loaning money, you're earning it with the equivalent of mining. Personally I've never seen the SEC consider loans as securities before, so it seems reasonable to ask for their reasoning.
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omarhaneef 5y ago
Not a lawyer here, but if I just apply the Howey Test based on my own intuition after reading it on investopedia(1), I haven't availed myself of the full range of arguments that the professionals apply. I would not, for instance, get this conclusion: https://corpgov.law.harvard.edu/2020/06/14/court-holds-that-syndicated-bank-loan-is-not-a-security/ https://corpgov.law.harvard.edu/2020/06/14/court-holds-that-... (1) https://www.investopedia.com/terms/h/howey-test.asp https://www.investopedia.com/terms/h/howey-test.asp
slavboj 5y ago
The entire point of having communications with your regulator is that you get to hear their reasoning. "I checked wikipedia and it seems like it might fit" is not how highly regulated industries work.
xivzgrev 5y ago
At last, my hours of watching lawyer TV shows comes in handy! A lawyer never assumes what the other side’s argument is, because your rebuttal hinges on exactly how their argument is constructed. Plus you don’t want to give your “opponent” ideas, nor do you want to essentially negotiate against yourself. If you lay out a defense, without a clear thing you are arguing against, the other side could just change their planned argument and say “ok THIS is our actual argument now”. The defense responds, not initiates. So this article makes sense to me - while Coinbase can clearly guess what the SEC might argue, the fact is the SEC hasn’t told them yet. So there’s nothing to respond to (yet).
spotline 5y ago
They want to try to prevent lawsuits from their customers. Agree, it is PR, they know it is a security and they have been able to get away with selling unregistered securities for so long, that they do have a legit reason to question why the SEC is just now starting to do their job. I wonder if Texas will extend the decentralized 'enforcement' nature of the abortion bill also to those selling unregistered securities? If you do not have to be directly harmed in order to sue Coinbase for breaking the law, you didn't have to wait for the state to actually enforce the laws that is... I don't think that is good policy, but if we are going to do it with abortion, why not extend it to money transmission and securities laws?
SilasX 5y ago
Okay, but in fairness, I don't think Coinbase is disputing that, a) "You can make a plausible legal argument for why Lend is a security." Their frustration, rather, is that: b) "The SEC is not doing the same thing for near-identical offerings like Gemini Earn." and c) "The SEC won't actually tell us what basis they're appealing to or how this relevantly differs from the others."
twirlock 5y ago
You somehow knew to Google the word test and are now appalled that coinbase doesn't know why they can't provide savings accounts. Ok.
kerng 5y ago
Bitcoin isn't a security, so why should a Bitcoin lending platform be one? Assuming that rewards are in Bitcoin and not dollars.
- kccqzy 5y ago
  This is absurd. You can make a security out of something that's not a security. The US Dollar isn't a security (it's a currency), but many USD lending platforms in fact offer securities. Bonds can be denominated in USD and they are securities. My house isn't a security, but when my bank decides to package the house-backed mortgage and sell it as MBS, it's a security.

bpodgursky 5y ago

Brian's concern in the tweet thread is that a lot of other companies are already providing lending services without SEC action, putting Coinbase at a disadvantage. The rule should be applied across the industry in a standard manner, no matter which direction the SEC rules, and it is apparently not being applied consistently currently.

seehafer 5y ago
Are the other companies already providing lending services public? Public companies get orders of magnitude more scrutiny from SEC relative to private companies.
- ac29 5y ago
  Other US companies providing similar products include Gemini, Kraken, and BlockFi. I dont think any of them are public. BlockFi's lending product has already been banned by several state regulatory agencies, but if they've been sued or warned by the SEC, I dont think thats been made public.
  - seehafer 5y ago
    Right. My point is that many federal agencies have mandates that dictate where they focus. For instance the SEC may come after any privately-owned startup, after the fact, if there’s overwhelming evidence of fraud (see: Theranos). But when you go public you enter into a whole new level of scrutiny, because regulating public markets is why the SEC even exists.
  - hackingforfun 5y ago
    There is a difference between lending assets and staking assets. Of the ones you mentioned, I've only used Gemini and Kraken. Gemini Earn offers similar lending products to Coinbase Lend (a % return is given when certain assets are lent) [1][2]. Kraken offers staking services [3], which are technically not "lending", but are staking rewards gained from staking assets in proof of stake protocols such as Ethereum 2.0, Polkadot, Kusama, Cosmos, Cardano, Solana, etc. These staking rewards could also be earned directly from the protocols, if users wanted to stake via their own hardware, but Kraken takes a fee in this case due to reducing the hassle for users to need to do this themselves (and some proof of stake protocols have slashing which means users would lose the coins they have staked if their hardware goes down or their connection is interrupted), so there is some reduction of risk as well for the user in that case. However, this also means the staking power is more centralized at the exchange level, which is a downside, but that is a different part of the discussion. FWIW, Coinbase has staking services as well [4], but Coinbase Lend, which hadn't even launched yet, was going to be something different. It looks like Coinbase was going to achieve that 4% interest on USDC in Lend via Compound [5] (which is a DeFi protocol they actually helped launch a few years ago [6]). Assets can already be lent directly to Compound via users, without Coinbase as an intermediary. Anyway, my point in bringing this up is there is difference between lending assets and staking assets, and actually both lending and staking can be done directly by users, without any of these exchanges as intermediaries. [1] https://www.gemini.com/earn https://www.gemini.com/earn [2] https://www.coinbase.com/lend https://www.coinbase.com/lend [3] https://www.kraken.com/en-us/features/staking-coins https://www.kraken.com/en-us/features/staking-coins [4] https://www.coinbase.com/staking https://www.coinbase.com/staking [5] https://blockworks.co/coinbase-compound-labs-launch-usdc-high-yield-accounts/ https://blockworks.co/coinbase-compound-labs-launch-usdc-hig... [6] https://techcrunch.com/2018/05/16/cryptocurrency-compound-interest/ https://techcrunch.com/2018/05/16/cryptocurrency-compound-in...
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dataflow 5y ago
"We think others should be sued too" is quite a different argument from "we don't know why we're being sued". In fact it strongly suggests the opposite.
- kobasa 5y ago
  They don't know why they're being sued because everyone else is doing it and not getting sued. Makes sense from that point of view. Coinbase technically should only be sued if the others doing were sued too, but they're not... Compound this with the fact that no explanation was given to them why they're being sued - when it is very much necessary in light of their competitors not getting sued and you can start understanding their confusion.
ac29 5y ago
Something tells me courts wont be too sympathetic to the "but other people are criming as well" argument.
- bpodgursky 5y ago
  That's not true at all? There is a ton of precedent for courts striking down selectively-enforced laws. Equality before the law is extremely important to how courts rule in the US.
  - pavlov 5y ago
    The SEC intentionally does “regulation by selective enforcement”, as shown by their actions following the 2017 ICO bubble: https://corpgov.law.harvard.edu/2019/11/21/regulation-by-selective-enforcement-the-sec-and-initial-coin-offerings/ https://corpgov.law.harvard.edu/2019/11/21/regulation-by-sel... It shouldn’t be a surprise to anyone in this space.
    - twirlock 5y ago
      No one said anything about what's a "surprise" in a ~space~.
- runawaybottle 5y ago
  It’s a good way to shut down your competitors and get certain legislation in place where only your mega corp can meet the standards. They bought a lot of Bitcoin recently, which could be decent enough collateral to offer a SEC-sanctified lending product. The other low-end Bitcoin companies may not be able to play at a poker table with that high of a buy in. The only other companies that will be able to offer something like that will be mega corps like the big banks, PayPal, etc. If they need to also buy large amounts of Bitcoin as collateral, that’s a win-win for their entire industry (price goes way up). The name of the game is not user adoption. The name of the game is pump the price, because that’s marketing on its own.
- harry8 5y ago
  How about the SEC has repeatedly refused to prosecute for X in the past showing they, like us and multiple other parties doing business in this space, do not believe X is a crime. Given they've shown they don't think it's a crime and we and we agree and also don't think X is as crime, we have no idea why they're prosecuting us? I dunno, seems like an obvious interpretation but I could be totally missing it. I could care f.all about the SEC and blockchain coin stuff.
arcticbull 5y ago
"But mom everyone else is doing crime, why cant I do crime? Not doing crime puts me at a major disadvantage with respect to my criminal peers." - Brian Armstrong, TLDR
- madamelic 5y ago
  I don't think the argument is that. It's that Coinbase asked if they could, SEC said "no, I'll sue you" and Coinbase is like "WTF dude, all these other platforms aren't being sued for doing exactly this." Coinbase may not have known the SEC's opinion on this before they started talking to the SEC since it seemed like the SEC was ok with it happening elsewhere.
  - arcticbull 5y ago
    It's their attorney's job to find out. This is why the have general counsel.
- SilasX 5y ago
  You really don't see anything wrong with, "It's illegal for you to do this but not your identical competitors with an identical product"?
  - arcticbull 5y ago
    The SEC didn't say that everyone else could do it. They said the action itself is illegal and they're beginning their enforcement actions at Coinbase. Nobody is allowed to do it, and a judgement in their favor here will allow them to expeditiously stop everyone else with the explicit precedent they form. That's almost certainly why they're pushing ahead. It feels like your reaction is akin to a group of 5 cars speeding back to back, and the cop picks off the first guy to get a speeding ticket. They're all speeding. It's illegal for everyone. Enforcement resources are limited and they choose one to make an example of. If the others keep speeding they'll get caught afterwards too. Is it unfair the cop grabs the first guy? In a sense. But also so long as it slows everyone down; mission accomplished.
chitowneats 5y ago
The SEC has limited resources. I applaud their decision to go after (potential) bad actors operating at scale. 6 months is a long time for back and forth to be had. It's not like they dropped this on Brian Armstrong's desk without notice.

darig 5y ago

Upon my personal reading of even just the basics of capitalism, allowing the fed to reverse repo trillions of dollars on a nightly basis, and allowing partner banks to lend out 10x the money they actually have control of, is patently egregious. ETFs, Short manipulation, Options in general all beside... America is broken. Capitalism is broken. It's all a joke.

OldHand2018 5y ago

> I cannot imagine how they don’t see the SEC’s reasoning about Lend wrt Howey. If you want to argue that Howey does not apply or fight the decision/lawsuit, then fine. But feigning ignorance of something a (non-legal expert) programmer can connect the dots of instantly just makes me feel like they’re playing a PR game. Grewal was a federal (magistrate) judge in SF before he quit to go work at Facebook. Everyone I know that has appeared before him has thought that he was very good. I'd like to give him the benefit of the doubt - his entire legal career has been patents. Perhaps he truly doesn't see how this applies. But you are right, this just seems... off. EDIT - I've read this a few times, and despite where it says that this is not an investment or note, it sure sounds similar to the unsecured demand notes that some car companies use for their captive finance operations (in day-to-day operations, they are virtually indistinguishable from an interest-bearing checking account). And those are most definitely SEC-registered securities. See: https://www.rightnotes.com https://www.rightnotes.com https://www.wsj.com/articles/car-maker-notes-attract-investors-seeking-short-term-yield-11605781801 https://www.wsj.com/articles/car-maker-notes-attract-investo... https://www.ford.com/finance/investor-center/ford-interest-advantage https://www.ford.com/finance/investor-center/ford-interest-a...

dataflow 5y ago
> his entire legal career has been patents I'm confused, is patent experience particularly relevant to this case about securities law?
- OldHand2018 5y ago
  No, that's why I'd like to assume that when he says he doesn't know why the SEC has a problem with their plan, he is telling the truth and this isn't just a PR attempt.
  - josefx 5y ago
    Except he says they got a wells notice, first hit for that on google: > A "Wells Notice" is a letter sent by a securities regulator to a prospective respondent, notifying him of the substance of charges that the regulator intends to bring against the respondent, and affording the respondent with the opportunity to submit a written statement to the ultimate decision maker. So did they receive a notice with the charges or didn't they?

dustintrex 5y ago

Agreed, and this line pretty much sums it up: > Customers won’t be “investing” in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship. "Give me money for a fixed period of time and I'll pay a guaranteed return on your principal. No, it's not an "investment", you're just lending it in connection with our existing relationship!"

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justincormack 5y ago
Securities lending, the repo market, is a large well understood and regulated existing market.
- darksaints 5y ago
  Securities lending is regulated by FINRA, not the SEC.
  - chews 5y ago
    No, FINRA is an SRO, meaning they effectively police and audit the securities industry. FINRA takes guidance from the SEC and enforces the rules by way of fines, separate from any action of the SEC.
mthoms 5y ago
Excuse my ignorance but how is that any different from "interest"?
- TameAntelope 5y ago
  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-stuff-the-sec-has-some-crypto-complaints https://www.bloomberg.com/news/newsletters/2021-08-09/money-...

baybal2 5y ago

In other news today: Facebook starts a payday loan business

classified 5y ago
But you can only buy their Face(palm)coin for your money.

rjknight 5y ago

IANAL, but isn't the point of the Howey test that you're making investments with variable returns, where those returns depend on the efforts of others? If Coinbase is _guaranteeing_ you a 4% return, then there is no variability and the efforts of others are irrelevant. Coinbase could spend all of the money on JPEGs of my cat and they would still have to pay a 4% return to the people they borrowed the money from.

onlyrealcuzzo 5y ago
Lend can pay you less than 4%. That being said, loans are not usually considered securities. Although they are regulated by FINRA.
- adrr 5y ago
  Mortgage backed securities are securities even though they are loans under the hood. Bond is also a loan. Same with money market accounts. There are a bunch of debt securities.
  - darksaints 5y ago
    Once you package it up into a tradable instrument, it becomes a security, which would either be regulated by the SEC (bonds) or the CFTC (swaps or futures). But if it isn't tradable (which a lending account is not), it's not a security. It's likely the jurisdiction of FINRA or the FDIC.
    - adrr 5y ago
      My sweep account on my brokerage is regulated by the SEC. I can’t trade it. Some of the challenger banks are using sweep accounts instead of standard deposit accounts. Just look at the ones with a broker dealer license.
      - darksaints 5y ago
        Sweep accounts are not regulated by the SEC, they're regulated by the FDIC and other bank-related regulatory bodies. They may be offered by SEC regulated brokerages, but that doesn't mean that the accounts themselves are regulated by the SEC. https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksweep.html https://www.sec.gov/oiea/investor-alerts-bulletins/ib_banksw...

asperous 5y ago

From the wikipedia article it seems the Howey test is the legal test if something is a security: "an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise." So presumably the logic is, lend is a security because people are "investing" securities in a contract and expecting returns not through their own efforts. Sec has additional guidance here: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets https://www.sec.gov/corpfin/framework-investment-contract-an...

cormacrelf 5y ago
The funny part is that Howey was about selling parcels of orange grove land to people who would then lease (“Lend”) it back. Howey would then cultivate oranges on the whole block of land, and distribute the profits to the landowners, who would not have to lift a finger. Coinbase is not only satisfying the Howey test, it’s doing almost exactly the same thing as the OG and acting all surprised the SEC considers it a security. This is like accidentally sealing a snail in a bottle of kombucha and making a blog post about how you don’t think it constitutes negligence because you haven’t read Donoghue v Stevenson but you heard it was actually about ginger beer.

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gnee 5y ago

When you put your money into a saving account, you're lending the bank your money with an 0.04% interest rate. Is that a security?

JumpCrisscross 5y ago
> lending the bank your money with an 0.04% interest rate. Is that a security? No. Banks are regulated separately and more strenuously than securities firms, much less issuers. If Coinbase wants to offer Lend as an FDIC-insured deposit account, I’m sure the SEC would be fine with it. But Coinbase can’t do that because it doesn’t follow the rules banks must follow.
- eru 5y ago
  And FDIC might not want them.
  - illgenr 5y ago
    Might is probably an understatement.
  - throwaway2037 5y ago
    I agree. It is very unlikely that FDIC would allow it. As I understand, all deposit products, including certificates of deposit, are guaranteed up to a certain amount with FDIC regulated banking institutions. The same is also true of securities brokers, but under a different regulator (SEC?) and different programme.
- davedx 5y ago
  But is Lend a security? As far as I can tell, there's no contract for capital flows that you can trade with others. Lend isn't fungible, the USDC is.
  - ketzo 5y ago
    As I understand it, there doesn’t need to be a liquid market for something in order for it to be a security; just an investment of capital with the expectation of return through the efforts of a third party (the Howey test)

olalonde 5y ago

Correct me if I'm wrong but the bigger problem here seems to be that there is now way to "fight the decision" other than ignoring it, getting sued and maybe winning in court?

klodolph 5y ago
Maybe they could sue for a declaratory judgment?
- encryptluks2 5y ago
  Here is our evidence your honor that we don't respond to support requests when customers have legitimate issues and we ignore them. Can you let us know if that is okay when dealing with people's finances, just to ignore them and keep their staking rewards.
- throwaway2037 5y ago
  Do you have any Real World examples of people using this strategy against a financial regulator? I never heard of such a thing.
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throwaway2037 5y ago
I am repeating myself from an earlier post, but read the Wiki page: https://en.wikipedia.org/wiki/Wells_notice https://en.wikipedia.org/wiki/Wells_notice <<The notice indicates that the SEC staff has determined it may bring a civil action against a person or firm, and provides the person or firm with the opportunity to provide information as to why the enforcement action should not be brought.[2] The person or firm is generally given 30 days to file this response in the form of a legal brief considering legal and factual arguments as to why no charges should be brought against them.>>
elliekelly 5y ago
Going to court is the “fight”? And at any rate, the SEC, in my experience, is exceedingly reasonable. If you have a cogent argument to put forth they’re more than willing to hear you out. In fact, I’d say they much prefer to hear you out over taking you to court.

throwaway224466 5y ago

At the end of the day, the SEC is bought and paid for by the banks. They are essentially an HR department for banking execs. E.g. How many bank execs went to prison after the great recession? And where were the "Howey test" type threats from the SEC when it was actually needed? Coinbase offering interest bearing assets is taking business away from the banks. Hence, the SEC will be used as guard dogs by the banks to at the very least slow them down.

miobrien 5y ago
How exactly is the SEC "bought and paid for by the banks"?

Glyptodon 5y ago

The Howey test generally hasn't applied to loans I don't think. What makes this different than other loans?

darawk 5y ago

If that were the case, then the SEC should say so. The fact that they are unwilling to suggests that there is more to it than you think.

TomSwirly 5y ago

They are deliberately lying. You can see on their Twitter feed where people have made the same argument to them, which they ignore.

xtat 5y ago

I'm truly boggled as to how many on this page seem to think the SEC's reasoning makes sense, let alone how the SEC reached this seemingly narrow-minded or lazy conclusion in the first place.

DennisP 5y ago

Staked Ethereum is an entirely different sort of thing. You're not loaning money, you're earning it with the equivalent of mining. Personally I've never seen the SEC consider loans as securities before, so it seems reasonable to ask for their reasoning.

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omarhaneef 5y ago

Not a lawyer here, but if I just apply the Howey Test based on my own intuition after reading it on investopedia(1), I haven't availed myself of the full range of arguments that the professionals apply. I would not, for instance, get this conclusion: https://corpgov.law.harvard.edu/2020/06/14/court-holds-that-syndicated-bank-loan-is-not-a-security/ https://corpgov.law.harvard.edu/2020/06/14/court-holds-that-... (1) https://www.investopedia.com/terms/h/howey-test.asp https://www.investopedia.com/terms/h/howey-test.asp

slavboj 5y ago

The entire point of having communications with your regulator is that you get to hear their reasoning. "I checked wikipedia and it seems like it might fit" is not how highly regulated industries work.

xivzgrev 5y ago

At last, my hours of watching lawyer TV shows comes in handy! A lawyer never assumes what the other side’s argument is, because your rebuttal hinges on exactly how their argument is constructed. Plus you don’t want to give your “opponent” ideas, nor do you want to essentially negotiate against yourself. If you lay out a defense, without a clear thing you are arguing against, the other side could just change their planned argument and say “ok THIS is our actual argument now”. The defense responds, not initiates. So this article makes sense to me - while Coinbase can clearly guess what the SEC might argue, the fact is the SEC hasn’t told them yet. So there’s nothing to respond to (yet).

spotline 5y ago

They want to try to prevent lawsuits from their customers. Agree, it is PR, they know it is a security and they have been able to get away with selling unregistered securities for so long, that they do have a legit reason to question why the SEC is just now starting to do their job. I wonder if Texas will extend the decentralized 'enforcement' nature of the abortion bill also to those selling unregistered securities? If you do not have to be directly harmed in order to sue Coinbase for breaking the law, you didn't have to wait for the state to actually enforce the laws that is... I don't think that is good policy, but if we are going to do it with abortion, why not extend it to money transmission and securities laws?

SilasX 5y ago

Okay, but in fairness, I don't think Coinbase is disputing that, a) "You can make a plausible legal argument for why Lend is a security." Their frustration, rather, is that: b) "The SEC is not doing the same thing for near-identical offerings like Gemini Earn." and c) "The SEC won't actually tell us what basis they're appealing to or how this relevantly differs from the others."

twirlock 5y ago

You somehow knew to Google the word test and are now appalled that coinbase doesn't know why they can't provide savings accounts. Ok.

kerng 5y ago

Bitcoin isn't a security, so why should a Bitcoin lending platform be one? Assuming that rewards are in Bitcoin and not dollars.

kccqzy 5y ago
This is absurd. You can make a security out of something that's not a security. The US Dollar isn't a security (it's a currency), but many USD lending platforms in fact offer securities. Bonds can be denominated in USD and they are securities. My house isn't a security, but when my bank decides to package the house-backed mortgage and sell it as MBS, it's a security.