12 ms·

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

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!"

deleted 5y ago
[deleted]
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-...
  - andreareina 5y ago
    I really hope this is showing up in the next Money Stuff.
- thaumasiotes 5y ago
  I'm guessing the concept is more like stock lending fees. You short a stock by borrowing shares and selling the borrowed shares. You'd short USDC the same way, if you could borrow them. The thing is that this really isn't an investment. An investment looks like this: - You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money. A rental looks like this: - I need a piano for 6 months. You have several pianos. You let me have one, and every month I can either give you $50 or return the piano. Stock borrowing works that second way, except that instead of a piano, it's a share of AAPL. There is no project involved, but the share of AAPL lives in my house instead of your house, and every month you get $0.04. Interest is also on that second model, so in that sense it's not different from interest. But neither is the piano rental.
  - TomSwirly 5y ago
    This is an investment. "To invest is to allocate money with the expectation of a positive benefit/return in the future." If I put money in your bank-like-thing, expecting to get more back at the end, it's an investment. > I'm guessing the concept is more like stock lending fees Those are investments too. Their technical name is "repos", short for "repurchase agreements".
  - umanwizard 5y ago
    > You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money. That’s venture capitalism which is just one of the many different types of investing. Buying pianos in order to lend them out is another type of investing.
    - thaumasiotes 5y ago
      > Buying pianos in order to lend them out is another type of investing. But the example here is renting out a piano you already have, not obtaining a piano so you can rent it out.
- Lazare 5y ago
  As in, the interest you might earn on a savings account? The rule is basically: "If you're giving someone else money in the hope of getting more money back later, it's a security UNLESS it fits into a list of exceptions, or if it meets the criteria to be added as a new exception." So a savings account would absolutely be a security, unless it fits into one of the recognised exceptions. One of those exceptions is the existence of an "alternative regulatory regime", ie, there being some other framework, other than security laws, to protect people. For a savings account, the fact that banks are federally regulated, and that deposits are federally insured via FDIC, means they don't count. But Coinbase's Lend program does not seem to be subject to any other regulatory regimes, so... In fact, the very fact that they went to the SEC to tell them what they were up to and check if it was legal is a bit of a red flag. The SEC enforces security laws. The fact Coinbase couldn't go to the Federal Department of Enforcing Crypto Lending Regulations is a sign that this falls under security laws, because there is no stand alone Crypto Lending Regulations to enforce.
  - mthoms 5y ago
    Very helpful, thanks. It sounds like you're saying the banks get a special carve-out to provide this service simply because the regulator is different. On a fundamental level though, I still don't see the difference. I do have to disagree with the last paragraph though. Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.
    - subroutine 5y ago
      Right, OP is saying that on a fundamental level, there isn't a difference (between LEND and a savings account), except that Coinbase is not a federally regulated FDIC insured bank. Metaphorically, Coinbase just went to the police department and explained in great detail their intention to sell hard liquor without a liquor license. Under sworn testimony, they explained... 'you see, we are just providing the same product as licensed liquor stores, so it's all good'.
      - ckdarby 5y ago
- dragonwriter 5y ago
  > Excuse my ignorance but how is that any different from "interest"? Corporate fixed-coupon bonds are corporate offerings of simple interest-bearing instruments, and are regulated as securities.
bjackman 5y ago
I'm not an expert here but I read their argument as they don't expect this lending to be regulated as "investment" because the capital is not in theory at risk. So it's more like a savings account than an investment account. That's the impression I got from the article, but reading other comments in the thread it doesn't seem like that's an at all relevant definition of the term!
- tylerhou 5y ago
  I don’t understand how you can make a profit larger than the risk-free rate of return without at least some risk; i.e. any risk free profit should be arbitraged away. If Coinbase has truly found risk-free profit it would be more profitable to sell it as an investment to some hedge fund, not give away free returns to retail.
  - ethbr0 5y ago
    Answer: Legal ambiguity carries its own risk. Therefore, rates in more ambiguous instruments should be higher than those in more certain ones, no?
  - anonymoushn 5y ago
    The risk-free rate in this sector is substantially higher than 4%.
    - Alex3917 5y ago
      If the value of crypto is that it drives down the risk of lending by bringing transparency to the assets of borrowers, then how can the interest rate be higher than in the normal financial system? The fact that there is less risk but interest rates are higher should tell you everything you need to know about why this is a scam.
      - anonymoushn 5y ago
        The question is "Why is there often 20% per year or higher cash-and-carry arbitrage for assets that have near zero carrying cost?" The answer might be that every crypto exchange has a 15% or higher chance of exploding per year and they've all just been extremely lucky, but I wonder if this is really the best explanation we can come up with.
vmception 5y ago
Read the securities act for once. The exceptions make the rule. Especially the big glaring exception for securities maturing in less than 270 days being completely exempt from the act no matter the nature of the transaction. There is a difference between excepted practice, regulator musings, and using a plain reading of the law no matter what people think. Protip: the regulator has no idea which part of the law you are using, and legally cant know when your lawyers have all the supporting documents. Make it more expensive for the regulator to find out, so they’ll choose to go after people without lawyers instead, who cant afford their rights. USA
- JumpCrisscross 5y ago
  > securities maturing in less than 270 days being completely exempt from the act This is false. Commercial paper (not any security) maturing in less than 270 days is exempt from registration. (Like shares in private companies.) The other provisions of the Securities Act of 1933, as amended, still apply.
  - vmception 5y ago
    An exemption from registration is functionally an exemption from most parts of the act. Sure, don't start manipulating your market or front running everyone. But for me that's enough. Everyone can issue to everyone and everyone can trade. That's what we're going for. And if you believe that means the SEC can still police and protect gullible easily swayed people, isn't that what everyone wants? That's a perfect medium. The act does not mention commercial paper, it is clear that the purpose of the exemption is to not disrupt the trade of rich people in the commercial paper market. Even more reason of ignoring the commercial paper assumption and corroborating musings of the regulator. People are just afraid of challenging it because so much money is involved and they don't want to to take a risk as an issuer which typically requires a relationship with the regulator, and a relationship with the investors, and a way to actually make an attractive enough return. Markets weren't fast enough for that most of the time, now it is. Its ripe for disruption and challenge.
    - 5y ago
deleted 5y ago
[deleted]
rmah 5y ago
From the information that Coinbase has given, it's no more an investment than a savings account is. More importantly, it's not a security since you can't sell your loan to someone else.
- deleted 5y ago
  [deleted]
- wantsanagent 5y ago
  They can't make this argument though because FDIC and Banking regulations are even more restrictive and they arn't (yet) a bank.
  - hef19898 5y ago
    Wirecard Bank was up for crabs...

deleted 5y ago

[deleted]

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-...
- andreareina 5y ago
  I really hope this is showing up in the next Money Stuff.
thaumasiotes 5y ago
I'm guessing the concept is more like stock lending fees. You short a stock by borrowing shares and selling the borrowed shares. You'd short USDC the same way, if you could borrow them. The thing is that this really isn't an investment. An investment looks like this: - You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money. A rental looks like this: - I need a piano for 6 months. You have several pianos. You let me have one, and every month I can either give you $50 or return the piano. Stock borrowing works that second way, except that instead of a piano, it's a share of AAPL. There is no project involved, but the share of AAPL lives in my house instead of your house, and every month you get $0.04. Interest is also on that second model, so in that sense it's not different from interest. But neither is the piano rental.
- TomSwirly 5y ago
  This is an investment. "To invest is to allocate money with the expectation of a positive benefit/return in the future." If I put money in your bank-like-thing, expecting to get more back at the end, it's an investment. > I'm guessing the concept is more like stock lending fees Those are investments too. Their technical name is "repos", short for "repurchase agreements".
- umanwizard 5y ago
  > You ask me for funding for a project. I give you funding, in cash or in kind, and I get (partial) ownership of the project. If it does OK, I get some money. If it does better than that, I get more money. If it does badly, I don't get much money. That’s venture capitalism which is just one of the many different types of investing. Buying pianos in order to lend them out is another type of investing.
  - thaumasiotes 5y ago
    > Buying pianos in order to lend them out is another type of investing. But the example here is renting out a piano you already have, not obtaining a piano so you can rent it out.
Lazare 5y ago
As in, the interest you might earn on a savings account? The rule is basically: "If you're giving someone else money in the hope of getting more money back later, it's a security UNLESS it fits into a list of exceptions, or if it meets the criteria to be added as a new exception." So a savings account would absolutely be a security, unless it fits into one of the recognised exceptions. One of those exceptions is the existence of an "alternative regulatory regime", ie, there being some other framework, other than security laws, to protect people. For a savings account, the fact that banks are federally regulated, and that deposits are federally insured via FDIC, means they don't count. But Coinbase's Lend program does not seem to be subject to any other regulatory regimes, so... In fact, the very fact that they went to the SEC to tell them what they were up to and check if it was legal is a bit of a red flag. The SEC enforces security laws. The fact Coinbase couldn't go to the Federal Department of Enforcing Crypto Lending Regulations is a sign that this falls under security laws, because there is no stand alone Crypto Lending Regulations to enforce.
- mthoms 5y ago
  Very helpful, thanks. It sounds like you're saying the banks get a special carve-out to provide this service simply because the regulator is different. On a fundamental level though, I still don't see the difference. I do have to disagree with the last paragraph though. Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.
  - subroutine 5y ago
    Right, OP is saying that on a fundamental level, there isn't a difference (between LEND and a savings account), except that Coinbase is not a federally regulated FDIC insured bank. Metaphorically, Coinbase just went to the police department and explained in great detail their intention to sell hard liquor without a liquor license. Under sworn testimony, they explained... 'you see, we are just providing the same product as licensed liquor stores, so it's all good'.
    - ckdarby 5y ago
dragonwriter 5y ago
> Excuse my ignorance but how is that any different from "interest"? Corporate fixed-coupon bonds are corporate offerings of simple interest-bearing instruments, and are regulated as securities.

bjackman 5y ago

I'm not an expert here but I read their argument as they don't expect this lending to be regulated as "investment" because the capital is not in theory at risk. So it's more like a savings account than an investment account. That's the impression I got from the article, but reading other comments in the thread it doesn't seem like that's an at all relevant definition of the term!

tylerhou 5y ago
I don’t understand how you can make a profit larger than the risk-free rate of return without at least some risk; i.e. any risk free profit should be arbitraged away. If Coinbase has truly found risk-free profit it would be more profitable to sell it as an investment to some hedge fund, not give away free returns to retail.
- ethbr0 5y ago
  Answer: Legal ambiguity carries its own risk. Therefore, rates in more ambiguous instruments should be higher than those in more certain ones, no?
- anonymoushn 5y ago
  The risk-free rate in this sector is substantially higher than 4%.
  - Alex3917 5y ago
    If the value of crypto is that it drives down the risk of lending by bringing transparency to the assets of borrowers, then how can the interest rate be higher than in the normal financial system? The fact that there is less risk but interest rates are higher should tell you everything you need to know about why this is a scam.
    - anonymoushn 5y ago
      The question is "Why is there often 20% per year or higher cash-and-carry arbitrage for assets that have near zero carrying cost?" The answer might be that every crypto exchange has a 15% or higher chance of exploding per year and they've all just been extremely lucky, but I wonder if this is really the best explanation we can come up with.

vmception 5y ago

Read the securities act for once. The exceptions make the rule. Especially the big glaring exception for securities maturing in less than 270 days being completely exempt from the act no matter the nature of the transaction. There is a difference between excepted practice, regulator musings, and using a plain reading of the law no matter what people think. Protip: the regulator has no idea which part of the law you are using, and legally cant know when your lawyers have all the supporting documents. Make it more expensive for the regulator to find out, so they’ll choose to go after people without lawyers instead, who cant afford their rights. USA

JumpCrisscross 5y ago
> securities maturing in less than 270 days being completely exempt from the act This is false. Commercial paper (not any security) maturing in less than 270 days is exempt from registration. (Like shares in private companies.) The other provisions of the Securities Act of 1933, as amended, still apply.
- vmception 5y ago
  An exemption from registration is functionally an exemption from most parts of the act. Sure, don't start manipulating your market or front running everyone. But for me that's enough. Everyone can issue to everyone and everyone can trade. That's what we're going for. And if you believe that means the SEC can still police and protect gullible easily swayed people, isn't that what everyone wants? That's a perfect medium. The act does not mention commercial paper, it is clear that the purpose of the exemption is to not disrupt the trade of rich people in the commercial paper market. Even more reason of ignoring the commercial paper assumption and corroborating musings of the regulator. People are just afraid of challenging it because so much money is involved and they don't want to to take a risk as an issuer which typically requires a relationship with the regulator, and a relationship with the investors, and a way to actually make an attractive enough return. Markets weren't fast enough for that most of the time, now it is. Its ripe for disruption and challenge.
  - 5y ago

deleted 5y ago

[deleted]

rmah 5y ago

From the information that Coinbase has given, it's no more an investment than a savings account is. More importantly, it's not a security since you can't sell your loan to someone else.

deleted 5y ago
[deleted]
wantsanagent 5y ago
They can't make this argument though because FDIC and Banking regulations are even more restrictive and they arn't (yet) a bank.
- hef19898 5y ago
  Wirecard Bank was up for crabs...