7 ms·

Excuse my ignorance but how is that any different from "interest"?

by mthoms 5y ago

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.

Excuse my ignorance but how is that any different from "interest"?

by mthoms 5y ago

Excuse my ignorance but how is that any different from "interest"?

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.