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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 lat

by 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
    And it worked! Reading this and reading HN comments I realize I don't want the SEC involved in this. Crypto is more & more bringing to the front of the conversation about how protection should be the default but having the ability to opt out is the choice individuals should have. FDIC is a perfect example! There are accounts I know and would expect that but there are times I'm willing to waive that for compensation. Welcome to the land of crypto where nothing is FDIC and the government isn't going to protect anything. Public opinion matters because it can be the very conversation that gets politicians to challenge the existing laws to be changed.
    - Wowfunhappy 5y ago
      FDIC was put in place after The Great Depression, in order to prevent another Great Depression. There is no opt out because when large numbers of people make risky investments without planning for the consequences, it affects the entire economy.
      - throwaway98797 5y ago
        Individual freedom vs. community safety. Where to draw the line? Who should draw it and by what mechanism?
        Wowfunhappy 5y ago
        > Where to draw the line? Who should draw it and by what mechanism? The democratically elected government seems like a good place to start!
- Lazare 5y ago
  Not exactly. After many, many decades of frauds, schemes, panics, and crashes, harsh experience has led to a regime where nobody can do anything without a very explicit carve out. In tech terms, it's a default "deny all", with a white list of "things which are not thinly disguised ponzi schemes", not a default "allow all" with a black list of "things which have been shown to be thinly disguised ponzi schemes". So yes, banks are one of the exemptions, because they have their own regulator (which is one way to get on the white list). > Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag. No, the red flag is that Coinbase (correctly!) understands that the SEC is the relevant regulator. Your local credit union does not go to the SEC when they want to offer a new type of savings account because the SEC does not regulate credit unions. Which is good, because the SEC is only competent to apply securities law, and securities law doesn't allow savings accounts. So yes, absolutely you should consult with the relevant regulator, and if the relevant regulator for you is the Office of the Comptroller of the Currency (who regulate banks), they're probably going to cheerfully sign off on your savings account idea; they like savings accounts. But for Coinbase, it's not the relevant regulator, because they're not a bank. Nor do they seem to fall into any of the other many exceptions and regulatory schemes so...
qwertox 5y ago
This is such a good explanation. It made me understand that this is all about protecting the customers investment, and, if nobody is protecting it, then it would have to be the SEC who does it, but they can only do this if it is a security. If it isn't a security which has to be protected by the SEC -- like Coinbase is claiming -- then who is protecting it? This appears to be what the SEC wants to have answered. Coinbase instead wants the SEC to tell them what to do about it, but that they don't want to set it up as a security. Yet Coinbase would be happy with just proceeding without any protections in place.
- vmception 5y ago
  Which should be a choice for all US residents to participate in, residents who can also go lose their money at casinos if they wanted, but are literally barred from participating in positive expected value financial systems. Just like Texas abortion laws, this is not enforced against the US resident, it is against the service providers, which has allowed this framework to persist for 70 years.
  - jrochkind1 5y ago
    Casinos are pretty highly regulated.
    - vmception 5y ago
      at the state level, and the choice is still available to participants to lose their money whether it is plainly obvious or buried in 30 pages of disclaimers
      - jrochkind1 5y ago
        The SEC appears to be arguing that Coinbases product should be regulated as a security.
        vmception 5y ago
darksaints 5y ago
Coinbase's Lend program actually would be subject to other existing regulatory regimes. For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA. The Coinbase CEO notified the SEC, as they would be expected to as a SEC-regulated brokerage and publicly traded company, but their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA. The whole situation smells of a turf war between regulatory agencies, which is entirely in character for the SEC. They've been doing the same shit for years with the CFTC. You're no longer allowed to trade forex using the same account that you trade stocks with...not because the SEC regulates forex, but because they want to regulate forex, and are trying to strongarm the CFTC into ceding it's jurisdiction by crippling the forex market. This is plainly another turf war play, trying to grab territory that is far more cleanly regulated by FINRA.
- dragonwriter 5y ago
  > Coinbase's Lend program actually would be subject to other existing regulatory regimes. How? > For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA. Cryptocurrencies are not generally securities, though some may be. To the extent this isn’t limited to securities, it would not be regulated by FINRA. > their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA. FDIC doesn’t insure, and therefore regulate, cryptocurrency accounts. I’m reasonably certain Coinbase is aware of this fact. [0] > The whole situation smells of a turf war between regulatory agencies, Which other regulatory agency is asserting authority? [0] https://help.coinbase.com/en/coinbase/other-topics/legal-policies/how-is-coinbase-insured#:~:text=Cryptocurrency%20is%20not%20legal%20tender,Securities%20Investor%20Protection%20Corporation%20protections https://help.coinbase.com/en/coinbase/other-topics/legal-pol....
  - darksaints 5y ago
    Your currency accounts at brokerages are regulated by FINRA. This includes your cash accounts at cryptocurrency brokerages and exchanges. Security lending, on both the lending of securities as well as the lending of cash for the purchase of securities, is also regulated by FINRA. This also extends to non-security financial instruments, such as forex and cryptocurrencies. Neither the SEC nor FINRA has stated anything public about this at the moment, but I'm willing to bet FINRA will go to bat for this.
habitue 5y ago
> 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. You might come to this conclusion if you think of laws as creating a fine boundary between legal and illegal. In crypto in particular, there are a ton of open legal questions that the SEC has not given explicit guidance about and certainly have no settled legal precedent in court. The SEC has the ability to write you a get out of jail free card, actually. You write to them and ask them to give you a letter saying they OK'd the thing you're doing as a one-off and that they are not issuing a general rule that that kind of thing is ok (in case they change their minds later).

by Lazare 5y ago

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
  And it worked! Reading this and reading HN comments I realize I don't want the SEC involved in this. Crypto is more & more bringing to the front of the conversation about how protection should be the default but having the ability to opt out is the choice individuals should have. FDIC is a perfect example! There are accounts I know and would expect that but there are times I'm willing to waive that for compensation. Welcome to the land of crypto where nothing is FDIC and the government isn't going to protect anything. Public opinion matters because it can be the very conversation that gets politicians to challenge the existing laws to be changed.
  - Wowfunhappy 5y ago
    FDIC was put in place after The Great Depression, in order to prevent another Great Depression. There is no opt out because when large numbers of people make risky investments without planning for the consequences, it affects the entire economy.
    - throwaway98797 5y ago
      Individual freedom vs. community safety. Where to draw the line? Who should draw it and by what mechanism?
      - Wowfunhappy 5y ago
        > Where to draw the line? Who should draw it and by what mechanism? The democratically elected government seems like a good place to start!
Lazare 5y ago
Not exactly. After many, many decades of frauds, schemes, panics, and crashes, harsh experience has led to a regime where nobody can do anything without a very explicit carve out. In tech terms, it's a default "deny all", with a white list of "things which are not thinly disguised ponzi schemes", not a default "allow all" with a black list of "things which have been shown to be thinly disguised ponzi schemes". So yes, banks are one of the exemptions, because they have their own regulator (which is one way to get on the white list). > Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag. No, the red flag is that Coinbase (correctly!) understands that the SEC is the relevant regulator. Your local credit union does not go to the SEC when they want to offer a new type of savings account because the SEC does not regulate credit unions. Which is good, because the SEC is only competent to apply securities law, and securities law doesn't allow savings accounts. So yes, absolutely you should consult with the relevant regulator, and if the relevant regulator for you is the Office of the Comptroller of the Currency (who regulate banks), they're probably going to cheerfully sign off on your savings account idea; they like savings accounts. But for Coinbase, it's not the relevant regulator, because they're not a bank. Nor do they seem to fall into any of the other many exceptions and regulatory schemes so...

qwertox 5y ago

This is such a good explanation. It made me understand that this is all about protecting the customers investment, and, if nobody is protecting it, then it would have to be the SEC who does it, but they can only do this if it is a security. If it isn't a security which has to be protected by the SEC -- like Coinbase is claiming -- then who is protecting it? This appears to be what the SEC wants to have answered. Coinbase instead wants the SEC to tell them what to do about it, but that they don't want to set it up as a security. Yet Coinbase would be happy with just proceeding without any protections in place.

vmception 5y ago
Which should be a choice for all US residents to participate in, residents who can also go lose their money at casinos if they wanted, but are literally barred from participating in positive expected value financial systems. Just like Texas abortion laws, this is not enforced against the US resident, it is against the service providers, which has allowed this framework to persist for 70 years.
- jrochkind1 5y ago
  Casinos are pretty highly regulated.
  - vmception 5y ago
    at the state level, and the choice is still available to participants to lose their money whether it is plainly obvious or buried in 30 pages of disclaimers
    - jrochkind1 5y ago
      The SEC appears to be arguing that Coinbases product should be regulated as a security.
      - vmception 5y ago

darksaints 5y ago

Coinbase's Lend program actually would be subject to other existing regulatory regimes. For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA. The Coinbase CEO notified the SEC, as they would be expected to as a SEC-regulated brokerage and publicly traded company, but their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA. The whole situation smells of a turf war between regulatory agencies, which is entirely in character for the SEC. They've been doing the same shit for years with the CFTC. You're no longer allowed to trade forex using the same account that you trade stocks with...not because the SEC regulates forex, but because they want to regulate forex, and are trying to strongarm the CFTC into ceding it's jurisdiction by crippling the forex market. This is plainly another turf war play, trying to grab territory that is far more cleanly regulated by FINRA.

dragonwriter 5y ago
> Coinbase's Lend program actually would be subject to other existing regulatory regimes. How? > For example, the lending of SEC-regulated securities like stocks is not regulated by the SEC, it is regulated by FINRA. Cryptocurrencies are not generally securities, though some may be. To the extent this isn’t limited to securities, it would not be regulated by FINRA. > their expectation was that the accounts would regulated by another entity, presumably the FDIC or FINRA. FDIC doesn’t insure, and therefore regulate, cryptocurrency accounts. I’m reasonably certain Coinbase is aware of this fact. [0] > The whole situation smells of a turf war between regulatory agencies, Which other regulatory agency is asserting authority? [0] https://help.coinbase.com/en/coinbase/other-topics/legal-policies/how-is-coinbase-insured#:~:text=Cryptocurrency%20is%20not%20legal%20tender,Securities%20Investor%20Protection%20Corporation%20protections https://help.coinbase.com/en/coinbase/other-topics/legal-pol....
- darksaints 5y ago
  Your currency accounts at brokerages are regulated by FINRA. This includes your cash accounts at cryptocurrency brokerages and exchanges. Security lending, on both the lending of securities as well as the lending of cash for the purchase of securities, is also regulated by FINRA. This also extends to non-security financial instruments, such as forex and cryptocurrencies. Neither the SEC nor FINRA has stated anything public about this at the moment, but I'm willing to bet FINRA will go to bat for this.

habitue 5y ago

> 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. You might come to this conclusion if you think of laws as creating a fine boundary between legal and illegal. In crypto in particular, there are a ton of open legal questions that the SEC has not given explicit guidance about and certainly have no settled legal precedent in court. The SEC has the ability to write you a get out of jail free card, actually. You write to them and ask them to give you a letter saying they OK'd the thing you're doing as a one-off and that they are not issuing a general rule that that kind of thing is ok (in case they change their minds later).