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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.

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.
  - quickthrowman 5y ago
    It’s not risk free, US Treasuries are ‘risk-free’ and anything that pays a higher yield has risk. If it didn’t have risk, it would be arbitraged down to the risk-free rate.
    - SilasX 5y ago
      And even the risk-free rate on[1] Treasurys is being held down by tremendous Federal Reserve purchases. (The Fed doesn't buy crypto loans, or at least, won't until Goldman Sachs keeps some on their balance sheet.) [1] at least short-term
    - anonymoushn 5y ago
      You can post that markets are efficient and I'll keep making money from obvious inefficiencies I guess.
      - deleted 5y ago
        [deleted]
deleted 5y ago
[deleted]
Reason077 5y ago
> "capital is not in theory at risk. So it's more like a savings account than an investment account." But I guess if you want to offer a "savings account" then you need to be a licensed bank and meet all the requirements and regulations that come with that?
- paulgb 5y ago
  Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail) I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.
  - Paradigma11 5y ago
    They could already be subject to those risks without getting the benefits. But yes, DeFi seems to me mostly zero sum gambling where the risks are shifted around until nobody understands the system any more which naturally means that there is no risk any more.
    - gitfan86 5y ago
      The way to guarantee return on investment is to denominate it in Monopoly money. I can guarantee that I will update your account with 5% more Monopoly coins every week if I have already minted my own trillions of monopoly coins and have them in reserve.
  - Danieru 5y ago
    > I don’t understand where DeFi yields come from Best I can tell from my research defi is being used for holder of volitile lower quality coins to exit without triggering a taxable event. This is based on how all the pools I found had clear lopsided supply of lending and borrowing. Stable coins all had the highest rates, with btc and eth being middling, and a flood of alt coins sitting in pools earning zero returns. This makes perfect sense. Margin loan volume is too low to explain the lending size. Likewise margin would want to borrow high volatility coins, and never stable coins. And yet stable coins are offering the highest interest precisely because stable coin borrowing is in demand. Overall defi makes sense if it is about holders of paper gains exiting with debt to avoid taxable events. It does suggest a worrying risk profile I suspect everyone is underesitmating: many borrowers do not care about the coins they put up as collateral.
TomSwirly 5y ago
> the capital is not in theory at risk. "In theory", and in practice, all investments are at risk. How anyone can look at this gimcrack investment and think it's riskless is beyond me. If Bitcoin were to drop to 1000 - and given it has no fundamentals and offers no actual services beyond a very volatile value store, why not? - then all of these companies would collapse like a house of cards and all these savings accounts would be worthless. > So it's more like a savings account than an investment account. If you recall, plenty of people lost everything they had in their savings account in bank crashes before FDIC insurance existed.
contravariant 5y ago
If you lose your money when the company goes bankrupt then that sounds like it's "at risk" to me. If not, any investment at all would be considered to not be "at risk".
ziml77 5y ago
They try to make it sound like they didn't expect Lend to be treated like an investment, but it's clear that's a load of bullshit. If they didn't think the lending program was a security, they wouldn't have gone to the SEC about it.
- darksaints 5y ago
  Theyre a public company (regulated by the SEC), offering SEC-regulated services. Of course they notified the SEC. The twitter thread that got merged with this thread was pretty clear about it: they notified the SEC, but they also notified other regulatory bodies and had the full expectation that the lending accounts would be regulated by another entity because they are not securities.
  - dragonwriter 5y ago
    > the full expectation that the lending accounts would be regulated by another entity because they are not securities. Why do they think they aren't securities? Because they obviously meet the Howey test, and while they may have “expected” that they would be regulated by another body (and which and on what basis?), they obviously haven’t done what it would take to make them (for instance) FDIC-insured depository accounts rather than SEC-regulated securities.
    - darksaints 5y ago
      The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security. You can't trade a lending account...you can either hold it, or liquidate it. FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
      - thedufer 5y ago
        > The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security. Do you have a reference for that? Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description (and, of course, the outcome was that they were considered securities). The Howey case actually refers to them as "investment contracts", which I presume is language from the securities act itself. This seems like better terminology than "securities", if only because it doesn't so obviously conflict with the colloquial meaning. I'm not sure how we got here from there, although the "securities act" naming probably didn't help.
JumpCrisscross 5y ago
> the capital is not in theory at risk The capital is in theory at risk. The DeFi protocol could get hacked. Coinbase could get hacked. Coinbase could steal your money. Coinbase could go bankrupt. The fact that their marketing leads reasonable people like you to compare Lend to a savings account with no risk, even in theory, is the choking canary of the mess.
- tw04 5y ago
  Sure, they want to rewind to a time when your bank account was unsecured and banks themselves had 0 regulation. Because it's a heck of a lot easier to make money when you can take massive risks with other people's money while lying to them and claiming there's no risk at all.
  - corey_moncure 5y ago
    The inverse take on this is that entrenched rich interests made all their money during such periods and have now used regulation to "pull up the ladder behind them". People who are foolish with their money will always find a way to lose it.
    - SpicyLemonZest 5y ago
      Coinbase is worth $50 billion. I like Brian Armstrong more than I like the typical finance CEO, but his company is definitely an entrenched rich interest, and if we treat them as a scrappy underdog we're going to let them get away with things they probably shouldn't. You should be skeptical on principle when a billionaire tells you that a financial regulator is being unfair to them.
      - itsme24543 5y ago
        in fact they make a lot of money from institutional investors https://www.theblockcrypto.com/post/116855/inside-coinbases-game-plan-to-be-a-one-stop-shop-for-wall-streets-largest-investors https://www.theblockcrypto.com/post/116855/inside-coinbases-..., so def not an underdog.
late2part 5y ago
It's not at risk as in it's FDIC insured?

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.
- quickthrowman 5y ago
  It’s not risk free, US Treasuries are ‘risk-free’ and anything that pays a higher yield has risk. If it didn’t have risk, it would be arbitraged down to the risk-free rate.
  - SilasX 5y ago
    And even the risk-free rate on[1] Treasurys is being held down by tremendous Federal Reserve purchases. (The Fed doesn't buy crypto loans, or at least, won't until Goldman Sachs keeps some on their balance sheet.) [1] at least short-term
  - anonymoushn 5y ago
    You can post that markets are efficient and I'll keep making money from obvious inefficiencies I guess.
    - deleted 5y ago
      [deleted]

deleted 5y ago

[deleted]

Reason077 5y ago

> "capital is not in theory at risk. So it's more like a savings account than an investment account." But I guess if you want to offer a "savings account" then you need to be a licensed bank and meet all the requirements and regulations that come with that?

paulgb 5y ago
Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail) I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.
- Paradigma11 5y ago
  They could already be subject to those risks without getting the benefits. But yes, DeFi seems to me mostly zero sum gambling where the risks are shifted around until nobody understands the system any more which naturally means that there is no risk any more.
  - gitfan86 5y ago
    The way to guarantee return on investment is to denominate it in Monopoly money. I can guarantee that I will update your account with 5% more Monopoly coins every week if I have already minted my own trillions of monopoly coins and have them in reserve.
- Danieru 5y ago
  > I don’t understand where DeFi yields come from Best I can tell from my research defi is being used for holder of volitile lower quality coins to exit without triggering a taxable event. This is based on how all the pools I found had clear lopsided supply of lending and borrowing. Stable coins all had the highest rates, with btc and eth being middling, and a flood of alt coins sitting in pools earning zero returns. This makes perfect sense. Margin loan volume is too low to explain the lending size. Likewise margin would want to borrow high volatility coins, and never stable coins. And yet stable coins are offering the highest interest precisely because stable coin borrowing is in demand. Overall defi makes sense if it is about holders of paper gains exiting with debt to avoid taxable events. It does suggest a worrying risk profile I suspect everyone is underesitmating: many borrowers do not care about the coins they put up as collateral.

TomSwirly 5y ago

> the capital is not in theory at risk. "In theory", and in practice, all investments are at risk. How anyone can look at this gimcrack investment and think it's riskless is beyond me. If Bitcoin were to drop to 1000 - and given it has no fundamentals and offers no actual services beyond a very volatile value store, why not? - then all of these companies would collapse like a house of cards and all these savings accounts would be worthless. > So it's more like a savings account than an investment account. If you recall, plenty of people lost everything they had in their savings account in bank crashes before FDIC insurance existed.

contravariant 5y ago

If you lose your money when the company goes bankrupt then that sounds like it's "at risk" to me. If not, any investment at all would be considered to not be "at risk".

ziml77 5y ago

They try to make it sound like they didn't expect Lend to be treated like an investment, but it's clear that's a load of bullshit. If they didn't think the lending program was a security, they wouldn't have gone to the SEC about it.

darksaints 5y ago
Theyre a public company (regulated by the SEC), offering SEC-regulated services. Of course they notified the SEC. The twitter thread that got merged with this thread was pretty clear about it: they notified the SEC, but they also notified other regulatory bodies and had the full expectation that the lending accounts would be regulated by another entity because they are not securities.
- dragonwriter 5y ago
  > the full expectation that the lending accounts would be regulated by another entity because they are not securities. Why do they think they aren't securities? Because they obviously meet the Howey test, and while they may have “expected” that they would be regulated by another body (and which and on what basis?), they obviously haven’t done what it would take to make them (for instance) FDIC-insured depository accounts rather than SEC-regulated securities.
  - darksaints 5y ago
    The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security. You can't trade a lending account...you can either hold it, or liquidate it. FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
    - thedufer 5y ago
      > The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security. Do you have a reference for that? Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description (and, of course, the outcome was that they were considered securities). The Howey case actually refers to them as "investment contracts", which I presume is language from the securities act itself. This seems like better terminology than "securities", if only because it doesn't so obviously conflict with the colloquial meaning. I'm not sure how we got here from there, although the "securities act" naming probably didn't help.

JumpCrisscross 5y ago

> the capital is not in theory at risk The capital is in theory at risk. The DeFi protocol could get hacked. Coinbase could get hacked. Coinbase could steal your money. Coinbase could go bankrupt. The fact that their marketing leads reasonable people like you to compare Lend to a savings account with no risk, even in theory, is the choking canary of the mess.

tw04 5y ago
Sure, they want to rewind to a time when your bank account was unsecured and banks themselves had 0 regulation. Because it's a heck of a lot easier to make money when you can take massive risks with other people's money while lying to them and claiming there's no risk at all.
- corey_moncure 5y ago
  The inverse take on this is that entrenched rich interests made all their money during such periods and have now used regulation to "pull up the ladder behind them". People who are foolish with their money will always find a way to lose it.
  - SpicyLemonZest 5y ago
    Coinbase is worth $50 billion. I like Brian Armstrong more than I like the typical finance CEO, but his company is definitely an entrenched rich interest, and if we treat them as a scrappy underdog we're going to let them get away with things they probably shouldn't. You should be skeptical on principle when a billionaire tells you that a financial regulator is being unfair to them.
    - itsme24543 5y ago
      in fact they make a lot of money from institutional investors https://www.theblockcrypto.com/post/116855/inside-coinbases-game-plan-to-be-a-one-stop-shop-for-wall-streets-largest-investors https://www.theblockcrypto.com/post/116855/inside-coinbases-..., so def not an underdog.

late2part 5y ago

It's not at risk as in it's FDIC insured?