11 ms·

Claiming a stable coin is a security, when it is offered specifically NOT to offer any return, seems like a stretch...

by LatteLazy 4y ago

bronson 4y ago
What definition of a security are you using? Neither the dictionary nor the SEC include return in their definitons.
- LatteLazy 4y ago
  Ummm... The "Howey test": >The U.S. Supreme Court's Howey case and subsequent case law have found that an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.[5] The so-called "Howey test" applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities. https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets https://www.sec.gov/corpfin/framework-investment-contract-an... There is no "reasonable expectation of profits" from a stable coin right? I should be able to buy it for 1USD and sell it for the same. No more. No less.
  - neffo 4y ago
    Hmm, you earn 6% APR on BUSD with Binance Earn. You'd buy 1BUSD with 1USD expecting to withdraw 1.06USD in one year. You hold it because you have a reasonable expectation of profits.
    - LatteLazy 4y ago
      But then the Earn program is the security right? Just holding BUSD gains me nothing, it just sits there. I've seen people argue that Eth is now a security IF you have 32ETH, because you can stake it (stake it yourself, not via a counterparties program) since it moved to Proof of Stake. But that's without involving a counterparty and their program and them defining the return etc, you can just do it.
      - neffo 4y ago
        No counterparty? The Eth network is the counterparty, you're buying a stake in the network, you are diluting everyone's control. And earning a reward.
        yokem55 4y ago
        One does not automatically earn a return just by staking eth. A validator with a node has to be operated which performs the validation and block proposal functions, and money is only made when those activities are performed. The eth that is deposited is not an investment - it is a bond for good and honest performance of the work. Now, there are services that perform those activities on behalf of others, and some of those arrangements could possibly be labeled as securities, but on it's own, at the base layer, participating in eth's proof of stake system is not a security.
        LatteLazy 4y ago
        Personally, I really dislike the idea of a decentralised counterparty but for eth I can see the argument at least. Of course, you could make the same argument about mining gold: it's a security because you are taking profit by diluting the overall global gold supply network... But for BUSD, none of this applies: you cannot mine it, control is absolutely with Paxos, and is undiluted and the price is (in theory) fixed.
  - ac29 4y ago
    The Howey test is a test for investment contracts, not securities in general. Securities are much broader and can even include things expected to yield a loss (such as negative yield-to-maturity bonds).
    - yokem55 4y ago
      True, but there has to be some kind of limiting definition of 'non-investment security', because otherwise any business offering a 'money back guarantee' when they sell a physical product is selling an unregistered security. Hence it should be a very tall order for the SEC to attempt to label non-investment things as securities.
    - LatteLazy 4y ago
      I am not sure that's accurate. I believe a security is MORE tightly defined than an investment contract: it had to be fungible etc. But I may be wrong and I think most of crypto already fulfils this which is why people default to Howey. I'd be happy to be corrected. Either way, we are sort of stuck on the same core problem: What is a security? The Howey test was made up by SCOTUS. It isn't set in stone. If someone can made a convincing case it's wrong, congress or the courts can change it. The problem is, it is actually hard to come up with a definition that is general, simple and applies to stable coins but not to 1000s of thinks like bricks or cars or concert tickets. That's how we ended up with Howey in the first place. So we either have to admit stable coins aren't securities. Or we have to widen the definition a lot and suddenly the sec also have to regulate all sorts of markets they've never actually touched before. Of course if you know such a definition, I am all ears. I actually think cryptos state as psuedo regulated is the worst of all worlds: good actors and would be investors or users are put off by the chance of politically motivated regulator actions and rampant fraud. But that's a much wider position than "stable coins aren't securities because they don't offer a reasonable expectation of profit"...
pavlov 4y ago
The "stable" part in the name suggests that it does in fact offer a return as a defensive investment against the volatility inherent in other crypto assets. If Bitcoin is going down, you sell and buy USDT instead, then two months later you trade the USDT for 20% more Bitcoin than what you started with... Measured in Bitcoin, you got a 20% return, and it was made possible by the asset-backed security in which you invested in the meantime. Regular money market funds didn't pay anything when interest rates were negative. They are still securities.
- Jommi 4y ago
  Are dollars in your Venmo account securities?
  - pavlov 4y ago
    The dollars in my Schwab account are securities because they're automatically invested in a money market fund. I would argue that a crypto exchange is more like Schwab than Venmo, and that stablecoins provide a function similar to money market funds.
    - Jommi 4y ago
      stablecoins are not automatically invested anywhere you arent accuring any yield
- yokem55 4y ago
  But such trading based profits come out of the efforts of the trader, not the issuer of the stable coin. Money market accounts have to be securities because most of the time they do offer some yield. If the SEC is going down this road (and I don't think they actually are - this is more aimed at the bad behavior of Binance) it means they are seriously expanding the "reasonable expectation of profits" prong of the Howey test to include assets that on their own, have no expectation of profits simply because some users of the asset could potentially gain a profit in their use. The current makeup of the judiciary is really unlikely to play along.
janmo 4y ago
My first though as well. There are however 2 scenarios where it could fit the definition: 1. arbitrage. It regularly happens that stable coins trade bellow 1 USD. Traders are buying them up to then redeem them at face value. Tether even made the mistake to advertise this "risk free" opportunity when USDT was trading around 0.98-0,99 USD. 2. I believe Paxos is sharing its bond profits together with Binance, in this case it could be seen as a security because Binance is earning money based on paxos effort.

Claiming a stable coin is a security, when it is offered specifically NOT to offer any return, seems like a stretch...

bronson 4y ago

What definition of a security are you using? Neither the dictionary nor the SEC include return in their definitons.

LatteLazy 4y ago
Ummm... The "Howey test": >The U.S. Supreme Court's Howey case and subsequent case law have found that an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.[5] The so-called "Howey test" applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities. https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets https://www.sec.gov/corpfin/framework-investment-contract-an... There is no "reasonable expectation of profits" from a stable coin right? I should be able to buy it for 1USD and sell it for the same. No more. No less.
- neffo 4y ago
  Hmm, you earn 6% APR on BUSD with Binance Earn. You'd buy 1BUSD with 1USD expecting to withdraw 1.06USD in one year. You hold it because you have a reasonable expectation of profits.
  - LatteLazy 4y ago
    But then the Earn program is the security right? Just holding BUSD gains me nothing, it just sits there. I've seen people argue that Eth is now a security IF you have 32ETH, because you can stake it (stake it yourself, not via a counterparties program) since it moved to Proof of Stake. But that's without involving a counterparty and their program and them defining the return etc, you can just do it.
    - neffo 4y ago
      No counterparty? The Eth network is the counterparty, you're buying a stake in the network, you are diluting everyone's control. And earning a reward.
      - yokem55 4y ago
        One does not automatically earn a return just by staking eth. A validator with a node has to be operated which performs the validation and block proposal functions, and money is only made when those activities are performed. The eth that is deposited is not an investment - it is a bond for good and honest performance of the work. Now, there are services that perform those activities on behalf of others, and some of those arrangements could possibly be labeled as securities, but on it's own, at the base layer, participating in eth's proof of stake system is not a security.
      - LatteLazy 4y ago
        Personally, I really dislike the idea of a decentralised counterparty but for eth I can see the argument at least. Of course, you could make the same argument about mining gold: it's a security because you are taking profit by diluting the overall global gold supply network... But for BUSD, none of this applies: you cannot mine it, control is absolutely with Paxos, and is undiluted and the price is (in theory) fixed.
- ac29 4y ago
  The Howey test is a test for investment contracts, not securities in general. Securities are much broader and can even include things expected to yield a loss (such as negative yield-to-maturity bonds).
  - yokem55 4y ago
    True, but there has to be some kind of limiting definition of 'non-investment security', because otherwise any business offering a 'money back guarantee' when they sell a physical product is selling an unregistered security. Hence it should be a very tall order for the SEC to attempt to label non-investment things as securities.
  - LatteLazy 4y ago
    I am not sure that's accurate. I believe a security is MORE tightly defined than an investment contract: it had to be fungible etc. But I may be wrong and I think most of crypto already fulfils this which is why people default to Howey. I'd be happy to be corrected. Either way, we are sort of stuck on the same core problem: What is a security? The Howey test was made up by SCOTUS. It isn't set in stone. If someone can made a convincing case it's wrong, congress or the courts can change it. The problem is, it is actually hard to come up with a definition that is general, simple and applies to stable coins but not to 1000s of thinks like bricks or cars or concert tickets. That's how we ended up with Howey in the first place. So we either have to admit stable coins aren't securities. Or we have to widen the definition a lot and suddenly the sec also have to regulate all sorts of markets they've never actually touched before. Of course if you know such a definition, I am all ears. I actually think cryptos state as psuedo regulated is the worst of all worlds: good actors and would be investors or users are put off by the chance of politically motivated regulator actions and rampant fraud. But that's a much wider position than "stable coins aren't securities because they don't offer a reasonable expectation of profit"...

pavlov 4y ago

The "stable" part in the name suggests that it does in fact offer a return as a defensive investment against the volatility inherent in other crypto assets. If Bitcoin is going down, you sell and buy USDT instead, then two months later you trade the USDT for 20% more Bitcoin than what you started with... Measured in Bitcoin, you got a 20% return, and it was made possible by the asset-backed security in which you invested in the meantime. Regular money market funds didn't pay anything when interest rates were negative. They are still securities.

Jommi 4y ago
Are dollars in your Venmo account securities?
- pavlov 4y ago
  The dollars in my Schwab account are securities because they're automatically invested in a money market fund. I would argue that a crypto exchange is more like Schwab than Venmo, and that stablecoins provide a function similar to money market funds.
  - Jommi 4y ago
    stablecoins are not automatically invested anywhere you arent accuring any yield
yokem55 4y ago
But such trading based profits come out of the efforts of the trader, not the issuer of the stable coin. Money market accounts have to be securities because most of the time they do offer some yield. If the SEC is going down this road (and I don't think they actually are - this is more aimed at the bad behavior of Binance) it means they are seriously expanding the "reasonable expectation of profits" prong of the Howey test to include assets that on their own, have no expectation of profits simply because some users of the asset could potentially gain a profit in their use. The current makeup of the judiciary is really unlikely to play along.

janmo 4y ago

My first though as well. There are however 2 scenarios where it could fit the definition: 1. arbitrage. It regularly happens that stable coins trade bellow 1 USD. Traders are buying them up to then redeem them at face value. Tether even made the mistake to advertise this "risk free" opportunity when USDT was trading around 0.98-0,99 USD. 2. I believe Paxos is sharing its bond profits together with Binance, in this case it could be seen as a security because Binance is earning money based on paxos effort.