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I’m not an expert or a lawyer but it seems pretty clear. Going by what the SEC has literally told them: Coinbase taking money from depositors, loaning it out,

by cududa 4y ago

I’m not an expert or a lawyer but it seems pretty clear. Going by what the SEC has literally told them: Coinbase taking money from depositors, loaning it out, and giving the depositors interest from the loan, is a security product. Page 1 of the Securities Exchange Act of 1934: https://www.govinfo.gov/content/pkg/COMPS-1885/pdf/COMPS-1885.pdf https://www.govinfo.gov/content/pkg/COMPS-1885/pdf/COMPS-188... It… really doesn’t seem complicated. The SEC told Coinbase they’d be in violation of security laws if they expanded these products, last summer. And did so publicly. I don’t understand how this could not be more clear. The first page of the securities act and the remaining of the paragraph that goes the page 2 describes exactly what they’re doing, and defines it as a security. The SEC has told them this is a security. I’m genuinely baffled how people are still amplifying this “well they won’t tell us what part is a security!” They’ve been explicitly clear. The law is not hard to understand - just read the above link for 2 pages. I feel like I’m taking crazy pills here.

Animats 4y ago
Right. How could "Coinbase Earn" not be a security?
- cududa 4y ago
  Based on comments here, because they called it “staking as a service”. But apparently that nomenclature bypasses this very clear and explicit definition “The term ‘‘exchange’’ means any organization, associa- tion, or group of persons, whether incorporated or unincor- porated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securi- ties the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.”
  - humanizersequel 4y ago
    >Based on comments here, because they called it “staking as a service”. You could reply to my comment instead of obliquely referencing it here. >this very clear and explicit definition This is a definition of an exchange (specifically a securities exchange), but nobody is contesting that Coinbase has an exchange product, just whether the assets for which they operate the exchange are securities or not. Coinbase Earn is not "bringing together purchasers and sellers", because people staking their crypto are doing neither. Putting up some collateral in exchange for the privilege to validate blocks and collect a reward for doing so cannot possibly fall under a reasonable function "commonly performed by a stock exchange".
    - headsoup 4y ago
      Does Coinbase stake on the user's behalf? Do they take a cut? What is Coinbase doing with the staked crypto? Don't regular banks turn your deposits into investments (securities) that provide returns which become your interest? Is the idea here that Coinbase is doing nothing but passing your crypto to the 'investment banks' to trade with and earn your return, then just depositing that 'interest' back?
      - humanizersequel 4y ago
        >Does Coinbase stake on the user's behalf? Yes. While blockchains like Ethereum are open protocols and staking is permissionless, it isn't exactly easy if you aren't savvy and/or somewhat well off already. The value add here is an IT service. >Do they take a cut? Yes, between 15 and 35 percent. >What is Coinbase doing with the staked crypto? Nothing, staking involves "locking" your crypto in exchange for the privilege of running a validator. This is equivalent to "mining" in a proof-of-work protocol, and comes with similar rewards from the protocol in exchange for securing the network (with the risk that if you deviate from consensus, your staked crypto could be "slashed"). Coinbase operates the validator on your behalf. >Don't regular banks turn your deposits into investments (securities) that provide returns which become your interest? I'm not sure every investment is a security (some of them are just loans), but more or less. >Is the idea here that Coinbase is doing nothing but passing your crypto to the 'investment banks' to trade with and earn your return, then just depositing that 'interest' back? Lol no.
        ashwagary 4y ago
        >This is equivalent to "mining" in a proof-of-work protocol, and comes with similar rewards from the protocol in exchange for securing the network (with the risk that if you deviate from consensus, your staked crypto could be "slashed"). Coinbase operates the validator on your behalf. Using your analogy, if I send money to a Bitcoin mining company, they use the money to buy/run miners, and then send me a percentage of their profit, isn't that an investment in a common pool? Isn't the item they use to validate my share a security? Bitcoin may not be a security but the middleman is a securitizing a service that involves bitcoin, right?
humanizersequel 4y ago
>Coinbase taking money from depositors, loaning it out, and giving the depositors interest from the loan, is a security product. What Coinbase product does this? I was under the impression all of "Coinbase earn" was just staking-as-a-service.
- pazimzadeh 4y ago
  They enabled that pretty recently for me. A few weeks ago?
- RC_ITR 4y ago
  From the 10-k: We operate staking nodes on certain blockchain networks utilizing customers’ crypto assets and pass through the rewards received to those customers, less a service fee. In other cases, upon customers’ instructions, we may delegate our customers’ assets to third-party service providers that are unaffiliated with us. Some networks may further require customer assets to be transferred into smart contracts on the underlying blockchain networks not under our or anyone’s control.
  - humanizersequel 4y ago
    For posterity's sake, if you insist on replying to me in two seperate threads, here is an excerpt from my reply there: ...probably moot if these "third party service providers" are just doing the busywork of interacting with the protocol, on behalf of Coinbase, on behalf of the user. I grant that this involves a kind of custody management you don't see in other non-securitized IT services, but as long as everything is spelled out clearly (which it seems to be in the excerpt you posted) I maintain my position.
    - RC_ITR 4y ago
      You maintain your position of what? That it's not a loan or it's not a security? Or both?
      - humanizersequel 4y ago
sonotathrowaway 4y ago
It’s really hard to convince a Bitcoin stan that labeling something as “crypto” doesn’t bypass all laws. Coinbase lawyers understand it perfectly well, Coinbase PR understands that their fans aren’t able too.
- d110af5ccf 4y ago
  Counterpoint: the anti-crypto crowd frequently condescends about these topics yet fails to provide rigorous explanations of how various laws apply when pressed.
shukantpal 4y ago
This Wells notice is not about Coinbase lending out money but rather about staked assets. Coinbase is not doing any lending.
- headsoup 4y ago
  Didn't they just offer ~$3Bil to Circle recently?
yokem55 4y ago
When it comes to the staking side of things - Coinbase's position is that they are simply providing a technical service to their customers to do something that their customer's could do themselves. There isn't a borrower that Coinbase is lending the coins to. It is a protocol that locks them up. Where this gets messy is with things like Eth when they stake amounts less then 32 Eth from a customer, which inherently means they are providing a pooling operation on top of what the protocol expects. Does that pooling make their activites a security? But the SEC is not providing any kind of clear lines on any of this to identify where there is a line when "IT services" becomes a security.
- 8note 4y ago
  Isn't it quite simple? Apply the Howey test. Very obviously yes. Both pooling and non-pooling are securities
- RC_ITR 4y ago
  >- Coinbase's position is that they are simply providing a technical service to their customers to do something that their customer's could do themselves. Sure, I could write multiple mortgages and roll them up into an MBS myself too, isn't the bank just doing the technical work there too?
  - d110af5ccf 4y ago
    When it comes to staking, who is being lent to? It doesn't seem like a loan to me at all.
    - RC_ITR 4y ago
      Validators. It's being lent to validators. Do you not know the mechanics of staking? If so: https://solana.com/staking https://solana.com/staking
  - humanizersequel 4y ago
    > I could write multiple mortgages and roll them up into an MBS myself too, isn't the bank just doing the technical work there too The bank is quite literally writing multiple loans and selling a security. I fail to see how providing tools for customers to more easily put up their tokens as collateral for the privilege of writing new chunks of data to a blockchain (and reaping the rewards) is at all equivalent to either activity. I admit that the name "Coinbase Earn" and the marketing material could be construed as misleading (but not that misleading).
deleted 4y ago
[deleted]
darksaints 4y ago
If that were the whole definition of a security, then interest-bearing savings accounts would be considered a SEC-regulated security. But they aren’t, for a very simple reason also outlined in securities law: They have no term nor maturity. Money can be withdrawn at will. There is no obligation to keep your money deposited in order to get paid for the time it has already been deposited. It isn’t clear to me how this is different from a savings account, which are not even in the legal jurisdiction of the SEC. This honestly smells of the usual turf war bullshit between the CFTC and SEC, just like the one that cause forex brokerages to completely separate from securities brokerages. The SEC wanted control over forex but they couldn’t have it, so they regulated the shit out of securities brokerages in order to twist the CFTCs arms.
gamblor956 4y ago
The issue is not that Coinbase is "taking money" and loaning the money out; it is that Coinbase is taking things that the SEC has decided are securities and loaning those out. Notably, the one crypto that the SEC guidance has said is not a security, i.e., Bitcoin, is missing from the list of coins available for Coinbase Earn.
- zoklet-enjoyer 4y ago
  Coinbase Earn is a staking service for people who don't know how or don't want to interact with the blockchain of the particular coin they're staking. Coinbase stakes the coins for them and takes a cut of the staking rewards. They're not lending assets. Bitcoin isn't included because Bitcoin uses proof of work, not proof of stake
  - gamblor956 4y ago
    Ah, it appears I have it backwards. Customer lends coins to CB, which then stakes those coins for them in crypto where staking is a thing. It does not matter if they don't "technically" lend the coins, what matters is that they what they have done has the legal effect of lending the coins to CB. In this case, CB is in a worse position than I originally stated, since essentially all staked crypto is regarded as a security by the SEC. In which case, it's irrelevant that the SEC didn't say which particular crypto is a security; by its guidance all of the coins in CB Earn are.

by cududa 4y ago

Animats 4y ago

Right. How could "Coinbase Earn" not be a security?

cududa 4y ago
Based on comments here, because they called it “staking as a service”. But apparently that nomenclature bypasses this very clear and explicit definition “The term ‘‘exchange’’ means any organization, associa- tion, or group of persons, whether incorporated or unincor- porated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securi- ties the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.”
- humanizersequel 4y ago
  >Based on comments here, because they called it “staking as a service”. You could reply to my comment instead of obliquely referencing it here. >this very clear and explicit definition This is a definition of an exchange (specifically a securities exchange), but nobody is contesting that Coinbase has an exchange product, just whether the assets for which they operate the exchange are securities or not. Coinbase Earn is not "bringing together purchasers and sellers", because people staking their crypto are doing neither. Putting up some collateral in exchange for the privilege to validate blocks and collect a reward for doing so cannot possibly fall under a reasonable function "commonly performed by a stock exchange".
  - headsoup 4y ago
    Does Coinbase stake on the user's behalf? Do they take a cut? What is Coinbase doing with the staked crypto? Don't regular banks turn your deposits into investments (securities) that provide returns which become your interest? Is the idea here that Coinbase is doing nothing but passing your crypto to the 'investment banks' to trade with and earn your return, then just depositing that 'interest' back?
    - humanizersequel 4y ago
      >Does Coinbase stake on the user's behalf? Yes. While blockchains like Ethereum are open protocols and staking is permissionless, it isn't exactly easy if you aren't savvy and/or somewhat well off already. The value add here is an IT service. >Do they take a cut? Yes, between 15 and 35 percent. >What is Coinbase doing with the staked crypto? Nothing, staking involves "locking" your crypto in exchange for the privilege of running a validator. This is equivalent to "mining" in a proof-of-work protocol, and comes with similar rewards from the protocol in exchange for securing the network (with the risk that if you deviate from consensus, your staked crypto could be "slashed"). Coinbase operates the validator on your behalf. >Don't regular banks turn your deposits into investments (securities) that provide returns which become your interest? I'm not sure every investment is a security (some of them are just loans), but more or less. >Is the idea here that Coinbase is doing nothing but passing your crypto to the 'investment banks' to trade with and earn your return, then just depositing that 'interest' back? Lol no.
      - ashwagary 4y ago
        >This is equivalent to "mining" in a proof-of-work protocol, and comes with similar rewards from the protocol in exchange for securing the network (with the risk that if you deviate from consensus, your staked crypto could be "slashed"). Coinbase operates the validator on your behalf. Using your analogy, if I send money to a Bitcoin mining company, they use the money to buy/run miners, and then send me a percentage of their profit, isn't that an investment in a common pool? Isn't the item they use to validate my share a security? Bitcoin may not be a security but the middleman is a securitizing a service that involves bitcoin, right?

humanizersequel 4y ago

>Coinbase taking money from depositors, loaning it out, and giving the depositors interest from the loan, is a security product. What Coinbase product does this? I was under the impression all of "Coinbase earn" was just staking-as-a-service.

pazimzadeh 4y ago
They enabled that pretty recently for me. A few weeks ago?
RC_ITR 4y ago
From the 10-k: We operate staking nodes on certain blockchain networks utilizing customers’ crypto assets and pass through the rewards received to those customers, less a service fee. In other cases, upon customers’ instructions, we may delegate our customers’ assets to third-party service providers that are unaffiliated with us. Some networks may further require customer assets to be transferred into smart contracts on the underlying blockchain networks not under our or anyone’s control.
- humanizersequel 4y ago
  For posterity's sake, if you insist on replying to me in two seperate threads, here is an excerpt from my reply there: ...probably moot if these "third party service providers" are just doing the busywork of interacting with the protocol, on behalf of Coinbase, on behalf of the user. I grant that this involves a kind of custody management you don't see in other non-securitized IT services, but as long as everything is spelled out clearly (which it seems to be in the excerpt you posted) I maintain my position.
  - RC_ITR 4y ago
    You maintain your position of what? That it's not a loan or it's not a security? Or both?
    - humanizersequel 4y ago

sonotathrowaway 4y ago

It’s really hard to convince a Bitcoin stan that labeling something as “crypto” doesn’t bypass all laws. Coinbase lawyers understand it perfectly well, Coinbase PR understands that their fans aren’t able too.

d110af5ccf 4y ago
Counterpoint: the anti-crypto crowd frequently condescends about these topics yet fails to provide rigorous explanations of how various laws apply when pressed.

shukantpal 4y ago

This Wells notice is not about Coinbase lending out money but rather about staked assets. Coinbase is not doing any lending.

headsoup 4y ago
Didn't they just offer ~$3Bil to Circle recently?

yokem55 4y ago

When it comes to the staking side of things - Coinbase's position is that they are simply providing a technical service to their customers to do something that their customer's could do themselves. There isn't a borrower that Coinbase is lending the coins to. It is a protocol that locks them up. Where this gets messy is with things like Eth when they stake amounts less then 32 Eth from a customer, which inherently means they are providing a pooling operation on top of what the protocol expects. Does that pooling make their activites a security? But the SEC is not providing any kind of clear lines on any of this to identify where there is a line when "IT services" becomes a security.

8note 4y ago
Isn't it quite simple? Apply the Howey test. Very obviously yes. Both pooling and non-pooling are securities
RC_ITR 4y ago
>- Coinbase's position is that they are simply providing a technical service to their customers to do something that their customer's could do themselves. Sure, I could write multiple mortgages and roll them up into an MBS myself too, isn't the bank just doing the technical work there too?
- d110af5ccf 4y ago
  When it comes to staking, who is being lent to? It doesn't seem like a loan to me at all.
  - RC_ITR 4y ago
    Validators. It's being lent to validators. Do you not know the mechanics of staking? If so: https://solana.com/staking https://solana.com/staking
- humanizersequel 4y ago
  > I could write multiple mortgages and roll them up into an MBS myself too, isn't the bank just doing the technical work there too The bank is quite literally writing multiple loans and selling a security. I fail to see how providing tools for customers to more easily put up their tokens as collateral for the privilege of writing new chunks of data to a blockchain (and reaping the rewards) is at all equivalent to either activity. I admit that the name "Coinbase Earn" and the marketing material could be construed as misleading (but not that misleading).

deleted 4y ago

[deleted]

darksaints 4y ago

If that were the whole definition of a security, then interest-bearing savings accounts would be considered a SEC-regulated security. But they aren’t, for a very simple reason also outlined in securities law: They have no term nor maturity. Money can be withdrawn at will. There is no obligation to keep your money deposited in order to get paid for the time it has already been deposited. It isn’t clear to me how this is different from a savings account, which are not even in the legal jurisdiction of the SEC. This honestly smells of the usual turf war bullshit between the CFTC and SEC, just like the one that cause forex brokerages to completely separate from securities brokerages. The SEC wanted control over forex but they couldn’t have it, so they regulated the shit out of securities brokerages in order to twist the CFTCs arms.

gamblor956 4y ago

The issue is not that Coinbase is "taking money" and loaning the money out; it is that Coinbase is taking things that the SEC has decided are securities and loaning those out. Notably, the one crypto that the SEC guidance has said is not a security, i.e., Bitcoin, is missing from the list of coins available for Coinbase Earn.

zoklet-enjoyer 4y ago
Coinbase Earn is a staking service for people who don't know how or don't want to interact with the blockchain of the particular coin they're staking. Coinbase stakes the coins for them and takes a cut of the staking rewards. They're not lending assets. Bitcoin isn't included because Bitcoin uses proof of work, not proof of stake
- gamblor956 4y ago
  Ah, it appears I have it backwards. Customer lends coins to CB, which then stakes those coins for them in crypto where staking is a thing. It does not matter if they don't "technically" lend the coins, what matters is that they what they have done has the legal effect of lending the coins to CB. In this case, CB is in a worse position than I originally stated, since essentially all staked crypto is regarded as a security by the SEC. In which case, it's irrelevant that the SEC didn't say which particular crypto is a security; by its guidance all of the coins in CB Earn are.