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Putting this here in case it's useful. Please correct if it's wrong. What is the Howey test for whether something is a security? """ The Howey Test asks whethe

Putting this here in case it's useful. Please correct if it's wrong. What is the Howey test for whether something is a security? """ The Howey Test asks whether a transaction constitutes an "investment contract," which is a type of security. If it is an investment contract, it must satisfy four criteria: It is an investment of money. The investment is in a common enterprise. There is an expectation of profits from the investment. Any profit comes from the efforts of a promoter or third party. If the answer to all these questions is "yes," the transaction is likely an investment contract and, therefore, a security. However, please note that this is a simplified explanation. The actual determination can be complex and might require a detailed analysis by legal professionals. """ To me it DEFINITELY sounds like crypto is a security, but it seems like it mostly hinges on whether people expect to make a profit by investing. Which some people do and some people don't. But most people do right?

itake 3y ago
who is buying crypto and not expecting to make a profit from it?
- rcme 3y ago
  You could be buying it to interact with a smart contract.
  - vkou 3y ago
    In theory, yes. In practice, most of the interaction with smart contracts consists of locking up your money in one and expecting yield.
- civilitty 3y ago
  People buying narcotics and narcotics accessories.
- codetrotter 3y ago
  > who is buying crypto and not expecting to make a profit from it? Me. I put my savings in Bitcoin because I dislike the tradfi system. All I want is to be in control of my savings and to be able to freely transact with anyone anywhere in the world. I am still affected by the exchange rates to USD and EUR. But the hope is that in the future I will be able to use BTC directly more often and not even have to touch USD or EUR. Perhaps one day even my country will get with the times and allow me to pay my taxes in BTC directly instead of having to exchange it to government funnymoney first.
  - SketchySeaBeast 3y ago
    > Perhaps one day even my country will get with the times and allow me to pay my taxes in BTC directly instead of having to exchange it to government funnymoney first. Something tells me your government cares more about their funnymoney than yours. I can't imagine a government wanting to take on the volatility of bitcoin for a tax payment. What possible compelling argument is there for them to do that?
    - EscapeFromNY 3y ago
      Right now every state that lets you pay taxes with crypto immediately converts it into USD. So the govt is not taking on any volatility risk.
    - mhluongo 3y ago
      El Salvador is a clear counter example. I can certainly imagine why a country with a history of poorly managing their own currency (and that for whatever reason doesn't want to be aligned to USD) might choose to use a more "neutral" fixed supply currency.
  - preseinger 3y ago
    there is no universe in which a (edit: financially sound) nation will accept tax payments in a denomination over which it has no influence or control (edit: nations that peg their currency to the euro or the dollar are clearly exceptions to what i'm describing here) this is literally money 101 type stuff, wars have been fought over this stuff, and it's insane that crypto folks don't seem to understand any of it
- creato 3y ago
  People paying ransoms.
- tornato7 3y ago
  People buy commodities like Oil to make a profit, too. The question is, what cryptos are commodities and which are securities?
  - steveBK123 3y ago
    Is it a future / forward / swap / put / call / etc? Security. Is it a barrel of oil / unit of BTC? Commodity/Currency.
    - MikeDelta 3y ago
      Indeed. In general, security is a product. Commodity and currencies are asset classes. BTC would fall under the crypto asset class. I don't think financial institutions see it a currency in terms of asset class.
- toast0 3y ago
  People using crypto for funds transfer. Buy now, transfer immediately, with an expectation that the other end sells immediately. No desire or expectation of profit.
- dagaci 3y ago
  For many people inside an defintely outside the USA sphere, theres a lot of utility in holding some cash money in Crypto even as a staging point for payments.
jcranmer 3y ago
If you're really, really motivated, you can make facially-plausible arguments against any of the four factors. (Coinbase does this, for example). Common enterprise and expectation of profit are the two factors that are the weakest, and for a pure cryptocurrency like Bitcoin or Ethereum, there's probably not enough to meet common enterprise there. Although by the time you get to staking--especially an exchange offering to stake on your behalf--you'd probably pass the threshold of common enterprise, and you should assume your service meets the Howey test.
- mrguyorama 3y ago
  Importantly, you don't have to convince yourself that you don't meet the Howey test. At the end of the day, if it comes to it, you have to convince a judge while they are being also courted by an adversarial party. It doesn't matter what your company's interpretation is if a judge says "nah dog that isn't right". What matters is whether you genuinely believe your interpretation is reasonable I don't think any of these crypto companies have ever believed they could convince a judge, hence all the hemming and hawing in the public sphere in an attempt to build pressure against the SEC to either give them an out by making a very specific statement that they can work around, or by getting an administration to push the SEC to ignore all the bad stuff in crypto land.
axus 3y ago
Maybe profit is the modern-day perception of why you'd buy crypto-currency. All I could hope for would be for the tokens to be kept secure and available for spending, that's already a high bar. I can see the argument against proof-of-stake, doesn't your quantity of tokens increase without doing anything? The way I see it, other crypto-currencies only have the payment-processing system component. There's no expectation that some "Bitcoin corporation" is working hard to increase the value of individual bitcoins. It's like buying Chinese currency, the promise is that you can spend it in some places more efficiently than dollars, not that China is working hard to make a yuan/renmenbi worth more than a dollar.
- CuriousCosmic 3y ago
  > I can see the argument against proof-of-stake, doesn't your quantity of tokens increase without doing anything? It depends. With Algorand for example where staking is "fully automated" and you don't actually even have to be online to stake or have delegated to an online party? Then yes. With Ethereum where you run a node secured with your stake? No. You have to maintain a staking node and mitigate potential threats/failure modes which would lead to downtime. It's kinda like being paid out for an SLA. If you can't maintain uptime and correct functioning, you don't get paid and potentially you owe money. Now if you outsource the operation of a staking node, it's still the same situation but you are just outsourcing to "the cloud" or someone else. With Cardano where you have stake pool operators and delegators? Also no. If you run a stake pool, you essentially are in the same situation as with Ethereum. You have an SLA target of practically 100% and get penalised for failing to meet it. However for delegates (people who assign their stake rather than run a pool themselves), it's still no just "money go up". You are being paid for picking reliable, functional pools and voting with your stake that they should be trusted. And that is a job that doesn't just stop once you pick a pool, you still need to monitor the pool to verify that they are performing. And it's lower risk but there is no assurance that your funds would continue to increase unless you do your job and pick pools that operate correctly and reliably. Those cover the big variants of Proof of stake that I am aware of.
jrflowers 3y ago
> Putting this here in case it's useful… ChatGPT is a text generator. It is “useful” for writing sentences in a context where correctness and understanding are less important than syntactical uniformity and word count. Edit: Ok, I guess people want ChatGPT responses. Risks when using ChatGPT instead of research while discussing financial securities: Accuracy: While AI models strive for accuracy, there can still be errors or misunderstandings. They might oversimplify complex concepts, miss nuances, or even provide incorrect information. It's always a good idea to verify information from multiple reliable sources. Bias: AI models are trained on existing data, which might contain inherent biases. Thus, the output of AI might also reflect these biases, although it is unintentional. Lack of deep understanding: While AI models like ChatGPT can process and generate language based on patterns they learned during training, they do not possess actual understanding or intuition. They are unable to think critically or provide expert judgment. Outdated Information: As of its last training cut-off (September 2021 for ChatGPT), the model might not have the most current information or developments in the field of financial securities. Regulation and legality: There are regulatory considerations in financial markets, and AI models may not be fully updated or able to provide guidance in line with current laws and regulations.
HWR_14 3y ago
You are almost correct. It doesn't matter whether most people make a profit. It just matters that they are investing believing they will make a profit. Buying my worthless stock or investing in my pyramid scheme are both securities even if I'm the only one who makes anything. It matters that the person buying reasonably thinks it could lead to profits. Not that it necessarily does.
jdasdf 3y ago
[flagged]
- srejk 3y ago
  Words have definitions. Investment and profit, for two. You can't just handwave that away. Your conclusion is "anything could be anything" which is utterly devoid of any meaning.
  - johngladtj 3y ago
    Define them then, in a way that is consistent with every other law that makes use of those terms. Do you not get taxed on your income if your paycheck is paid in bars of gold? Would you not call purchasing something to enjoy a return from it's ownership as an investment? Whether it is a consumable, or it produces something that isn't cash?
- tick_tock_tick 3y ago
  > No reason profits can't be something other than cash. Other then the legal definition.....
  - johngladtj 3y ago
    Most tax laws don't make such a distinction. Whether you're receiving cash, or some other asset you're taxed on that as income.
- imtringued 3y ago
  A dinner is a classic example of consumer spending... The only way this could be considered an investment is if you bought a crate of wine bottles at a bulk discount and sold the left over wine bottles to third parties and used the proceeds to pay for the dinner.
Ajedi32 3y ago
Interesting. I'd answer those questions as "Yes. No. Maybe. No." So definitely not a security. 1. Is cryptocurrency an investment of money? Obviously yes, at least in the sense you have to spend money to purchase or mine it. 2. Is cryptocurrency investment in a common enterprise? No. What enterprise? Common with who? Maybe if it's a token issued by a company or something and tied to their profits somehow, but that doesn't apply to any of the common cryptocurrencies like Bitcoin, Etherium, Monero, etc. 3. Is there an expectation of profits? This depends on entirely on the person buying the token and what they intend to use it for. 4. Does any profit come from the efforts of a promoter or third party? No. What promoter? What third party? If the value fluctuates you can make a profit, but there's no third party involved exerting "effort" that's involved in that process. If you want to argue with me on 2 and 4, explain how cryptocurrency meets those criteria but not, say, gold.
- dontreact 3y ago
  2: The more people buy and hold Bitcoin, the more valuable it becomes. I asked ChatGPT about the definition of common enterprise: The 7th and 2nd Circuits use a "horizontal commonality" test, where a common enterprise is found if the profits of the investors are interdependent - i.e., if the success of the enterprise is tied to the success of other investors. Essentially, the investors' funds are pooled and they share in the profits and losses. 3: Overwhelming majority of people who buy gold buy it as a hedge against inflation. In the past 5 years everyone I personally know who has bought cryptocurrency was expecting it to increase massively in value (expecting profit). 4: There have been a huge amount of cryptocurrency pump and dump stories where the promoters have benefitted immensely. In those cases it seems pretty clear that those are securities. In fact pretty much anything that isn't a top-2 coin at this point is subject to this sort of behavior from what I've seen.
  - Ajedi32 3y ago
    2 is also true of gold and any other commodity. 3 I'd quibble with you about "overwhelming majority", but yes that's a common use of gold. It's a fairly common use of cryptocurrency too though, especially in countries with high inflation. 4 Maybe in that specific situation yes. Sounds like you agree that's not all cryptocurrencies though. It's also kinda weird that something could go from not being a security to being one (and back) depending on how people happen using it at any given moment in time. E.g. If someone somehow managed to orchestrate a pump and dump scheme with silver, would it temporarily become a security for that brief moment in time and then go back to being a commodity afterwards?
deleted 3y ago
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EGreg 3y ago
Please tell me, how is Bitcoin a security? Speaking to various security lawyers there were two terms that are extremely vague in the industry: 1) "Common enterprise". What does that mean? Gary Gensler openly said in a speech Bitcoin isnt a security because there is no "common enterprise." When he was saying these words he made a motion with his elbows like you've got a buddy. That's the closest I got into his mind for what "common enterprise" means. But really, if you go by the widest definitions, "common enterprise" means anything where various entities are all united in winning, e.g. miners mine, people buy and hold, it's all a common enterprise. By that definition, almost everything is a security, including Bitcoin, despite what even a hawk like Gary Gensler says. 2) "Equity securities". As opposed to non-equity securities such as debt. Let's say all tokens are securities. But are they "equity securities" meaning you have to register with the SEC as soon as you have more than 2000 holders? But what makes a security an "equity security" specifically? Is it the ability to vote? Then governance tokens are "equity securities". Is it the ability to receive dividends from some profits? Then maybe Liquidity Pool tokens on Uniswap are equity securities. But nevermind that these terms are not well defined, even in the statutory law or case law. The vagueness is actually broader than that. All shows like Yu Gi Oh, Pokemon, etc. have been running, technically speaking, unregistered securities offerings throughout the world and United States, yet the SEC does nothing. They are textbook cases of the Howey Test: 1) People (kids, in fact!) buy Yu Gi Oh trading cards 2) There is an investment of money (either they nag their parents, or they actually spend a non-trivial proportion of their own life savings) 3) With an expectation of profit. Witness how many of them don't actually use the cards, but keep them in mint condition (and as we have seen SEC successfully argue in the recent case SEC vs LBRY, if even a few people buy with expectation of profit, then ALL those sales are securities). 4) From the efforts of others -- namely the producers of the show, and their promotion of Yu Gi Oh trading cards. Trading! Perhaps even selling! 5) There is definitely a common enterprise, that isn't even decentralized. The Yu Gi Oh show is produced in Japan and shown in the USA, and drives the sales of the cards. Cancel the show, and the cards fall in price. Yu Gi Oh Abridged series even lampooned this, to great comedic effect. Oh those foreign-owned Japanese companies, preying on our kids selling them investment contracts! Do they really think the kids are sophisticated investors who think things through when they keep their mint-condition cards! Who will buy the top and be holding the bag after the show is canceled? So being a textbook definition of Howey, why did the SEC never go after Pokemon, Yu Gi Oh and any of the other "merchandising" companies? How about Marvel with their mint-condition comics? Isn't that a "common enterprise" since some people buy comics for their investment value? But vagueness actually broader than that. According to some experts, everything is a security: https://www.linkedin.com/pulse/everything-security-chris-harvey/ https://www.linkedin.com/pulse/everything-security-chris-har... This article was shared on HN at some point, and it shows how the SEC has at times considered even transactions outside the united states, which did not have any character you'd normally associate a security, a security transaction in the USA. So at this point it starts bordering on the absurd. If you take Objectivism to its logical conclusion, it could seem that it's morally better to torture a man for a $100 profit, as long as you could get away with it. But then Ayn Rand throws in "as befits a rational being", as a sort of no true scotsman argument that avoids the logical conclusion. Similarly the SEC has been using "Sufficiently Decentralized" as a way to avoid the logical conclusion that they should go after a ton of other large ecosystems. For example, Hinman famously did it with Ethereum: https://www.sec.gov/news/speech/speech-hinman-061418 https://www.sec.gov/news/speech/speech-hinman-061418 But now after he left, the SEC is revisiting that: https://decrypt.co/46456/regulator-coined-term-sufficiently-decentralized-leave-sec https://decrypt.co/46456/regulator-coined-term-sufficiently-... Today, Gensler says Bitcoin is not a security. Tomorrow, it could be considered one. But wait, it gets worse. Let's remember that the STATES also have their own definition of a security. In fact, the states on the West Coast (from Washington to California) consider anything a security that puts capital at risk. Yes, that's right, even if it doesn't meet the Howey test, as long as you have put your capital at risk, it's a security transaction! You don't need an expectation of profit. Wow! https://www.theselc.org/which_states_apply_the_risk_capital_test_when_deciding_what_is_a_security https://www.theselc.org/which_states_apply_the_risk_capital_... I have asked securities lawyers and they have confirmed that MOST KICKSTARTER CAMPAIGNS ARE TECHNICALLY SECURITIES SALES according to these state laws, they just don't enforce it. Many of you live in California, so all of you who have done kickstarter campaigns have probably violated your own state's securities laws. But it's so absurd that they haven't bothered enforcing those. About the only things that aren't at securities transactions, by the way, are donations. That's when people simply send money with no expectation in return. Hex tried to leverage that with their "sacrifices". Think you can just airdrop coins to people? There's no "investment of money" right? Well, using human logic that would be correct. But there have been some precedent back in the 90s when people showed up to drink beer, put their contact info and got free stock, or something like that. And the SEC said that even that was a security, presumably because the contact info was worth something, or maybe some other reason, it's not actually spelled out clearly in the case law. So now, although there has never been a single SEC case going after an airdrop, lawyers are cautious. Yes they laws are protecting you from getting free stuff in your wallet! Who knows kind of loss you can incur by getting free stuff with no obligation! Anyway, of course there are important scams to go after and the SEC has a job to do. I think it's an important job. But I'm just showing you how absurd the thing can get if you try to use actual definitions of words in the Howey Test and take it to their logical conclusion, and what it actually means. This isn't limited to Securities laws. Remember the Infrastructure Bill? Well, it said that a "broker" is anyone who builds software. Now if you build a wallet, you might have to KYC all your users. Except the Treasury said they won't enforce it. How nice (what about under the next admin?) Well, the Bitcoin lobby got them to exempt Bitcoin through an amendment around proof-of-work, but that's pretty much it. Oh and Europe is about to pass the Cyber Resilience Act that might create penalties for any open source software that doesn't pass a check by their cyber security watchdog agencies, which haven't been created yet for this bill. I'll just finish with a couple words about FINCEN, because OFAC and FINCEN are far more serious than the SEC. (And FATCA also enforces things like the Travel Rule worldwide, and soon the Travel Rule will require everyone to track everything). You know all of you who build marketplaces and handle money? Well, you might be a MONEY TRANSMITTER. According to the Bank Secrecy Act, you have to register and then the States will slap you with a lot of requirements, like maintaining a surety bond. But, there are exemptions, I'll let you read about them here: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20... Here's the interesting thing. These are only exemptions on the FEDERAL level. The individual states might have a DIFFERENT definition of "money transmission business" and they might apply their own local laws to you. It might be that two sided marketplace you're building, it's violating money transmission laws in a dozen states. Maybe. I've asked lawyers for a list, and very few actually have them. But here is a useful link, enjoy: https://abnk.assembly.ca.gov/sites/abnk.assembly.ca.gov/files/50%20State%20Survey%20-%20MTL%20Licensing%20Requirements(72986803_4).pdf https://abnk.assembly.ca.gov/sites/abnk.assembly.ca.gov/file... Alright entrepreneurs, good luck navigating that!

itake 3y ago

who is buying crypto and not expecting to make a profit from it?

rcme 3y ago
You could be buying it to interact with a smart contract.
- vkou 3y ago
  In theory, yes. In practice, most of the interaction with smart contracts consists of locking up your money in one and expecting yield.
civilitty 3y ago
People buying narcotics and narcotics accessories.
codetrotter 3y ago
> who is buying crypto and not expecting to make a profit from it? Me. I put my savings in Bitcoin because I dislike the tradfi system. All I want is to be in control of my savings and to be able to freely transact with anyone anywhere in the world. I am still affected by the exchange rates to USD and EUR. But the hope is that in the future I will be able to use BTC directly more often and not even have to touch USD or EUR. Perhaps one day even my country will get with the times and allow me to pay my taxes in BTC directly instead of having to exchange it to government funnymoney first.
- SketchySeaBeast 3y ago
  > Perhaps one day even my country will get with the times and allow me to pay my taxes in BTC directly instead of having to exchange it to government funnymoney first. Something tells me your government cares more about their funnymoney than yours. I can't imagine a government wanting to take on the volatility of bitcoin for a tax payment. What possible compelling argument is there for them to do that?
  - EscapeFromNY 3y ago
    Right now every state that lets you pay taxes with crypto immediately converts it into USD. So the govt is not taking on any volatility risk.
  - mhluongo 3y ago
    El Salvador is a clear counter example. I can certainly imagine why a country with a history of poorly managing their own currency (and that for whatever reason doesn't want to be aligned to USD) might choose to use a more "neutral" fixed supply currency.
- preseinger 3y ago
  there is no universe in which a (edit: financially sound) nation will accept tax payments in a denomination over which it has no influence or control (edit: nations that peg their currency to the euro or the dollar are clearly exceptions to what i'm describing here) this is literally money 101 type stuff, wars have been fought over this stuff, and it's insane that crypto folks don't seem to understand any of it
creato 3y ago
People paying ransoms.
tornato7 3y ago
People buy commodities like Oil to make a profit, too. The question is, what cryptos are commodities and which are securities?
- steveBK123 3y ago
  Is it a future / forward / swap / put / call / etc? Security. Is it a barrel of oil / unit of BTC? Commodity/Currency.
  - MikeDelta 3y ago
    Indeed. In general, security is a product. Commodity and currencies are asset classes. BTC would fall under the crypto asset class. I don't think financial institutions see it a currency in terms of asset class.
toast0 3y ago
People using crypto for funds transfer. Buy now, transfer immediately, with an expectation that the other end sells immediately. No desire or expectation of profit.
dagaci 3y ago
For many people inside an defintely outside the USA sphere, theres a lot of utility in holding some cash money in Crypto even as a staging point for payments.

jcranmer 3y ago

If you're really, really motivated, you can make facially-plausible arguments against any of the four factors. (Coinbase does this, for example). Common enterprise and expectation of profit are the two factors that are the weakest, and for a pure cryptocurrency like Bitcoin or Ethereum, there's probably not enough to meet common enterprise there. Although by the time you get to staking--especially an exchange offering to stake on your behalf--you'd probably pass the threshold of common enterprise, and you should assume your service meets the Howey test.

mrguyorama 3y ago
Importantly, you don't have to convince yourself that you don't meet the Howey test. At the end of the day, if it comes to it, you have to convince a judge while they are being also courted by an adversarial party. It doesn't matter what your company's interpretation is if a judge says "nah dog that isn't right". What matters is whether you genuinely believe your interpretation is reasonable I don't think any of these crypto companies have ever believed they could convince a judge, hence all the hemming and hawing in the public sphere in an attempt to build pressure against the SEC to either give them an out by making a very specific statement that they can work around, or by getting an administration to push the SEC to ignore all the bad stuff in crypto land.

axus 3y ago

Maybe profit is the modern-day perception of why you'd buy crypto-currency. All I could hope for would be for the tokens to be kept secure and available for spending, that's already a high bar. I can see the argument against proof-of-stake, doesn't your quantity of tokens increase without doing anything? The way I see it, other crypto-currencies only have the payment-processing system component. There's no expectation that some "Bitcoin corporation" is working hard to increase the value of individual bitcoins. It's like buying Chinese currency, the promise is that you can spend it in some places more efficiently than dollars, not that China is working hard to make a yuan/renmenbi worth more than a dollar.

CuriousCosmic 3y ago
> I can see the argument against proof-of-stake, doesn't your quantity of tokens increase without doing anything? It depends. With Algorand for example where staking is "fully automated" and you don't actually even have to be online to stake or have delegated to an online party? Then yes. With Ethereum where you run a node secured with your stake? No. You have to maintain a staking node and mitigate potential threats/failure modes which would lead to downtime. It's kinda like being paid out for an SLA. If you can't maintain uptime and correct functioning, you don't get paid and potentially you owe money. Now if you outsource the operation of a staking node, it's still the same situation but you are just outsourcing to "the cloud" or someone else. With Cardano where you have stake pool operators and delegators? Also no. If you run a stake pool, you essentially are in the same situation as with Ethereum. You have an SLA target of practically 100% and get penalised for failing to meet it. However for delegates (people who assign their stake rather than run a pool themselves), it's still no just "money go up". You are being paid for picking reliable, functional pools and voting with your stake that they should be trusted. And that is a job that doesn't just stop once you pick a pool, you still need to monitor the pool to verify that they are performing. And it's lower risk but there is no assurance that your funds would continue to increase unless you do your job and pick pools that operate correctly and reliably. Those cover the big variants of Proof of stake that I am aware of.

jrflowers 3y ago

> Putting this here in case it's useful… ChatGPT is a text generator. It is “useful” for writing sentences in a context where correctness and understanding are less important than syntactical uniformity and word count. Edit: Ok, I guess people want ChatGPT responses. Risks when using ChatGPT instead of research while discussing financial securities: Accuracy: While AI models strive for accuracy, there can still be errors or misunderstandings. They might oversimplify complex concepts, miss nuances, or even provide incorrect information. It's always a good idea to verify information from multiple reliable sources. Bias: AI models are trained on existing data, which might contain inherent biases. Thus, the output of AI might also reflect these biases, although it is unintentional. Lack of deep understanding: While AI models like ChatGPT can process and generate language based on patterns they learned during training, they do not possess actual understanding or intuition. They are unable to think critically or provide expert judgment. Outdated Information: As of its last training cut-off (September 2021 for ChatGPT), the model might not have the most current information or developments in the field of financial securities. Regulation and legality: There are regulatory considerations in financial markets, and AI models may not be fully updated or able to provide guidance in line with current laws and regulations.

HWR_14 3y ago

You are almost correct. It doesn't matter whether most people make a profit. It just matters that they are investing believing they will make a profit. Buying my worthless stock or investing in my pyramid scheme are both securities even if I'm the only one who makes anything. It matters that the person buying reasonably thinks it could lead to profits. Not that it necessarily does.

jdasdf 3y ago

[flagged]

srejk 3y ago
Words have definitions. Investment and profit, for two. You can't just handwave that away. Your conclusion is "anything could be anything" which is utterly devoid of any meaning.
- johngladtj 3y ago
  Define them then, in a way that is consistent with every other law that makes use of those terms. Do you not get taxed on your income if your paycheck is paid in bars of gold? Would you not call purchasing something to enjoy a return from it's ownership as an investment? Whether it is a consumable, or it produces something that isn't cash?
tick_tock_tick 3y ago
> No reason profits can't be something other than cash. Other then the legal definition.....
- johngladtj 3y ago
  Most tax laws don't make such a distinction. Whether you're receiving cash, or some other asset you're taxed on that as income.
imtringued 3y ago
A dinner is a classic example of consumer spending... The only way this could be considered an investment is if you bought a crate of wine bottles at a bulk discount and sold the left over wine bottles to third parties and used the proceeds to pay for the dinner.

Ajedi32 3y ago

Interesting. I'd answer those questions as "Yes. No. Maybe. No." So definitely not a security. 1. Is cryptocurrency an investment of money? Obviously yes, at least in the sense you have to spend money to purchase or mine it. 2. Is cryptocurrency investment in a common enterprise? No. What enterprise? Common with who? Maybe if it's a token issued by a company or something and tied to their profits somehow, but that doesn't apply to any of the common cryptocurrencies like Bitcoin, Etherium, Monero, etc. 3. Is there an expectation of profits? This depends on entirely on the person buying the token and what they intend to use it for. 4. Does any profit come from the efforts of a promoter or third party? No. What promoter? What third party? If the value fluctuates you can make a profit, but there's no third party involved exerting "effort" that's involved in that process. If you want to argue with me on 2 and 4, explain how cryptocurrency meets those criteria but not, say, gold.

dontreact 3y ago
2: The more people buy and hold Bitcoin, the more valuable it becomes. I asked ChatGPT about the definition of common enterprise: The 7th and 2nd Circuits use a "horizontal commonality" test, where a common enterprise is found if the profits of the investors are interdependent - i.e., if the success of the enterprise is tied to the success of other investors. Essentially, the investors' funds are pooled and they share in the profits and losses. 3: Overwhelming majority of people who buy gold buy it as a hedge against inflation. In the past 5 years everyone I personally know who has bought cryptocurrency was expecting it to increase massively in value (expecting profit). 4: There have been a huge amount of cryptocurrency pump and dump stories where the promoters have benefitted immensely. In those cases it seems pretty clear that those are securities. In fact pretty much anything that isn't a top-2 coin at this point is subject to this sort of behavior from what I've seen.
- Ajedi32 3y ago
  2 is also true of gold and any other commodity. 3 I'd quibble with you about "overwhelming majority", but yes that's a common use of gold. It's a fairly common use of cryptocurrency too though, especially in countries with high inflation. 4 Maybe in that specific situation yes. Sounds like you agree that's not all cryptocurrencies though. It's also kinda weird that something could go from not being a security to being one (and back) depending on how people happen using it at any given moment in time. E.g. If someone somehow managed to orchestrate a pump and dump scheme with silver, would it temporarily become a security for that brief moment in time and then go back to being a commodity afterwards?

deleted 3y ago

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EGreg 3y ago

Please tell me, how is Bitcoin a security? Speaking to various security lawyers there were two terms that are extremely vague in the industry: 1) "Common enterprise". What does that mean? Gary Gensler openly said in a speech Bitcoin isnt a security because there is no "common enterprise." When he was saying these words he made a motion with his elbows like you've got a buddy. That's the closest I got into his mind for what "common enterprise" means. But really, if you go by the widest definitions, "common enterprise" means anything where various entities are all united in winning, e.g. miners mine, people buy and hold, it's all a common enterprise. By that definition, almost everything is a security, including Bitcoin, despite what even a hawk like Gary Gensler says. 2) "Equity securities". As opposed to non-equity securities such as debt. Let's say all tokens are securities. But are they "equity securities" meaning you have to register with the SEC as soon as you have more than 2000 holders? But what makes a security an "equity security" specifically? Is it the ability to vote? Then governance tokens are "equity securities". Is it the ability to receive dividends from some profits? Then maybe Liquidity Pool tokens on Uniswap are equity securities. But nevermind that these terms are not well defined, even in the statutory law or case law. The vagueness is actually broader than that. All shows like Yu Gi Oh, Pokemon, etc. have been running, technically speaking, unregistered securities offerings throughout the world and United States, yet the SEC does nothing. They are textbook cases of the Howey Test: 1) People (kids, in fact!) buy Yu Gi Oh trading cards 2) There is an investment of money (either they nag their parents, or they actually spend a non-trivial proportion of their own life savings) 3) With an expectation of profit. Witness how many of them don't actually use the cards, but keep them in mint condition (and as we have seen SEC successfully argue in the recent case SEC vs LBRY, if even a few people buy with expectation of profit, then ALL those sales are securities). 4) From the efforts of others -- namely the producers of the show, and their promotion of Yu Gi Oh trading cards. Trading! Perhaps even selling! 5) There is definitely a common enterprise, that isn't even decentralized. The Yu Gi Oh show is produced in Japan and shown in the USA, and drives the sales of the cards. Cancel the show, and the cards fall in price. Yu Gi Oh Abridged series even lampooned this, to great comedic effect. Oh those foreign-owned Japanese companies, preying on our kids selling them investment contracts! Do they really think the kids are sophisticated investors who think things through when they keep their mint-condition cards! Who will buy the top and be holding the bag after the show is canceled? So being a textbook definition of Howey, why did the SEC never go after Pokemon, Yu Gi Oh and any of the other "merchandising" companies? How about Marvel with their mint-condition comics? Isn't that a "common enterprise" since some people buy comics for their investment value? But vagueness actually broader than that. According to some experts, everything is a security: https://www.linkedin.com/pulse/everything-security-chris-harvey/ https://www.linkedin.com/pulse/everything-security-chris-har... This article was shared on HN at some point, and it shows how the SEC has at times considered even transactions outside the united states, which did not have any character you'd normally associate a security, a security transaction in the USA. So at this point it starts bordering on the absurd. If you take Objectivism to its logical conclusion, it could seem that it's morally better to torture a man for a $100 profit, as long as you could get away with it. But then Ayn Rand throws in "as befits a rational being", as a sort of no true scotsman argument that avoids the logical conclusion. Similarly the SEC has been using "Sufficiently Decentralized" as a way to avoid the logical conclusion that they should go after a ton of other large ecosystems. For example, Hinman famously did it with Ethereum: https://www.sec.gov/news/speech/speech-hinman-061418 https://www.sec.gov/news/speech/speech-hinman-061418 But now after he left, the SEC is revisiting that: https://decrypt.co/46456/regulator-coined-term-sufficiently-decentralized-leave-sec https://decrypt.co/46456/regulator-coined-term-sufficiently-... Today, Gensler says Bitcoin is not a security. Tomorrow, it could be considered one. But wait, it gets worse. Let's remember that the STATES also have their own definition of a security. In fact, the states on the West Coast (from Washington to California) consider anything a security that puts capital at risk. Yes, that's right, even if it doesn't meet the Howey test, as long as you have put your capital at risk, it's a security transaction! You don't need an expectation of profit. Wow! https://www.theselc.org/which_states_apply_the_risk_capital_test_when_deciding_what_is_a_security https://www.theselc.org/which_states_apply_the_risk_capital_... I have asked securities lawyers and they have confirmed that MOST KICKSTARTER CAMPAIGNS ARE TECHNICALLY SECURITIES SALES according to these state laws, they just don't enforce it. Many of you live in California, so all of you who have done kickstarter campaigns have probably violated your own state's securities laws. But it's so absurd that they haven't bothered enforcing those. About the only things that aren't at securities transactions, by the way, are donations. That's when people simply send money with no expectation in return. Hex tried to leverage that with their "sacrifices". Think you can just airdrop coins to people? There's no "investment of money" right? Well, using human logic that would be correct. But there have been some precedent back in the 90s when people showed up to drink beer, put their contact info and got free stock, or something like that. And the SEC said that even that was a security, presumably because the contact info was worth something, or maybe some other reason, it's not actually spelled out clearly in the case law. So now, although there has never been a single SEC case going after an airdrop, lawyers are cautious. Yes they laws are protecting you from getting free stuff in your wallet! Who knows kind of loss you can incur by getting free stuff with no obligation! Anyway, of course there are important scams to go after and the SEC has a job to do. I think it's an important job. But I'm just showing you how absurd the thing can get if you try to use actual definitions of words in the Howey Test and take it to their logical conclusion, and what it actually means. This isn't limited to Securities laws. Remember the Infrastructure Bill? Well, it said that a "broker" is anyone who builds software. Now if you build a wallet, you might have to KYC all your users. Except the Treasury said they won't enforce it. How nice (what about under the next admin?) Well, the Bitcoin lobby got them to exempt Bitcoin through an amendment around proof-of-work, but that's pretty much it. Oh and Europe is about to pass the Cyber Resilience Act that might create penalties for any open source software that doesn't pass a check by their cyber security watchdog agencies, which haven't been created yet for this bill. I'll just finish with a couple words about FINCEN, because OFAC and FINCEN are far more serious than the SEC. (And FATCA also enforces things like the Travel Rule worldwide, and soon the Travel Rule will require everyone to track everything). You know all of you who build marketplaces and handle money? Well, you might be a MONEY TRANSMITTER. According to the Bank Secrecy Act, you have to register and then the States will slap you with a lot of requirements, like maintaining a surety bond. But, there are exemptions, I'll let you read about them here: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20... Here's the interesting thing. These are only exemptions on the FEDERAL level. The individual states might have a DIFFERENT definition of "money transmission business" and they might apply their own local laws to you. It might be that two sided marketplace you're building, it's violating money transmission laws in a dozen states. Maybe. I've asked lawyers for a list, and very few actually have them. But here is a useful link, enjoy: https://abnk.assembly.ca.gov/sites/abnk.assembly.ca.gov/files/50%20State%20Survey%20-%20MTL%20Licensing%20Requirements(72986803_4).pdf https://abnk.assembly.ca.gov/sites/abnk.assembly.ca.gov/file... Alright entrepreneurs, good luck navigating that!