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SEC isn't suing Coinbase over Bitcoin. They're suing under two things: 1. Unregistered exchange for several tokens the SEC believes are securities: > This inc

SEC isn't suing Coinbase over Bitcoin. They're suing under two things: 1. Unregistered exchange for several tokens the SEC believes are securities: > This includes, but is not limited to, the units of each of the crypto asset securities further described below—with trading symbols SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO—(the “Crypto Asset Securities”). 2. Unregistered sale of securities related to the staking program for XTZ, ETH, ATOM, ADA, SOL. This in particular has a full, point-by-point rationale for why they are defined as securities under the Howey test (in short, you deposit money, and the terms make clear that it's Coinbase's money at that point, not your money, so definitely an investment; staking involves a common enterprise; and it's clearly advertised as making you money based on Coinbase doing stuff with your investment). Maybe Coinbase should have listened to its own advisors on how to tailor a prospectus to not meet the Howey test definition of a security... or maybe their advisors didn't do a good job in the first place!

mrcode007 3y ago
Very good points. People often go a long way to argue against the Howey test. The best example is Howey Co case. If someone is a lawyer dealing in securities and acting as an advisor I would have expected them to be familiar with the law. Coinbase issuing public statements to SEC “tell us what is a security” were basically a ploy or the lawyers involved were extremely inexperienced. https://en.m.wikipedia.org/wiki/SEC_v._W._J._Howey_Co https://en.m.wikipedia.org/wiki/SEC_v._W._J._Howey_Co.
- whimsicalism 3y ago
  It is not obvious a priori how regulators will treat tokens or which ones will be permissible.
  - qeternity 3y ago
    It was obvious to a lot of people who were wondering what was taking regulators so long.
    - whimsicalism 3y ago
      Interesting, maybe you should let Gensler know that the law is much more obvious than he appears to realize [0] [0]: https://youtu.be/VhA1dZXeao0?t=58 https://youtu.be/VhA1dZXeao0?t=58
      - mrcode007 3y ago
        Under the Howey test, the rules are clear. "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value." I think it is plausible that all pure staking initiatives will go. I don’t think you have much of an argument here but I could be wrong. It will definitely be an interesting case to watch.
        CuriousCosmic 3y ago
        > investment of money in a common enterprise with profits to come solely from the efforts of others This is where I see the "staking makes a cryptocurrency a security" fall apart. There are a handful of definitions for "staking" and some of them definitely meet the criteria of "a common enterprise with profits to come solely from the efforts of others" however many do not. 1. Ethereum's staking at a protocol level requires you to run a staking node and you are paid for what is basically an SLA between you and the network and you only get paid if your node maintains a certain uptime, is kept up to date, and operates correctly. That I don't believe meets the criteria as it requires direct, sustained effort from you the operator (even if it's generally low effort). 2. Cardano's (or Tezos') staking is similar. Stake pool operators are effectively the same as Ethereum's stake node operators. But even delegators (who aren't required to stay online) still provide a service in that they are picking the stake pools who then fill the SLAs. If they pick pools that can't meet the requirements then the delegators don't get paid until they can find one that does. 3. Meanwhile you have networks like Algorand where participation in consensus does not effect staking rewards and you never have to perform a service to get paid out by the network. Those would meet the criteria by my understanding. 4. And then you have all the DeFi "staking" which is better described as lending or liquidity pooling. You aren't doing anything proof of stake related but are just lending out capital as an investment. I can't speak on other networks but generally I found that networks fell into one of those 4 categories. The first two only pay people who provide a service back to the network while with those like the third, even if you can provide a service back to the network, you aren't required to to be able to get paid. And then the fourth category is just a security outright. Edit (because I forgot to mention it): With regards to Coinbase's staking program, it's in a weird spot. With those you aren't directly staking but you are outsourcing the responsibility to a 3rd part (coinbase) to stake for you. I wouldn't be opposed to considering this type of custodial staking as meeting the criteria to be a security but I don't think proof of stake at a protocol level constitutes "a common enterprise with profits to come solely from the efforts of others" as they require work on behalf of the participants to get paid out.
  - nradov 3y ago
    In general if you're thinking of doing something in a gray area of federal law or regulations then you can write a formal letter to the competent regulatory agency and request an opinion. But you have to be extremely specific and pose your questions in ways that can be answered with a clear yes or no; you can't expect a useful response to a vague request for clarifications or definitions. If the agency does give you a letter containing a positive opinion then it serves as a nearly ironclad defense against any civil enforcement actions or criminal prosecution. Those opinions can change later for political reasons, but you won't be punished retroactively for actions prior to the change.
    - whimsicalism 3y ago
      Yes, see for instance prediction markets in the US.
    - sroussey 3y ago
      FundersClub did this for creating a portal to invest in startups.
      - nradov 3y ago
        Right, good example. You can read the SEC letter here. As long as you ask the right questions you can get useful answers and protect your business. https://www.sec.gov/divisions/marketreg/mr-noaction/2013/funders-club-032613-15a1.pdf https://www.sec.gov/divisions/marketreg/mr-noaction/2013/fun...
  - choppaface 3y ago
    It’s not a matter of what tokens are “permissible” but rather what protections market participants get against fraud and instability. There was plenty of opportunity for crypto to actually raise the bar in protecting the consumer and it just never happened.
- George83728 3y ago
  > Coinbase issuing public statements to SEC “tell us what is a security” were basically a ploy or the lawyers involved were extremely inexperienced. I take it as a stunt intended shift the layman's perception of Coinbase's legal responsibilities onto the SEC. They're counting on cryptobros using this "SEC won't tell us what's legal" talking point to affect favorable political / legislative change. But newsflash: government regulators aren't obliged to act as your legal council.
- yieldcrv 3y ago
  The stance isn’t about whether Howey can be applied literally everywhere The stance is that applying it to digital tokens as unregistered securities means applying it to other places, like Nike shoes and baseball cards, just because any random individual expected to profit when they bought one that this framework is not applied everywhere, specifically how congress exempted spot commodities and commodities derivatives from the SEC framework specifically because it was untenable That there is a difference between a digital commodity and a digital security that is mutually exclusive, but the SEC has provided no way of understanding that distinction, and now has resorted to just arbitrarily claiming random assets are securities in cases against the people that trade those assets, instead of taking up cases against the issuers of those assets and letting those issuers defend themselves or reach a definitive conclusion That it is impossible to comply if it was applied everywhere, as registered security status inherits tons of unrelated regulations to protect incumbent intermediaries That the SEC will never achieve congress’ delegated mission of investor protection and only hurt investors And that actually inconveniencing everyone will put this framework under a constitutional test that the SEC probably needs to avoid, but I’m all the SEC going after the entire sneaker trading ecosystem as unregistered broker dealers as fallout to their crusade just to prove they aren’t just trying to debilitate crypto (The staking program has a separate evaluation)
  - esotericimpl 3y ago
    Nike shoes and baseball cards are clearly commodities. If you were to stake your Air Jordan's with coinbase and Coinbase told you in a years time you'd have 2 pairs, it would become a security.
    - yieldcrv 3y ago
      like I wrote, the staking program has a different evaluation and my post was not about that. we agree that any asset can be transferred in a way that is a securities transaction.
  - majormajor 3y ago
    Why would a sneaker fall under the terms they're using to define a security if not every digital token does?
MrMan 3y ago
[dead]
moralestapia 3y ago
>Maybe Coinbase should have listened to its own advisors ... Maybe they just hired @butlerm which definitely knows what s/he's talking about and ... well here we are :)
testfoobar 3y ago
What is a plausible range of outcomes for Coinbase here?
- Breza 3y ago
  Years of litigation. Some people think they're hoping for Congress to intervene and moot the case.
chrisco255 3y ago
The SEC provides NO guidance on what is or isn't a security. We have the Howey test to go off of. There is no way to register, no legal way to achieve anything that should be legal in a democratic capitalist society. You just have the threat of an SEC lawsuit on nebulous terms. It's completely fucked up. Another incredibly important point is the $1 million net worth and $200k income based test for becoming an "accredited investor" is racist, classist, sexist, and evil. People should have the right to invest their money how they see fit. If you want people to sign some kind of disclosure, or some kind of term sheet that makes it very clear to a retail investor what they're getting into, fine. But the law as it exists is outrageously undemocratic. In regards to the SEC, a system that was built for 1933 is not even relevant in a world where you can spin up a million new tokens in 10 seconds and deploy to 24/7 worldwide markets in 5 minutes from anywhere. Keeping the 1933 SEC Act in tact in 2023 is like trying to keep Prohibition going even though it's raining whiskey from the sky.
- Breza 3y ago
  Sounds like you're advocating for Matt Levine's "Certificate of Dumb Investment" proposal. The fact that so many retail investors have been scammed by crypto gives support to the current regime, but I think there's something to Levine's idea. https://archive.is/ggCjN https://archive.is/ggCjN

mrcode007 3y ago

Very good points. People often go a long way to argue against the Howey test. The best example is Howey Co case. If someone is a lawyer dealing in securities and acting as an advisor I would have expected them to be familiar with the law. Coinbase issuing public statements to SEC “tell us what is a security” were basically a ploy or the lawyers involved were extremely inexperienced. https://en.m.wikipedia.org/wiki/SEC_v._W._J._Howey_Co https://en.m.wikipedia.org/wiki/SEC_v._W._J._Howey_Co.

whimsicalism 3y ago
It is not obvious a priori how regulators will treat tokens or which ones will be permissible.
- qeternity 3y ago
  It was obvious to a lot of people who were wondering what was taking regulators so long.
  - whimsicalism 3y ago
    Interesting, maybe you should let Gensler know that the law is much more obvious than he appears to realize [0] [0]: https://youtu.be/VhA1dZXeao0?t=58 https://youtu.be/VhA1dZXeao0?t=58
    - mrcode007 3y ago
      Under the Howey test, the rules are clear. "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value." I think it is plausible that all pure staking initiatives will go. I don’t think you have much of an argument here but I could be wrong. It will definitely be an interesting case to watch.
      - CuriousCosmic 3y ago
        > investment of money in a common enterprise with profits to come solely from the efforts of others This is where I see the "staking makes a cryptocurrency a security" fall apart. There are a handful of definitions for "staking" and some of them definitely meet the criteria of "a common enterprise with profits to come solely from the efforts of others" however many do not. 1. Ethereum's staking at a protocol level requires you to run a staking node and you are paid for what is basically an SLA between you and the network and you only get paid if your node maintains a certain uptime, is kept up to date, and operates correctly. That I don't believe meets the criteria as it requires direct, sustained effort from you the operator (even if it's generally low effort). 2. Cardano's (or Tezos') staking is similar. Stake pool operators are effectively the same as Ethereum's stake node operators. But even delegators (who aren't required to stay online) still provide a service in that they are picking the stake pools who then fill the SLAs. If they pick pools that can't meet the requirements then the delegators don't get paid until they can find one that does. 3. Meanwhile you have networks like Algorand where participation in consensus does not effect staking rewards and you never have to perform a service to get paid out by the network. Those would meet the criteria by my understanding. 4. And then you have all the DeFi "staking" which is better described as lending or liquidity pooling. You aren't doing anything proof of stake related but are just lending out capital as an investment. I can't speak on other networks but generally I found that networks fell into one of those 4 categories. The first two only pay people who provide a service back to the network while with those like the third, even if you can provide a service back to the network, you aren't required to to be able to get paid. And then the fourth category is just a security outright. Edit (because I forgot to mention it): With regards to Coinbase's staking program, it's in a weird spot. With those you aren't directly staking but you are outsourcing the responsibility to a 3rd part (coinbase) to stake for you. I wouldn't be opposed to considering this type of custodial staking as meeting the criteria to be a security but I don't think proof of stake at a protocol level constitutes "a common enterprise with profits to come solely from the efforts of others" as they require work on behalf of the participants to get paid out.
- nradov 3y ago
  In general if you're thinking of doing something in a gray area of federal law or regulations then you can write a formal letter to the competent regulatory agency and request an opinion. But you have to be extremely specific and pose your questions in ways that can be answered with a clear yes or no; you can't expect a useful response to a vague request for clarifications or definitions. If the agency does give you a letter containing a positive opinion then it serves as a nearly ironclad defense against any civil enforcement actions or criminal prosecution. Those opinions can change later for political reasons, but you won't be punished retroactively for actions prior to the change.
  - whimsicalism 3y ago
    Yes, see for instance prediction markets in the US.
  - sroussey 3y ago
    FundersClub did this for creating a portal to invest in startups.
    - nradov 3y ago
      Right, good example. You can read the SEC letter here. As long as you ask the right questions you can get useful answers and protect your business. https://www.sec.gov/divisions/marketreg/mr-noaction/2013/funders-club-032613-15a1.pdf https://www.sec.gov/divisions/marketreg/mr-noaction/2013/fun...
- choppaface 3y ago
  It’s not a matter of what tokens are “permissible” but rather what protections market participants get against fraud and instability. There was plenty of opportunity for crypto to actually raise the bar in protecting the consumer and it just never happened.
George83728 3y ago
> Coinbase issuing public statements to SEC “tell us what is a security” were basically a ploy or the lawyers involved were extremely inexperienced. I take it as a stunt intended shift the layman's perception of Coinbase's legal responsibilities onto the SEC. They're counting on cryptobros using this "SEC won't tell us what's legal" talking point to affect favorable political / legislative change. But newsflash: government regulators aren't obliged to act as your legal council.
yieldcrv 3y ago
The stance isn’t about whether Howey can be applied literally everywhere The stance is that applying it to digital tokens as unregistered securities means applying it to other places, like Nike shoes and baseball cards, just because any random individual expected to profit when they bought one that this framework is not applied everywhere, specifically how congress exempted spot commodities and commodities derivatives from the SEC framework specifically because it was untenable That there is a difference between a digital commodity and a digital security that is mutually exclusive, but the SEC has provided no way of understanding that distinction, and now has resorted to just arbitrarily claiming random assets are securities in cases against the people that trade those assets, instead of taking up cases against the issuers of those assets and letting those issuers defend themselves or reach a definitive conclusion That it is impossible to comply if it was applied everywhere, as registered security status inherits tons of unrelated regulations to protect incumbent intermediaries That the SEC will never achieve congress’ delegated mission of investor protection and only hurt investors And that actually inconveniencing everyone will put this framework under a constitutional test that the SEC probably needs to avoid, but I’m all the SEC going after the entire sneaker trading ecosystem as unregistered broker dealers as fallout to their crusade just to prove they aren’t just trying to debilitate crypto (The staking program has a separate evaluation)
- esotericimpl 3y ago
  Nike shoes and baseball cards are clearly commodities. If you were to stake your Air Jordan's with coinbase and Coinbase told you in a years time you'd have 2 pairs, it would become a security.
  - yieldcrv 3y ago
    like I wrote, the staking program has a different evaluation and my post was not about that. we agree that any asset can be transferred in a way that is a securities transaction.
- majormajor 3y ago
  Why would a sneaker fall under the terms they're using to define a security if not every digital token does?

MrMan 3y ago

[dead]

moralestapia 3y ago

>Maybe Coinbase should have listened to its own advisors ... Maybe they just hired @butlerm which definitely knows what s/he's talking about and ... well here we are :)

testfoobar 3y ago

What is a plausible range of outcomes for Coinbase here?

Breza 3y ago
Years of litigation. Some people think they're hoping for Congress to intervene and moot the case.

chrisco255 3y ago

The SEC provides NO guidance on what is or isn't a security. We have the Howey test to go off of. There is no way to register, no legal way to achieve anything that should be legal in a democratic capitalist society. You just have the threat of an SEC lawsuit on nebulous terms. It's completely fucked up. Another incredibly important point is the $1 million net worth and $200k income based test for becoming an "accredited investor" is racist, classist, sexist, and evil. People should have the right to invest their money how they see fit. If you want people to sign some kind of disclosure, or some kind of term sheet that makes it very clear to a retail investor what they're getting into, fine. But the law as it exists is outrageously undemocratic. In regards to the SEC, a system that was built for 1933 is not even relevant in a world where you can spin up a million new tokens in 10 seconds and deploy to 24/7 worldwide markets in 5 minutes from anywhere. Keeping the 1933 SEC Act in tact in 2023 is like trying to keep Prohibition going even though it's raining whiskey from the sky.

Breza 3y ago
Sounds like you're advocating for Matt Levine's "Certificate of Dumb Investment" proposal. The fact that so many retail investors have been scammed by crypto gives support to the current regime, but I think there's something to Levine's idea. https://archive.is/ggCjN https://archive.is/ggCjN