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I feel like this won't end up going well for the SEC. This whole methodology of telling exchanges "I don't know, you figure it out" when they ask for clarity an

I feel like this won't end up going well for the SEC. This whole methodology of telling exchanges "I don't know, you figure it out" when they ask for clarity and then turning around and suing them for not figuring it out is extremely shaky legal ground.

kova12 3y ago
such approach has been working fine for IRS
- nijaar 3y ago
  Not really bc the IRS actually has puts guidelines (although kind of slow) for crypto unlike the SEC
kadoban 3y ago
Law enforcement has no obligation to explain the laws to you.
- stevev 3y ago
  It’s congress’s fault for not defining the rules and for giving the SEC a hammer.
- armatav 3y ago
  Except when they sue you for it.
  - polygamous_bat 3y ago
    They will happily explain it to the judge with you in the room, I believe.
- tripplyons 3y ago
  I hope some branch of the government gives an explanation.
  - kadoban 3y ago
    Ideally Congress should pass some legislation if it's unclear. But that hasn't been a functioning branch of govt for a couple of decades now. IMO it's not even unclear, crypto companies just want to pretend it is because their pocketbook depends on it, but I'm not a lawyer.
- az226 3y ago
  Calling crypto an investment contract is a shaky argument at best.
- ascendantlogic 3y ago
  At some point someone has to explain to you what law you broke and how you broke it. We'll see how this goes for the SEC. I'm not convinced they're going to end up on the winning side with these vague enforcement lawsuits substituting for policy/law from the legislative branch.
  - kadoban 3y ago
    More to a judge or jury than to you exactly, but yeah they'll have to do that. I don't personally have a lot of doubt in their abilities to do so, but I'm very much not a lawyer. Just the legal system tends to be unsympathetic to hacker technicalities that us techies like.
  - ac29 3y ago
    > At some point someone has to explain to you what law you broke and how you broke it The link at the top of this page is 90 pages of the SEC telling Kraken what rules and regulations they have broken. It is certainly possible the court will disagree with the SEC, but I wouldnt bet on it.
    - humanizersequel 3y ago
      >It is certainly possible the court will disagree with the SEC, but I wouldnt bet on it. I would (not a lot, but I would). They lost on the Grayscale trust, they lost on XRP being a security (extremely relevant here), they're seemingly settling with Binance... the court has been disagreeing with the SEC a whole lot on the matter of blockchain regulation lately.
  - patmorgan23 3y ago
    "At some point someone has to explain to you what law you broke and how you broke it. " Yes, that would be what the SEC is doing right now by initiating enforcement actions.
- hn_throwaway_99 3y ago
  Many organizations in law enforcement have explicit programs to do exactly that. Here is one from the IRS: https://www.irs.gov/retirement-plans/determination-opinion-and-advisory-letter-for-retirement-plans-scope-and-benefit-of-a-favorable-determination-opinion-or-advisory-letter https://www.irs.gov/retirement-plans/determination-opinion-a... Basically, the rules for whether a retirement plan meets the qualifications for favorable tax treatment are highly complex, so a plan sponsor can ask the IRS to determine if the structure of the plan fits the rules by asking for a "Favorable Determination Letter". This seems to me highly analogous to what crypto exchanges wanted from the SEC.
  - lcnPylGDnU4H9OF 3y ago
    Perhaps this is nitpicking too much but now I wonder on the point of obligation. Is this IRS function required per some law or other mandate? Of course, it seems best that a regulating body is clear about their regulations. It seems weird that’s even in contention, to be honest. But I do wonder about an obligation to do so.
- lmm 3y ago
  Morally they do. Secret laws and secret courts are widely recognised as inimical to democracy; laws that are too complex for regular people to understand are too, for the same reasons.
- ahallock 3y ago
  Interesting. I thought government was there to serve the people not to be an adversary. No wonder our tax code is so convoluted.
  - Broken_Hippo 3y ago
    It is: You might or might not be considered one of the people, though. Long history of making people not people (See: Slavery and incarceration)
- b112 3y ago
  Law enforcement has no obligation to explain the laws to you. One aspect of common-law, is that it is law that is equally applied to all. The logic is, if Bob did thing $x, and Sally did thing $x, both should expect a similar outcome. This is because a person has a right to know how specific acts are interpreted by courts, for whatever legislation is being tried against. A person has a literal right in common-law, pre-dating most modern democracies, to know how a thing they do will be interpreted. And this is why most descendants of common-law legal systems, such as the US, put such strong strictures on prior judgements. It's vital. It's missed by many, but this is how people know how the law will be interpreted. And my point in all of this is, yes, 100%, under common-law, someone has to give you an idea of how your actions will be interpreted. It's core to common-law, and US law, is predicated upon common-law, criminal or civil. "Ignorance of the law is no excuse", however, that does not remove the right to be informed of the law when asked! (Let's not dive into the few places that have napoleonic civil code in the US, and stick to federal law at least)
jcranmer 3y ago
Matt Levine I think put it best: if Bernie Madoff were to go to the SEC and ask them "I don't know how to run a Ponzi scheme legally, can you please update the guidelines to make it easier", of course the SEC is going to refuse. And the situation with cryptocurrencies seems to be broadly similar: there's actually a pretty clear answer as to what would need to be done to be fully above-the-board and legal, it's just not what the cryptocurrency people want, so they want the SEC to make it easier for them. And given that we've seen exchange after exchange fail to perform basic tasks like "don't commingle customer funds," I have a hard time feeling any sympathy for cryptocurrency companies here.
- jongjong 3y ago
  The SEC has no place in a free market. If people trust a company which co-mingles funds, they should be punished for misplacing their trust. Both the scammer and the scammed deserve a share of the punishment. Life naturally punishes the scammed already and teaches them a lesson at the same time... Without the help of the SEC... How good is that?! If my startup fails because I hired the wrong people, I take the full blame. Why should it be different if I invested in the wrong company or trusted the wrong company with my money? As someone who is trustworthy and providing a service, I am harmed by the SEC creating a false veneer or respectability for investors to invest in my biggest competitors. I'd rather investors be forced to do due diligence.
  - zacmps 3y ago
    Because it causes preventable harm.
  - nindalf 3y ago
    In the real world, we try to have government operate law enforcement. Doesn’t always work, but it works a lot better than outsourcing law enforcement on financial scams to retail investors.
  - djur 3y ago
    The analogy isn't valid. If your startup fails because the people you hire steal from the company, you have legal recourse. If you lose money because you invest in companies that underperform, the SEC won't intervene. No markets operate with perfect information for all participants. That creates the opportunity for fraud, and governments regulate to prevent fraud. In principle this permits broader access to markets (whether this is actually true is a different subject).
xwolfi 3y ago
> The SEC’s complaint also alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices present a range of risks for its customers. As alleged in the complaint, Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers. Sounds clear enough to me...
arctek 3y ago
I also don't think this will work for them in the context of the Ripple case they just lost - and decided to not appeal - as this will be referenced as part of Kraken's defense. It'd be very different if the SEC maintained a list of even examples of tokens that are/aren't compliant and a straightforward registration process with active registrants. The fact that neither of these exist but the SEC likes to pretend they do isn't working in their favour. There is no such thing as a 'registered securities exchange' for cryptocurrency, so how can they be at fault (note its unregistered, not illegal is the allegation).
- pavlov 3y ago
  There are at least hundreds of thousands (probably millions) of securities that have been properly registered in the USA: stocks, corporate bonds, private offerings, and many other kinds of financing structures. It’s not that hard since obviously all kinds of issuers can figure it out. The crypto people want to pretend their tokens are something completely different, so they’re not willing to use the existing process and instead cry out for SEC to come up with something just for them.
  - mattdesl 3y ago
    How do you propose Bitcoin, or Ethereum, or any other decentralized & peer-to-peer asset be registered as a security? Coinbase and Kraken argue that there is no clear path toward registering these assets within the current framework. For an example, some of the stringent per-transaction KYC/AML reporting requirements in traditional financial systems are often incompatible with today’s mechanisms of distributed ledgers.
    - pavlov 3y ago
      These cases aren’t about Bitcoin and Ethereum but the dozens of other coins that these exchanges have listed. Coinbase actively cooperated with token founders and venture capitalists like A16Z to list various newly issued tokens so that the creators and VCs could sell them to retail investors. This arrangement sure makes them look like securities. Personally I’m fine if Coinbase and Kraken trade Bitcoin and Ethereum. Being restricted to those would be devastating for their profits though.
1vuio0pswjnm7 3y ago
You "feel" the SEC will lose against Kraken. Is that correct.
- jgilias 3y ago
  They did lose against Ripple. That’s one case law precedent right there for determining what is a security. There’s also a non-negligible chance that they are going to either lose or have a dismissed case against Coinbase. Given that this case is basically a copy-paste of that one, it’s a possible outcome. There’s a reason why the lawmaking, executive, and judicial powers are separated in a democracy.
  - 1vuio0pswjnm7 3y ago
    Kraken already lost against the SEC in February. Will Kraken lose again. https://www.sec.gov/news/press-release/2023-25 https://www.sec.gov/news/press-release/2023-25
    - jgilias 3y ago
      As far as I know they didn’t lose, they opted not to fight. This time looks like they don’t have the option not to fight.
- 1vuio0pswjnm7 3y ago
  https://www.reuters.com/investigates/special-report/fintech-crypto-binance-dirtymoney/ https://www.reuters.com/investigates/special-report/fintech-... "Investigators tracked the money through many layers of bank accounts to Binance and another exchange, U.S.-based Kraken, police said. By the time Binance and Kraken provided account records, the police said the funds had been withdrawn or sent to a "mixer," a service which anonymises crypto transactions by breaking them up and mixing them with other funds. The personal information held by both exchanges on the accounts was often fake or stolen from victims, the officers said. Kraken told Reuters it has "bank-grade" customer checks and robust tools to prevent fraud. Kraken disputed that customer information provided to Braunschweig police was fake, saying "every indicator we have suggests these accounts were used by legitimate clients.""
runeks 3y ago
Honest question: is it normal for a business to be able to ask law enforcement "is this legal?" and expect to get a binding answer? IANAL, but I would think it'd be the job of the business in question to hire lawyers, who would then offer their opinion on the matter.
- jgilias 3y ago
  What if your lawyers say one thing, but one of your possible regulators say something else? Or rather, doesn’t say anything, just allude? It’s for the courts to decide then. That’s what they’re literally for. You could argue that a more productive approach would be to come up with something at the lawmaker level. Even if it’s so restrictive that it drives most exchanges out, such as Canada has done.
shortsunblack 3y ago
Regulators are not required to consult businesses. That's what McKinsey, and Ernst & Young are for. In fact, I would like it very much that regulators would stay hostile to business as they are meant to. Not coddle with industry in events to have a chat and a coffee. Keeps the revolving door shut.

kova12 3y ago

such approach has been working fine for IRS

nijaar 3y ago
Not really bc the IRS actually has puts guidelines (although kind of slow) for crypto unlike the SEC

kadoban 3y ago

Law enforcement has no obligation to explain the laws to you.

stevev 3y ago
It’s congress’s fault for not defining the rules and for giving the SEC a hammer.
armatav 3y ago
Except when they sue you for it.
- polygamous_bat 3y ago
  They will happily explain it to the judge with you in the room, I believe.
tripplyons 3y ago
I hope some branch of the government gives an explanation.
- kadoban 3y ago
  Ideally Congress should pass some legislation if it's unclear. But that hasn't been a functioning branch of govt for a couple of decades now. IMO it's not even unclear, crypto companies just want to pretend it is because their pocketbook depends on it, but I'm not a lawyer.
az226 3y ago
Calling crypto an investment contract is a shaky argument at best.
ascendantlogic 3y ago
At some point someone has to explain to you what law you broke and how you broke it. We'll see how this goes for the SEC. I'm not convinced they're going to end up on the winning side with these vague enforcement lawsuits substituting for policy/law from the legislative branch.
- kadoban 3y ago
  More to a judge or jury than to you exactly, but yeah they'll have to do that. I don't personally have a lot of doubt in their abilities to do so, but I'm very much not a lawyer. Just the legal system tends to be unsympathetic to hacker technicalities that us techies like.
- ac29 3y ago
  > At some point someone has to explain to you what law you broke and how you broke it The link at the top of this page is 90 pages of the SEC telling Kraken what rules and regulations they have broken. It is certainly possible the court will disagree with the SEC, but I wouldnt bet on it.
  - humanizersequel 3y ago
    >It is certainly possible the court will disagree with the SEC, but I wouldnt bet on it. I would (not a lot, but I would). They lost on the Grayscale trust, they lost on XRP being a security (extremely relevant here), they're seemingly settling with Binance... the court has been disagreeing with the SEC a whole lot on the matter of blockchain regulation lately.
- patmorgan23 3y ago
  "At some point someone has to explain to you what law you broke and how you broke it. " Yes, that would be what the SEC is doing right now by initiating enforcement actions.
hn_throwaway_99 3y ago
Many organizations in law enforcement have explicit programs to do exactly that. Here is one from the IRS: https://www.irs.gov/retirement-plans/determination-opinion-and-advisory-letter-for-retirement-plans-scope-and-benefit-of-a-favorable-determination-opinion-or-advisory-letter https://www.irs.gov/retirement-plans/determination-opinion-a... Basically, the rules for whether a retirement plan meets the qualifications for favorable tax treatment are highly complex, so a plan sponsor can ask the IRS to determine if the structure of the plan fits the rules by asking for a "Favorable Determination Letter". This seems to me highly analogous to what crypto exchanges wanted from the SEC.
- lcnPylGDnU4H9OF 3y ago
  Perhaps this is nitpicking too much but now I wonder on the point of obligation. Is this IRS function required per some law or other mandate? Of course, it seems best that a regulating body is clear about their regulations. It seems weird that’s even in contention, to be honest. But I do wonder about an obligation to do so.
lmm 3y ago
Morally they do. Secret laws and secret courts are widely recognised as inimical to democracy; laws that are too complex for regular people to understand are too, for the same reasons.
ahallock 3y ago
Interesting. I thought government was there to serve the people not to be an adversary. No wonder our tax code is so convoluted.
- Broken_Hippo 3y ago
  It is: You might or might not be considered one of the people, though. Long history of making people not people (See: Slavery and incarceration)
b112 3y ago
Law enforcement has no obligation to explain the laws to you. One aspect of common-law, is that it is law that is equally applied to all. The logic is, if Bob did thing $x, and Sally did thing $x, both should expect a similar outcome. This is because a person has a right to know how specific acts are interpreted by courts, for whatever legislation is being tried against. A person has a literal right in common-law, pre-dating most modern democracies, to know how a thing they do will be interpreted. And this is why most descendants of common-law legal systems, such as the US, put such strong strictures on prior judgements. It's vital. It's missed by many, but this is how people know how the law will be interpreted. And my point in all of this is, yes, 100%, under common-law, someone has to give you an idea of how your actions will be interpreted. It's core to common-law, and US law, is predicated upon common-law, criminal or civil. "Ignorance of the law is no excuse", however, that does not remove the right to be informed of the law when asked! (Let's not dive into the few places that have napoleonic civil code in the US, and stick to federal law at least)

jcranmer 3y ago

Matt Levine I think put it best: if Bernie Madoff were to go to the SEC and ask them "I don't know how to run a Ponzi scheme legally, can you please update the guidelines to make it easier", of course the SEC is going to refuse. And the situation with cryptocurrencies seems to be broadly similar: there's actually a pretty clear answer as to what would need to be done to be fully above-the-board and legal, it's just not what the cryptocurrency people want, so they want the SEC to make it easier for them. And given that we've seen exchange after exchange fail to perform basic tasks like "don't commingle customer funds," I have a hard time feeling any sympathy for cryptocurrency companies here.

jongjong 3y ago
The SEC has no place in a free market. If people trust a company which co-mingles funds, they should be punished for misplacing their trust. Both the scammer and the scammed deserve a share of the punishment. Life naturally punishes the scammed already and teaches them a lesson at the same time... Without the help of the SEC... How good is that?! If my startup fails because I hired the wrong people, I take the full blame. Why should it be different if I invested in the wrong company or trusted the wrong company with my money? As someone who is trustworthy and providing a service, I am harmed by the SEC creating a false veneer or respectability for investors to invest in my biggest competitors. I'd rather investors be forced to do due diligence.
- zacmps 3y ago
  Because it causes preventable harm.
- nindalf 3y ago
  In the real world, we try to have government operate law enforcement. Doesn’t always work, but it works a lot better than outsourcing law enforcement on financial scams to retail investors.
- djur 3y ago
  The analogy isn't valid. If your startup fails because the people you hire steal from the company, you have legal recourse. If you lose money because you invest in companies that underperform, the SEC won't intervene. No markets operate with perfect information for all participants. That creates the opportunity for fraud, and governments regulate to prevent fraud. In principle this permits broader access to markets (whether this is actually true is a different subject).

xwolfi 3y ago

> The SEC’s complaint also alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices present a range of risks for its customers. As alleged in the complaint, Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers. Sounds clear enough to me...

arctek 3y ago

I also don't think this will work for them in the context of the Ripple case they just lost - and decided to not appeal - as this will be referenced as part of Kraken's defense. It'd be very different if the SEC maintained a list of even examples of tokens that are/aren't compliant and a straightforward registration process with active registrants. The fact that neither of these exist but the SEC likes to pretend they do isn't working in their favour. There is no such thing as a 'registered securities exchange' for cryptocurrency, so how can they be at fault (note its unregistered, not illegal is the allegation).

pavlov 3y ago
There are at least hundreds of thousands (probably millions) of securities that have been properly registered in the USA: stocks, corporate bonds, private offerings, and many other kinds of financing structures. It’s not that hard since obviously all kinds of issuers can figure it out. The crypto people want to pretend their tokens are something completely different, so they’re not willing to use the existing process and instead cry out for SEC to come up with something just for them.
- mattdesl 3y ago
  How do you propose Bitcoin, or Ethereum, or any other decentralized & peer-to-peer asset be registered as a security? Coinbase and Kraken argue that there is no clear path toward registering these assets within the current framework. For an example, some of the stringent per-transaction KYC/AML reporting requirements in traditional financial systems are often incompatible with today’s mechanisms of distributed ledgers.
  - pavlov 3y ago
    These cases aren’t about Bitcoin and Ethereum but the dozens of other coins that these exchanges have listed. Coinbase actively cooperated with token founders and venture capitalists like A16Z to list various newly issued tokens so that the creators and VCs could sell them to retail investors. This arrangement sure makes them look like securities. Personally I’m fine if Coinbase and Kraken trade Bitcoin and Ethereum. Being restricted to those would be devastating for their profits though.

1vuio0pswjnm7 3y ago

You "feel" the SEC will lose against Kraken. Is that correct.

jgilias 3y ago
They did lose against Ripple. That’s one case law precedent right there for determining what is a security. There’s also a non-negligible chance that they are going to either lose or have a dismissed case against Coinbase. Given that this case is basically a copy-paste of that one, it’s a possible outcome. There’s a reason why the lawmaking, executive, and judicial powers are separated in a democracy.
- 1vuio0pswjnm7 3y ago
  Kraken already lost against the SEC in February. Will Kraken lose again. https://www.sec.gov/news/press-release/2023-25 https://www.sec.gov/news/press-release/2023-25
  - jgilias 3y ago
    As far as I know they didn’t lose, they opted not to fight. This time looks like they don’t have the option not to fight.
1vuio0pswjnm7 3y ago
https://www.reuters.com/investigates/special-report/fintech-crypto-binance-dirtymoney/ https://www.reuters.com/investigates/special-report/fintech-... "Investigators tracked the money through many layers of bank accounts to Binance and another exchange, U.S.-based Kraken, police said. By the time Binance and Kraken provided account records, the police said the funds had been withdrawn or sent to a "mixer," a service which anonymises crypto transactions by breaking them up and mixing them with other funds. The personal information held by both exchanges on the accounts was often fake or stolen from victims, the officers said. Kraken told Reuters it has "bank-grade" customer checks and robust tools to prevent fraud. Kraken disputed that customer information provided to Braunschweig police was fake, saying "every indicator we have suggests these accounts were used by legitimate clients.""

runeks 3y ago

Honest question: is it normal for a business to be able to ask law enforcement "is this legal?" and expect to get a binding answer? IANAL, but I would think it'd be the job of the business in question to hire lawyers, who would then offer their opinion on the matter.

jgilias 3y ago
What if your lawyers say one thing, but one of your possible regulators say something else? Or rather, doesn’t say anything, just allude? It’s for the courts to decide then. That’s what they’re literally for. You could argue that a more productive approach would be to come up with something at the lawmaker level. Even if it’s so restrictive that it drives most exchanges out, such as Canada has done.

shortsunblack 3y ago

Regulators are not required to consult businesses. That's what McKinsey, and Ernst & Young are for. In fact, I would like it very much that regulators would stay hostile to business as they are meant to. Not coddle with industry in events to have a chat and a coffee. Keeps the revolving door shut.