If you look up the definitions of "security", "financial instrument", "commodity", and "currency", it is pretty clear that a plain vanilla crypto-currency like Bitcoin is no ordinary security nor a financial instrument. It is not a claim on something else, even less so than a traditional bank note. It is more like a commodity. Since when is "aluminum" a security?
A crypto currency business however may be engaged in trading of crypto currencies which are negotiable financial instruments, and a stable coin that is a claim on a traditional currency is an example of that. A stable coin bears a direct relationship to a bank note. It is a claim on something else. It is not really an investment though, so not much of a security.
And then of course there are more creative negotiable financial instruments which are definitely securities. Options, derivatives, swaps, futures, and the like.
The Supreme Court has a broader definition of securities, that involves a promoted investment in a "common enterprise", but it is unclear that a commodity currency really is a common enterprise like a corporation is for example. It seems unlikely to me that Bitcoin as such would even meet that definition of a security. But other products offered by crypto currency exchanges might.
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!
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.
> 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.
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
They wouldn't. 'yieldcrv is not demonstrating knowledge of the Howey test, and appears to be heavily focused on a narrower reading, "buying something with the expectation of increased future value" -- which they're setting up as a strawman's Howey's test.
Sneakers would not meet the Howey Test: An investment contract exists if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."
The four parts of the Howey test, distilled down to plain English (and therefore losing a great deal of nuance in the process):
- It is an investment of money.
- The investment is in a common enterprise.
- There is an expectation of profits.
- The expectation of profits is solely from the efforts of the promoter or a third party.
Buying the latest Yeezy's is not a common enterprise. The fourth point is debatable.
that’s an interesting use of strawman to invalidate the observation
The howey test doesn’t need all prongs satisfied and avoidance is based on probability only
The SEC and securities industry has enjoyed a symbiosis for 70 years, where things that blurred the lines didnt exist, were never imagined, or were never challenged. Challenging one challenges them all.
> Why would a sneaker fall under the terms they're using to define a security
because the sneaker trade market focuses on sneakers that are released with artificial scarcity, where many participants in that market buy with an investment of money, with a reliance on the issuer and others to keep them scarce and valuable and promote them, with an expectation of profit.
the SEC is basically saying if any random person has an expectation of profit guiding their purchase at any time, the entire asset and all transactions is a security and everyone that is trading it needs to be a registered broker dealer or registered promoter, and then even if they could be registered they would not be allowed to trade unregistered securities, or even registered esoteric securities like shoes and digital commodity units because the Self Regulatory Organizations are too permissioned for shares and bonds exclusively.
> if not every digital token does?
that's the point. there is either a way where a digital asset is exclusively a commodity, or there isn't at all and every corporate controlled unnatural commodity inherits the same regulatory framework that the SEC is trying to impose on digital assets and the entire trading ecosystem.
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.
Has Gensler never consulted lawyers on the status of ethereum prior to this hearing?
It should be easy yes or no from the lawyers, I'm hearing that the law is incredibly clear and not really prone to misinterpretation so it shouldn't be an issue. Or maybe Gensler's lawyers are "extremely inexperienced" if they couldn't figure out such an obvious issue?
You're not answering the question. Why do you think Gensler in official capacity should just dispense one-off soundbite determinations at the request of some clown grilling him?
> It should be easy yes or no from the lawyers...
When has that ever been the case, and why should it be the case now?
[edit] The law is not just what's written but the entirely of case law. The SEC has provided a framework for analysis of securities in the context of crypto. It's here. [1] And it builds on the DAO report, here. [2]
It is not at all surprising to me that he would refuse to answer the question, but the precise reason he is doing that is so that the SEC has freedom of movement to regulate without being pinned down by public statements he has made in front of congress. But that entire notion belies the idea that the regulations are super clear or predictable. The whole reason for this kind of maneuver is because the regulations are not clear or predictable.
I have no doubt he has discussed the status of ethereum with SEC lawyers before.
> It is not at all surprising to me that he would refuse to answer the question, but the precise reason he is doing that is so that the SEC has freedom of movement to regulate without being pinned down by public statements he has made in front of congress.
Because they're a legal body and what they say off hand is precedent, so of course they have to be measured and thoughtful. This was a shameful display, but not by Gensler.
> I have no doubt he has discussed the status of ethereum with SEC lawyers before.
Me too, but again, I refer you to the DAO Report and the Framework for “Investment Contract” Analysis
of Digital Assets
> But that entire notion belies the idea that the regulations are super clear or predictable. The whole reason for this kind of maneuver is because the regulations are not clear or predictable.
They're quite clear, and the whole reason for this kind of maneuver is showboating and pandering. Based on this thread it seems to be working.
In a similar vein I'm confident that Brian and his attorneys have spoken and concluded that they're almost 100% certain to be securities, and for that reason, they chose to avoid working with the SEC at all costs at every point along the way. But of course that determination would undermine the business, so off to court we go.
> Why do you think Gensler in official capacity should just dispense one-off soundbite determinations at the request of some clown grilling him?
Because the whole point of the rule of law is that the law same law applies to any clown. If the head of securities law in the country can't tell you whether a basic thing is legal or not then why even bother having a congress and elections and any pretense that we live in something other than a corrupt oligarchy?
> [edit] The law is not just what's written but the entirely of case law. The SEC has provided a framework for analysis of securities in the context of crypto. It's here. [1] And it builds on the DAO report, here. [2]
If the SEC themselves is incapable of applying their framework to the second-most-prominent entry in the category of things it's designed to analyse, then what is that framework good for?
> Because the whole point of the rule of law is that the law same law applies to any clown. If the head of securities law in the country can't tell you whether a basic thing is legal or not then why even bother having a congress and elections and any pretense that we live in something other than a corrupt oligarchy?
In the linked video the questioner is asking about about potential future cases/decisions and one reason not to comment on specific cases/decisions, as is what happened in the video[0], is that an agency does not want to telegraph their moves ahead of time, since that would give potential criminals a heads up that they are on a deadline and need to focus on cover up their crimes.
If the questioner needs insight into how policing actions are decided they can ask about pervious cases/decisions and the reasoning that went into those pervious cases/decisions.
> In the linked video the questioner is asking about about potential future cases/decisions and one reason not to comment on specific cases/decisions, as is what happened in the video[0], is that an agency does not want to telegraph their moves ahead of time, since that would give potential criminals a heads up that they are on a deadline and need to focus on cover up their crimes.
That's putting the cart before the horse. Catching criminals is supposed to be a means to an end; compliance with the law is supposed to be the end, and getting people to voluntarily stop doing crimes is a win. "We can't tell people what the law is because then they might stop breaking it" is absurd policy.
> If the questioner needs insight into how policing actions are decided they can ask about pervious cases/decisions and the reasoning that went into those pervious cases/decisions.
The whole reason people are arguing about this stuff is that there are no clear precedents (or there are multiple contradictory ones); crypto is similar to a lot of things but not exactly the same as any of them.
> That's putting the cart before the horse. Catching criminals is supposed to be a means to an end; compliance with the law is supposed to be the end, and getting people to voluntarily stop doing crimes is a win. "We can't tell people what the law is because then they might stop breaking it" is absurd policy.
The questioner was not asking about what the law was. They were asking a future potential case or enforcement action.
The questioner in the video could have asked about the law and the details and how it has historically been enforced. They did not though. If they did and questions were still dodged then I might agree with what you are putting out here. At the very least I would think the answerer is not well versed on the topic at hand, but I would want the answer to be straight forward with that.
> The whole reason people are arguing about this stuff is that there are no clear precedents (or there are multiple contradictory ones); crypto is similar to a lot of things but not exactly the same as any of them.
I do not know about that. I think the majority of new crypto coins that have made it into the ads I see are scams, probably because the ones that are scams push for advertisement more. Of those they seem to fall into pyramid scheme and obvious security that would probably run foul of other laws as well. In these cases if a lawyer is not giving a clear answer then you need to hire a new lawyer.
Outside the obvious scams I assume there are people who are at best skirting the law at best and some are turning a blind eye, pretending the law is confusing on the topic when it is really not.
So far it seems like the SEC is ruling and enforcing the above cases, clear cut cases. If you have a part of the current enforcement that is on something that is ambiguous rather than pretty clear cut then I would be interested what makes it ambiguous and potentially reading more into it.
> So far it seems like the SEC is ruling and enforcing the above cases, clear cut cases. If you have a part of the current enforcement that is on something that is ambiguous rather than pretty clear cut then I would be interested what makes it ambiguous and potentially reading more into it.
This article is in significant part about the SEC going after Coinbase, which made a significant effort to stay on the right side of the rules and only allow crypto tokens that operated in ways that are closely analogous to e.g. frequent flier miles. They wrote a great many blog posts giving their perspective and calling for regulatory clarity.
> ... which made a significant effort to stay on the right side of the rules and only allow crypto tokens that operated in ways that are closely analogous to e.g. frequent flier miles.
They list ICOs by the fistful.
I sorted alphabetically and only had to go as far as AAVE to find the first obviously-a-security.
They really didn't try and stay on the right side of anything.
Frequent flyer miles are generally considered to fall under the IRS rebate rule. They're considered rebates on purchases. There's no investment of money (they're a rebate on a purchase), there's no common enterprise, there's no expectation of profit derived from the efforts of others (after all airlines generally devalue miles 10-20% year over year). It fails all prongs of the Howey test. Not to mention you don't own your frequent flyer miles, the airline program does.
If you find me a crypto token that operates 'like a frequent flyer mile' I'll happily tell you why you didn't.
> They wrote a great many blog posts giving their perspective and calling for regulatory clarity.
They wrote a lot of blog posts, I'll give you that. They have regulatory clarity, they just don't like it. [1, 2, lots of case law].
> There's no investment of money (they're a rebate on a purchase)
Seems pretty dubious when there are well-documented cases of the miles being worth a lot more than the purchase (from the famous pudding guy onwards). Hell, mine explicitly advertises the option to "buy miles".
> there's no common enterprise, there's no expectation of profit derived from the efforts of others
Miles become more or less valuable depending on how well the airline is doing, exactly like how these tokens tend to go.
> Not to mention you don't own your frequent flyer miles, the airline program does.
The whole point of Howey is that the details of the ownership structure don't matter, the overall economic effect is what does.
> Miles become more or less valuable depending on how well the airline is doing, exactly like how these tokens tend to go.
You can sell your token in this case right, but you can not sell the airline miles, not in the rule/tos of the miles program, at least that is my understanding.
>> Not to mention you don't own your frequent flyer miles, the airline program does.
>The whole point of Howey is that the details of the ownership structure don't matter, the overall economic effect is what does.
This does not seem the structure or details of ownership, it is flat out whether you own the miles or not.
If you have an example of token that acted more like an airline miles and there is an action against it or because of it I am interested to read more about that token and SEC reasoning.
> You can sell your token in this case right, but you can not sell the airline miles, not in the rule/tos of the miles program, at least that is my understanding.
There may notionally be a rule against it, but you certainly can - my airline will let you transfer them (for a fee in miles) and they certainly know or should know that buying and selling happens.
> This does not seem the structure or details of ownership, it is flat out whether you own the miles or not.
You're the beneficiary of them and have contractual rights to them, whether they're notionally held by some other party or not. If anything the idea that you don't own them makes the argument for it being a security stronger.
>an agency does not want to telegraph their moves ahead of time, since that would give potential criminals a heads up that they are on a deadline and need to focus on cover up their crimes.
I think you might mean the "potential suspects" of the investigation.
"Criminal" as a basic categorization is binary in nature. All non-criminals are also "potential criminals." No criminals are "potential criminals" (they've already realized said potential).
"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.
> 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.
It was however an ICO does not make it inherently a security. Per the SEC:
ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.
And I think it's ultimately up to the courts (unless the SEC eventually gives a definitive answer) to determine what specific qualities make an token offered via ICO into a security, especially because what qualifies as an ICO really kinda varies and how they are structured also really widely varies.
Which is weird. In my humble layman's opinion, an ICO looks an awful lot like a security offering, while a staking protocol doesn't.
Compare the simplified statements "Buy my token! It's going to be great in the future!" with "Let's pool our money and execute an agreed-upon protocol where those who have the most get more". Why is the SEC wasting time by going after all the weird ones before the easy pickings?
Yes, I think a reasonable position would be that if you perform staking by self-hosting then you're providing a service. An example is getting paid for running a machine on the Ethereum network.
If you pay money in now and get more money out later, and someone else runs the machines, then it's just a loan.
Then there's a question of where to draw the line with cloud hosting, and I have no opinion about that. Someone will sell a service that's barely on the right side of that line, wherever it is.
Crypto people constantly point to this video as some kind of evidence that the SEC is clueless. Maybe it just doesn't make sense for them to give clear answers in that kind of hearings,or answers related to specific crypto token. Just normal for government officials to cover their own asses primarily and giving specific guidance related to a specific issue at a hearing doesn't just serve them well.
I don't own any crypto [outside of very small curiosity amounts when I was playing with it to figure out how it works years ago] nor do I consider myself a 'crypto person' (only, perhaps, compared to the backdrop of extreme HN negativity around the topic). I just think that people saying 'regulations are perfectly clear' on this issue have not spent that much time dealing with regulators in emerging technology.
> Just normal for government officials to cover their own asses primarily
I agree - I just disagree with people suggesting that the same logic doesn't apply to regulators and their actions.
They want to keep it unclear precisely so they have the ability to maneuver in the future and regulate if they want. That is the exact opposite of the 'super clear' regulations & guidance that GP was suggesting currently exists.
> people saying 'regulations are perfectly clear' on this issue have not spent that much time dealing with regulators in emerging technology
I work in a regulated industry. I have my criticisms of Gensler. And I’ve (separately) profited off crypto.
The regulations for non-Bitcoin exchanges were clear from the start. Nobody liked that clarity. And the regulators spent a few years navel gazing. But the legal advice I got at the start has remained consistent: the operators are putting themselves in jeopardy.
One way to look at it is a generation of boiler room operators moved their pump'n-dump schemes from central securities clearinghouse to crypto ledgers, because they realized what a loophole the Bitcoin exception was. And they brought in enough politicians and celebrities to slow walk promises of updated regulations, and regulators cautiously warned and waited, and here we are, with some bowtied man criticizing the SEC for doing its job precisely in the manner politicians demanded.
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.
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.
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.
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.
I think the real crux of the issue is that these instruments were designed to be confusing to regulate and, alas, they're confusing to regulate. The error was in thinking that a confused regulator says "I don't understand what's going on here, carry on and rest easy" rather than what actually happens: "I don't understand what's going on here, and until I do -- on my schedule, not yours -- your business is always at risk of falling on the wrong side of my reasoning."
I don't think the pure commodity coins (layer 1 networks like btc, xch, etc) are confusing at all. You do work and get rewarded with a digital commodity. It’s exactly like digging up gold, or tapping a tree for maple syrup.
Then a bunch of crypto anarchists showed up and started speculating that these coins would be worth a lot in the future because we could topple the financial hegemony by their powers combined. Okay whatever, still commodity trading.
Then we started getting all these fake Ponzi coins that are standing in for something else. That’s a security.
What is possible with e.g. BTC is that it’s easy to trade at scale. A commodity that’s easy to trade isn't a security, but if you squint it kinda looks like one. Regardless, it’s not crypto’s fault that regulators are having a hard time understanding it. That’s the regulators’ and lawmakers' problem. (So elect people into power who are your peers, and who aren't 70 years old and have no hope of anything more than a cursory understanding world from the last 20 years.)
But, of course they’re not going to stand aside while people get scammed. Only the anarchists want that. The rest of us just want crypto to be treated fairly.
I think it's more a case that anyone who was involved in crypto early, and who has actually taken the time to understand the technology, has realised about a decade ago that crypto currencies are mostly useless.
But then people had they idea that they could still make money from it by grifting people if they just added layer upon layer of complexity in order to disguise the ultimate uselessness of the underlying technology. That is where all of your Ponzis, rugpulls, NFTs and everything else comes into the picture.
> I think it's more a case that anyone who was involved in crypto early, and who has actually taken the time to understand the technology, has realised about a decade ago that crypto currencies are mostly useless.
I don't know what it is about crypto that makes HN commentators want to make the most ridiculous, put-downy statements without evidence to back it up.
Crypto is not mostly useless, it is just that people don't like the uses. crypto is absolutely massive for avoiding capital controls in countries with inflation, etc.
> I don't know what it is about crypto that makes HN commentators want to make the most ridiculous, put-downy statements without evidence to back it up.
HN has many people who understand how technology work and a smaller but still large number of people who understand economics. Cryptocurrency has a few people like that but also a ton of get-rich-quick types who think their best work is making random claims until someone buys whatever they’re selling. We’re a decade and a half into that, with billions of dollars of real money pumped in and almost no benefit outside of some early investors being able to cash out before the inevitable dip.
At this point, the onus is on anyone promoting cryptocurrencies to show up front why they’re different than their waves of predecessors. One big challenge here is the inherent conflict of interest: unlike other things which have come in and out of popularity, someone who tries cryptocurrency but realizes it’s not really useful to them doesn’t have an option for getting out without a financial loss which doesn’t involve finding a buyer for something they know isn’t really worth the price. If you backed MongoDB a decade ago, you can just switch to Postgres without either eating a loss or finding someone to buy your old Mongo server.
This also leads me to your next sentence: for years, the claim was that cryptocurrency was going to transform the financial world and beyond. Sales guys went on at length about how you’d use blockchains to buy coffee and a ride to work, make sure the farmer who grew your coffee beans was organic, store your software licenses, record the deed to your house, etc. They couldn’t explain how any of that would work and dismissed criticism, and were especially upset if people said the only real use cases seemed to be illegal transactions. Now, in 2023 we’re back to the primary use being breaking laws, hoping that the government in question chooses not to monitor cryptocurrencies?
> Crypto is not mostly useless, it is just that people don't like the uses. crypto is absolutely massive for avoiding capital controls in countries with inflation, etc.
>Cryptocurrency has a few people like that but also a ton of get-rich-quick types
There are literally hundreds of millions of people who're into cryptocurrencies...and you clearly don't have a clue what kind of people are into it and to what degree. I'd suggest not to make up statements like this if you want your opinion to be taken seriously. FYI bypassing capital controls with cryptos does not necessarily mean "breaking the law". Learn a thing or two if you're going to spout nonsense.
What an elegant description! I completely agree with you. Back in 2013, I looked at the massive number of financial middlemen on Wall Street and thought Bitcoin (or a future blockchain) could help lubricate the system. It took a few years for me to realize that blockchains are fundamentally flawed and cannot compete at scale with other technologies.
> Crypto is not mostly useless, it is just that people don't like the uses
Crypto has legitimate use as a rebel medium. It’s also plagued with criminality. Its promoters had a decade to clean up its act and refuse to self regulate.
That’s soured the public’s mood towards the whole enterprise. If crypto’s benefits are niche, its development should be niche. And if its sole beneficiaries are people in failing foreign countries, it might make sense to put the whole thing under the aegis of State versus continuing to create chaos from the private sector.
This only applies to literally one or two cryptocurrencies, stuff like Monero. They're very much the exception to the rule. Most cryptocurrencies like Bitcoin and Ethereum just publish the entire ledger which is constantly being pulled in by the PLA, the SEC, the FBI and myriad other law enforcement authorities the world over. Not to mention Chainalysis.
If the government that's oppressing you is capable enough to oppress you they're more than capable enough to, in the fullness of time, deanonymize your transactions and send you directly to jail for them. You're not just defending against the current start of the art tech but all future improvements - against an adversary with dramatically more resources than you have.
Illicit transactions on public ledgers are simply prosecution futures. People get jail time constantly for crypto transactions.
If I were a dissident in a country like the PRC hypothetically, I'd run like hell from crypto. Talk about asking for trouble.
That's before we even get to the point of how you plan to acquire these currencies without the government noticing.
They have a use: gambling and speculation at a massive decentralized offshore casino. Coinbase and Kraken are the cage. Binance, for example, and DeFi are the table games.
> crypto is absolutely massive for avoiding capital controls in countries with inflation, etc
etc doing some heavy lifting here. The article is about US-based crypto company. How is your list of massive uses applicable to US specifically? (I actually have sympathy for coinbase for at least trying to follow some rules)
Yes, evading capital controls is illegal, part of the informal economy in large parts of the world, and very helpful to many people.
I also think there are useful legal uses, but yes - where crypto has the best comparative advantage is when people are trying to circumvent harmful laws. Not every country is a (relatively) well-run procedural democracy. Crypto helps people route around that.
> > crypto is absolutely massive for avoiding capital controls in countries with inflation
Inflation hedge means mantaining parity against a weighted basket of stable currencies such as USD/EUR/CHF/JPY. Maybe gold?
Bitcoin didn't mantain parity at all, it's up some 20,000% since 2013 and +∞ since its inception.
So crypto failed as inflation hedge too, because the world of finance is very specific, you can't say 'this asset is an inflation hedge' and then it's up 20,000%
It also failed as a tool for capital controls and tax evasion because if you do that sort of things you don't want publicity...what happened is that crypto-bros and crypto-enthusiast went on to scream off the top of their lungs and it resulted in the death of the largest capital control avoidance use case: getting money out of China.
Nobody uses Crypto for getting money out of China anymore.
> Bitcoin didn't mantain parity at all, it's up some 20,000% since 2013 and +∞ since its inception.
Dai and other stablecoins maintain parity and are what is mostly used.
> It also failed as a tool for capital controls and tax evasion because if you do that sort of things you don't want publicity...what happened is that crypto-bros and crypto-enthusiast went on to scream off the top of their lungs and it resulted in the death of the largest capital control avoidance use case: getting money out of China.
I don't know what to tell you, these are heavily used behind-the-scenes in the dollar black market in places like Argentina, etc.
> Nobody uses Crypto for getting money out of China anymore.
Yeah, the informal economy is not actually very large in China, it's not a good example.
> > Dai and other stablecoins maintain parity and are what is mostly used.
Dai and stablecoins are currencies issued by private companies, if the private company sponsoring it were to disappear, the decentralized and federated (or whatever) community won't be able to support such a huge undertaking.
Besides the whole thing is pointless because whatever authority or control system you are evading with crypto sooner or later you'd have to come back into it, because nobody sells food, water, shelter, houses for crypto. Nor bitcoin nor stablecoins. Actually it's worse because the authorities will be waiting for you at on and off ramps.
Wrong from the jump about Dai, and I don't think you know about how black market cash economies work - there are plenty of informal economy places you can exchange local currency for dollar, dollar for crypto, etc.
Meh, I'm no bull but I also don't think "cryptos are mostly useless" is accurate. I believe there are solid use cases for distributed global ledger and digital replacement for cash. Is Bitcoin the winning/best manifestation? I doubt it, we likely need something much more energy efficient (like Chia is trying to be). But I don't think the idea is bust. It just isn't as overwhelmingly applicable as people dreamed it might be. We're trying out use cases, vetting the good ones and sometimes painfully learning the which ones were stupid or bad ideas. And once all the speculation settles, I do think true currency is still a viable one. Logistics and markets are another, etc.
I think that it's still unproven that a distributed global ledger is actually a fundamentally useful thing, outside of speculation. We're 15 years out from the invention of Bitcoin, and if all of blockchain technology snapped out of existence today, there are very few people, other than speculators, who would be impacted. It has comprehensively failed to be adopted into any value chains.
Which is why I'm extremely long on crypto and patient. It takes more than 15 years to fundamentally change the type of things crypto might really be useful for. And as a currency it's already shown traction, just not ubiquitous adoption. The currency use case requires people to stop creating volatility by hyper speculating with it, so I welcomed the crypto winter. I remember when people bought pizza with bitcoin. It wasn't that long ago, as you point out.
I don't think anyone here is arguing that digital cash or a global ledger is bad they are arguing that the specific structures and incentives of crypto are bad.
Bring on the digital cash IMO but bearer instruments underpinning any large scale finance is a recipe for disaster.
I think people are latching on to the magnitude of your claim rather than the direction and therein missing the point. FWIW, as somebody who meets your criteria, myself and my network of people from that time offer much credence to your claim.
Even back in 2016/17, many people involved were openly bemoaning how 80+% of ICOs were unregistered security offerings to vaporware.
You can almost pinpoint the inflection point at which Coinbase decided their goal was short-term profit maximization vs developing a healthy ecosystem. The company in the last 5 years is completely unrecognizable in contrast to when there were only 3 coins you could buy from them (USDT, BTC, ETH).
Coinbase tried to be the good guy in crypto. They lost money. Then they tried to be the good guy with a sideline in shitcoins. They lost money.
No matter how this case winds up, Coinbase is in a terrible financial position. If you were a Wall Street bank, would you give them financing right now?
But what on earth is a digital commodity? I think the whole concept of digital commodity is nonsensical.
A commodity is a product. Products are either consumed or used as raw materials. A digital commodity is not a product. It can't be consumed or used, because it's entirely imaginary.
I think a better term is "abstract unit of account".
Respectfully, I think your understanding is behind the curve. Even the SEC says BTC itself is a commodity.
You consume a BTC by using/trading it. You consume gold or maple syrup by using/trading it. Just because the uses are a little different doesn't mean it's incompatible with the definition of commodity. If I started using gold in a nonsensical way you wouldn't start saying "oh now it's a security", would you?
I think the hangup with BTC as a commodity is that I can make a loaf of bread with wheat and eat it and the amount of wheat in the world is depleted as a result. Similarly I can use gold to build a cell phone or some jewelry and while it is possible to recover it isn't as simple as trading BTC. How is a BTC consumed?
The majority of gold usage is in investment/central bank reserve. Technology applications are a fraction of the usage. Jewelry is a major usage, however part of the reason for its use in jewelry is a hybrid combination of its store of value properties (ex. in Indian culture afaik, gold jewelry plays a large part in passing down wealth, families gift gold jewelry at weddings etc.).
So you consume bitcoin the same way a central bank consumes gold: by sitting on it, selling it when you need to, or buying more in times of expected turmoil.
Bitcoin is far younger than gold (12 years vs thousands), so its obviously more volatile.
shaping gold into jewelry doesn't consume it. One of the reasons its been currency for 5k years is because you can melt it down and re-use it as coins or other jewelry etc. Gold isn't consumed, for the most part.
Technically the thing you hold and use is a transaction output, and once an unspent transaction output (UTXO) is spent it can't be spent again. So from that perspective it is consumed!
Commodities are usually raw/close-to-raw inputs into some process. Bitcoin doesn’t really meet that, but again the whole point is recent technological innovations haven’t really settled into the language yet.
And again, that is by design of both the instruments themselves and the massive PR campaigns/grifts around them.
The whole trick is attempting to position these things as “the half of the definition of commodity that means this has intrinsic value but not the other half of the definition which says it’s a raw input,” or “the half of the definition of a security that means You Can Make Money, but not the other half that says I can be regulated as someone selling a You Can Make Money instrument.”
This is my read as well. However,I think if you regulate the security like stuff in the same way we regulate existing financial instruments the whole thing collapses anyways, so who really cares what we call this specific coin.
You can consume a Fortnite skin or a Call of Duty weapon.
The point is that you cannot consume crypto, it's a problem which is understood inside the community, that's why the push for NFTs which started as legitimate art to enjoy on huge 8K screens or VR headsets but quickly ended up becoming Twitter avatars built for the purpose of trading and offloading to a bigger fool.
You consume it by trading it or, for a direct analog to your example, by showing off your wallet balance. Your Fortnite skin is no more consumable than a BTC. It just has a different value and use.
Hence the SEC is right to clampdown on crypto for violations of securities law, in order to prevent bubbles that emerge when the only use for something is trading it for something else. We already have that, people who want to participate in that game know where to go, the stock market.
> > for a direct analog to your example, by showing off your wallet balance
1st, you need to read up on how commodities and securities are regulated. 2nd, showing off your wallet balance is the same as showing off your NFT, and NFTs, digital skins, etc. are all obviously consumables.
they literally started bitcoin and were the guys mapping out what they wanted from a digital currency over the previous twenty years, this is well known history
My point is simply that crypto requiring a nuanced legal treatment is not implicitly by design even if it was promoted as a feature early on by grifters and anarchists. It’s a technology like any other and it’s the regulators’ job to create fair and appropriate treatment for it (and our job to elect ones who will).
Bitcoin was literally designed to circumvent state monetary systems and their affiliated controls. Almost all the crypto descendants follow this path as well.
So yes, it was by design that it’s hard to regulate.
First of all, the actual difficulty is not really material since we're debating whether it was a design goal. Bitcoin came out of a long line of libertarian/anarchist projects to circumvent state controls. I don't know why you're pretending like this is some unique interpretation of history. E.g. the problem that the Satoshi whitepaper sets out to solve was (as cited in the whitepaper, source [1] in the footnotes) laid out with this preamble:
> I am fascinated by Tim May's crypto-anarchy. Unlike the communities
traditionally associated with the word "anarchy", in a crypto-anarchy the
government is not temporarily destroyed but permanently forbidden and
permanently unnecessary.
Secondly, a lot of features make it harder to regulate than cash. Off the top of my head, being able to transport it over national borders via the Internet. Storing arbitrarily large amounts of it in zero physical square meters. Keeping it relatively secure without having to rely on third parties (banks) gaining knowledge of your ownership, etc. etc.
Bitcoin isn't any different than cash except it’s got a decentralized public immutable ledger and therefore isn't a bearer currency. But like cash its transactions are not governed by an authoritative financial institution that can repudiate and/or reverse them. (It’s proven effectively easier to regulate than cash on the tracking transactions front, though.)
That’s the “anarchy” the paper refers to.
In the paper, the goal was not to topple governments. It was to build a digital cash equivalent where the payment processing happened in a distributed and ultimately trust-less “anarchist” manner. Thus allowing people to transact as they do in cash, but digitally.
All this anti-regulation no laws style of anarchist stuff is downstream. Sure it’s adjacent, but also easily conflated.
Anyway, to be super clear, being resistant to the rule of law is a very different property than being resistant to centralized control.
Cash is decentralized.
Credit, debit, ACH, are centralized.
Crypto is decentralized.
All are subject to the rule of law. But only centralized transactions can be manipulated without coercion or use of force against a one of the parties involved (if they are unwilling to abide).
I don't know any technology that fundamentally cannot have laws created governing its use. It’s just not possible to prevent someone from legally regulating something. But it is possible to design systems that don't require 3rd parties to mediate transactions and do require an actual authoritative monopoly on violence to manipulate, as we’ve seen with cash and as is the case with BTC.
Care to explain? FWIW I was around when crypto was born and know very well the initial scene and motives. The crypto anarchists showed up pretty quickly, sure, but they weren't the seeds of the technology.
Where the definition gets confusing is when a cryptocurrency gives you voting rights to modify the underlying protocol, or determine the direction of an entity that manages the underlying protocol, etc.
There isn't (AFAIK) a commodity that operates in this manner. Owning a lot of gold doesn't mean that I'm able to unilaterally adjust how gold is mined or obtained, for example.
Or when a cryptocurrency has bizarre rules controlling how it can be traded -- for instance, a number of Ethereum tokens like Safemoon had rules enforcing a "tax" on all transfers, ostensibly to reduce volatility.
The only question here is whether cryptocurrency is a security or a commodity. Securities fall under regulation by the SEC (SECURITIES and Exchange Commission). Commodities are regulated by the CFTC (COMMODITIES Future Trading Commission). SEC Chair Gensler agrees that Bitcoin is a commodity, but thinks everything else is a security.[1] Securities are much more tightly regulated than commodities. The SEC is making it clear with these complaints that they believe certain cryptocurrencies are securities.
A court might disagree. The CFTC could potentially disagree, although yesterday's agreement makes me think they may have given up on that to some extent. But I actually think it's pretty clear that any cryptocurrency project offering a reward for "staking" or similar is a security.
You capitalized the wrong word. The CFTC is the Commodities FUTURES Trading Commission. After all, a commodity is defined as anything traded with a futures contract (except for onions and movie tickets)!
A whole lot of things that aren't commodities in common parlance are within the jurisdiction of the CFTC because they are traded with futures contracts. This includes some securities. A whole lot of things that are commodities in common parlance are not within its jurisdiction, as the CFTC only deals with futures contracts.
Orange juice concentrate is a commodity by any definition. The CFTC regulates futures contracts on orange juice concentrate. It does not regulate its production, sale, transportation, or anything else unrelated to futures contracts. That is the job of the USDA, FDA, DoT, and so forth.
Stocks are securities. As they are traded with futures contracts, they are also commodities. The CFTC regulates futures contracts on securities jointly with the SEC. It does not regulate any trading of securities that does not involve futures contracts. That is the job of the SEC. The fact that people trade stocks with futures has never hampered the SEC's efforts to regulate them.
Curious: is "bitcoin" being used by the SEC as a general term to mean "all cryptos that fundamentally employ a work-based consensus algorithm", or "pure" cryptos or whatever? Or is it not yet clear to the SEC that there are more instances of Nakamoto consensus networks out there and not everything other than BTC is a security?
I agree that staked projects and derivative projects are securities since they are fundamentally a representation of or proxy for the actual thing of value, BTC, XCH, formerly ETH, etc.
Of course not everything other than bitcoin is a security. My private blockchain no one knows about is not a security. It's not a universal law of the universe.
What they mean is every coin/token they looked at. If asked to evaluate litecoin for example probably they'd say it's not a security as well. They don't need to pass judgement on each of the thousands of coins individually because definitions and common sense exists.
I’m just trying to understand the context. I hope it is as you say and it would be my baseline assumption that it is as well. But it’s not unquestionably obvious given history and what relatively little context is present in this thread. The SEC used to think all crypto is a security to the point where honest miners are instructed to declare blockchain rewards as income (I have, and TurboTax even asks you if you acquired crypto in the last year with no nuance as to how you acquired it or which one you acquired). It may be obvious to you and me but my question was more about how far the SEC’s understanding has evolved.
Commodities have real-world uses (e.g. gold, oil, frozen orange juice), securities represent a claim on some productive enterprise. Cryptocurrency is neither.
Gambling happens in real world markets as well, but that doesn't mean that real world markets are casinos.
Beaniebabies were effectively regulated and taxed like commodities. Commodities do not require a real-world use. All they are are tradable non-currency things which can result in capital gains.
The speculative (HODL!!) cryptocurrencies should probably be treated like commodities, and regulated as such by the CFTC. The cryptocurrencies that are actually being used like currencies (e.g. actually used to buy things) should be regulated like foreign currencies, which would also be regulated by the CFTC (this is essentially the same exact thing as Commodities trading, but with simpler accounting rules which reflect the much higher liquidity, divisibility, and likelyhood that a unit changes hands). Neither of these scenarios involve the SEC. The SEC should only be involved when coins are being issued like securities (e.g. as a way to raise funding and sell financial stakes in some kind of enterprise).
Collectibles are just a subclass of Commodities which can't be taxed using Mark To Market rules, but there are a whole host of commodities which are just like that. Precious metals, rare coins, cards, comics, etc., are all collectibles, but they are still commodities for regulatory purposes. For example, here is PR release of a CFTC enforcement action against some fraudulent coin dealers: https://www.cftc.gov/PressRoom/PressReleases/8694-23
IIRC, the IRS and CFTC have already issued rules to treat NFTs as collectibles.
That could change in a second if another agency like the SEC decides it's something else. There is nothing to say that two agencies couldn't hold conflicting positions over what BTC is or isn't.
Binance was up for “money laundering and tax offenses” issues because they deal with large sums of fiat money independent from what’s being sold. Replace Bitcoin with physical artwork and you can still run into issues here.
Coinbase similarly ran into issues not because they were selling crypto but from related activities which fall under SEC regulations. It’s one thing to operate an auction selling pigs or crypto, but when you start getting into ‘related activities’ they don’t necessarily fall under the same umbrella. Read up on “Pork Bellies” and you might start to understand the issues.
This is a slightly incorrect interpretation. Not all financial instruments are securities. Financial instruments are legal contracts between an issuer and one or more holders + other parties. If you own any stock in a company, you don’t own part of that company… what you own is a portion of a legal contract that defines what rights you have as a shareholder and what obligations the issuer has.
Currency isn’t a commodity. It’s treated as a commodity because they shares characteristics - you can buy and sell them over FX market. It’s a bit of an oddity because its value isn’t solely based on supply and demand, but stability and existence of a central authority controlling its supply.
(Opinion) Bitcoin, on the other hand, is a virtual Commodity. It is not recognized as a currency. Similarly, gold is a commodity but not a currency, though it does have a place as a non-standard currency in ISO-4217.
Commodities can be hedged against (oil futures) through derivative products. Those are formalized through a legal contract.
Your notion of a financial instrument doesn’t cover the fact that it is the legal contract involving money that makes it an instrument.
But as others have pointed out that’s not why the SEC is suing.
Seems obvious that Bitcoin shouldn't be unregulated and that there should be no question of which regulator has jurisdiction. Unfortunately that probably needs Congress to act.
Gold is a commodity because it exists in the real world and you make it. Bitcoins aren't a commodity because a random person or entity has created it with the intention of selling it to people as a financial instrument.
You can't issue more gold. And to pre-empt your inevitable reply: the limited supply of bitcoins is not equivalent because Apple also has limited amounts of stock. Doesn't make it a commodity.
>If you look up the definitions of "security", "financial instrument", "commodity", and "currency", it is pretty clear that a plain vanilla crypto-currency like Bitcoin is no ordinary security nor a financial instrument. It is not a claim on something else, even less so than a traditional bank note. It is more like a commodity. Since when is "aluminum" a security?
It's a financial instrument. A commodity is used to make or do something. Crypto currencies are literally just money making devices. Sure they call themselves currencies, but that's not their primary purpose. They're investment vehicles. Even the limited ability to trade them for goods an services doesn't get around this fact. It's like being paid in stock. That's how they're marketed. Not as a way to buy takeout, but rather get rich.
Gold is not a currency, it is a commodity that is similar enough to a currency (meaning it can substitute as a currency). ISO 4217 includes precious metals that it explicitly states are not currencies.
Currencies do not exist outside a monetary system. If I sell you something, and accept skittles as payment, that does not make skittles a currency.
It’s kind of interesting that the “commonwealth” countries (AU/NZ/GB/CA) have different classifications of crypto (AU/NZ treat them as property, CA as securities, GB varies depending on the thing).
The SEC filings do give the rationale for why specific coins are securities though.
Hard to summarize each filing though. Worth reading because, unfortunately (?), they make a good case.
Bitcoin might be classified as a commodity, but nearly every other crypto out there, especially anything with a premine or any sort of revenue sharing, is pretty clear cut a security.
I disagree that the line between 'premine' and what happened with Bitcoin is actually all that clear.
Sure, genesis block yada yada but Satoshi (if he were alive/inclined) is still a multi-billionaire from behaviors that are pretty similar to what we call premining.
Are there any crypto tokens not backed by a state that the SEC has officially and clearly declared a currency and not a commodity?
I'm starting to feel, as a practical matter, they will never consider non-government backed crypto a currency regardless of what the rules on paper are. But maybe this has already happened and I'm ignorant, I don't follow this space closely.
There was no ICO, it has an immutable fixed supply, it's not in perpetual startup mode, and not centrally controlled operationally and can't be bought back.
Crypto is more a commodity than currencies, because unlike currency, crypto is subject to the same speculative supply and demand forces as conventional commodities.
Examples of non-physical commodities: music and apps.
Example of something that doesn’t exist at all: Carbon Offsets which are credits for negative production of GHG. Credits can be purchased on the market by companies to offset their own emissions for regulatory or other reasons.
So many of these HN conversations devolve into shit bonanzas because so many people approach this topic as if it is a "Regulation vs No Regulation" topic, instead of the more appropriate "Bad Regulation vs Good Regulation" topic, or even more appropriately the "Which agency should have jurisdiction" topic. And it is a shame, because cryptocurrency has largely outgrown the anarchocapitalist utopian's mindshare, and the people involved that actually want no regulation are an extreme minority now.
You're spot on here. The vast majority of cryptocurrencies (modulo a bunch of shittokens) are better described as foreign currencies or commodities, and they should be regulated as such. Unfortunately for the SEC, that implies that they don't have jurisdiction, and that regulatory burden lies with the CFTC. And from my handful of years as a commodities trader, I would much rather have the CFTC involved than the SEC. The SEC is too inconsistent...institutionally they act like a primadonna that is interested in making headlines more than creating effective policy. The CFTC is all business. They're not perfect, but they are damn good at their job, and they are transparent about what they do and how they work, and they don't see enforcement action as a PR move, but rather as a way to ensure functioning markets and common public interest.
The Supreme Court seems to agree. The SEC has lost 4 out of their last 5 SC cases on cryptocurrency. All indicators from those decisions are pointing in the direction of cryptocurrency being regulated as a commodity, which is pointing towards the CFTC being the ones in charge.
This case makes the news because that is how the SEC works. They won't win this case, and they will cover up that fact by doing what they always do...create more news.
A crypto currency business however may be engaged in trading of crypto currencies which are negotiable financial instruments, and a stable coin that is a claim on a traditional currency is an example of that. A stable coin bears a direct relationship to a bank note. It is a claim on something else. It is not really an investment though, so not much of a security.
And then of course there are more creative negotiable financial instruments which are definitely securities. Options, derivatives, swaps, futures, and the like.
The Supreme Court has a broader definition of securities, that involves a promoted investment in a "common enterprise", but it is unclear that a commodity currency really is a common enterprise like a corporation is for example. It seems unlikely to me that Bitcoin as such would even meet that definition of a security. But other products offered by crypto currency exchanges might.