There's a few people picking sides here in the comments. Just reminding everybody that it's possible for two sides to be at issue; the SEC can be trying its best to apply its mandate in a world where technology has surpassed the law, and in a void of congressional action, and as a result giving very vague guidance so that it can squeeze its mandate into the crypto realm. And Coinbase can be purposely threading the needle in an area they know could probably be interpreted as being SEC regulated. In my opinion, Congress is the problem here, and their inaction is going to cause this to get duked out in the court, when it didn't have to be so.

I actually agree with Armstrong here - the SEC has had plenty of time to assess the market for crypto products and offer clear rules...it almost feels like the indecisiveness is an intentional policy used to cow the industry.

How much of this is actually opaque regulation, and how much is "we don't like the rules the SEC has, so we are going to do our best to not understand them"?

This story is INCREDIBLY interesting on a lot of levels.

Here's one level: Paul Grewal, the 'head lawyer' referred to in the underlying articles, is a former United States federal (magistrate) judge. He was the judge who oversaw part of the Apple v. Samsung patent cases, some of the biggest technology cases litigated in history.

In other words, he's basically as respected in the legal community as you can possibly imagine, and he made the controversial move of exiting the judiciary to go back into private practice. And now he's clashing with an administrative agency in a public, confident, perhaps brazen way.

Coinbase essentially hired the absolute best person to challenge the government on this point. It's sort of like wanting to hire a good basketball coach and hiring Michael Jordan, or something.

It's very interesting to watch from the sidelines, because not only is the legality of crypto at stake, but this guy's amazing career feels at stake, too, like he's betting his name on this.

I think the situation can be summed up nicely by Matt Levine:

> "There is a traditional financial system, and crypto has built a different system, and the SEC has pretty much everywhere said “nah, you gotta follow the traditional system.” And crypto people have said “well we can’t really do that because ...” and the SEC has said “shh, shh, we don’t care.”

Barring an act of congress to change the purview of the SEC, I don't think there is much to stop them. Maybe there was a chance before the FTX debacle and fallout - but I think now the SEC sees the industry as weak enough to strangle with a pillow.

Good and bad, regulators act as white blood cells for the systems they regulate. Their obsession is always going to be to root out abnormalities and protect the host.

"Coinbase could theoretically be forced to separate the exchange and broker portions of the business."

Probably the right outcome. And of course they can choose to move overseas. I assume that will be their decision.

Coinbase and Armstrong tried for months to get the SEC to tell them if their Earn/Staking product constituted a security, and they declined to answer. Serving a Welles Notice makes it clear Gensler is a bad faith regulator

https://podcasts.google.com/feed/aHR0cHM6Ly91bmNoYWluZWQubGl...

Gensler not able to clearly articulate an answer to a simple question presented in a multiple of ways:

https://twitter.com/sassal0x/status/1648338351832064003

Can I pay for a Starbucks Double Frap Latte with Apple stock? Probably not, Apple stock is a security, not a currency... I'm sure someone has tried. But can I use Apple Stock as an investment vehicle? Yes.

Conversely, can I pay for said surgary drink in DodgeCoin? Well no, you can't, but not for the same reasons. Starbucks doesn't have the facilities to accept DodgeCoin. Can you use it as an investment vehicle? Yes.

And that is crux the problem. Because the answer is {"No", "Yes"}, the SEC has determined that these things (crypto) are regulated as Securities. The problem is it's far more nuanced than that. Just because everyone is using them as securities instead of currencies, does that make them securities?

> Furthermore, under current securities law, securities exchanges are not permitted to offer services directly to retail customers

I wonder who lobbied for that regulation...

> “We think the most onerous outcome could be that, if various crypto assets are deemed securities, Coinbase would therefore need to register as a securities exchange, in order to keep offering trading in those assets,” Barclays added.

All this, plus talk of leaving the country, just to avoid registering as a securities exchange?

Where would he move his business to? And why would it matter as his customers are still mostly in the US?

The SEC are constantly stepping out of bounds and refuse to offer clear guidance on the security vs non-security issue. There is a pretty clear reason for this...they have long had a turf war with the CFTC, and if they admit something is not a security, that instrument is no longer within their jurisdiction. The SEC chairman has even publicly admitted that he doesn't think the CFTC needs to exist, and that the SEC should handle all fin regulation. A recent example of this was when they wanted regulatory authority over forex, so they banned any brokerage that handled securities from allowing forex trading as well.

The SEC has lost four out of the last five Supreme Court cases on cryptocurrency. They are out of their depth. Regulatory authority should be handed to the CFTC. They are more than competent enough to be able to clearly state when a cryptocurrency is acting as a security, and have shown that they are the more rational side in this turf war.

Good. It’s about time these things get established as law one way or the other. Court cases are necessary to see where crypto and regulations fit and what if any new legislation is needed.

Here's Matt Levine's column on this:

-------------------------------------

Coinbase Chief Legal Officer Paul Grewal wrote a blog post:

    The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. Today’s Wells notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to. …

    The Wells notice comes out of the investigation that we disclosed last summer. Shortly after that investigation began, the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none. …

    Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only. 

I sympathize with all of this, and I have written similar things. It is truly hard to fit the particular features of crypto into the existing US system for regulating securities, and a conscientious securities regulator with an interest in crypto regulation would sit down and write rules explaining how a project could register its crypto securities, how a crypto exchange could list crypto securities, etc. (Obviously Coinbase’s proposal to write those rules for the SEC is kind of self-interested, but sure in general regulation proceeds with industry input.)

On the other hand I think that the SEC’s response is straightforward and obvious:

    There absolutely are existing, reasonably clear rules about how you register securities.
    Yes, you’re right, it’s impossible for crypto tokens to follow those rules.
    Oh well! Guess that means crypto exchanges are illegal.

The position of Coinbase — and of the crypto industry more broadly — is “look, SEC, if you want to have a flourishing system of legally compliant, safe, trustworthy crypto assets, you will need to work with us a little bit to write new rules,” and the position of the SEC is “no, we don’t want that, we want all of you to go away forever.” If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.

On the other hand Coinbase is an SEC-registered public company with an SEC-registered broker-dealer license! The approval is kind of already there! The SEC’s attitude to crypto is extremely negative, but it is only slowly getting around to doing anything about it — and in particular it is only slowly getting around to going after big respectable crypto firms like Coinbase. And in the interim, those firms have had time to get bigger and more respectable, with the SEC’s quiet acquiescence.

Here again I think the explanation is obvious but unsatisfying. I wrote last month:

    I submit to you that the main fact of crypto regulation in early 2023 is that regulators feel really burned by the events of 2022, and particularly by the collapse of FTX. “We want to work with these nice smart young people who are building the financial system of the future, and I am sure that with their advice we can write smart regulations that protect consumers while still fostering innovation” was a totally normal thing for regulators (except the SEC) to think and say in 2021. But now it is not! Now too many of those smart young people are under indictment or giving interviews from undisclosed locations; too much customer money is gone. If you run a crypto exchange and you want to set up a meeting with regulators to talk about how to write regulations to prevent a repeat of the recent crypto collapses, they will not trust you, because that is what FTX was saying too. There is not much goodwill left. …

    When crypto is popular and exciting and going up, if you are a regulator who says “no, we must stop this,” you look like a killjoy. Investors want to put their money into stuff that is going up, and they are mad at you for stopping them. Politicians like the stuff that is going up, and hold hearings about how you’re stifling innovation. Crypto founders are rich and popular and criticize you on Twitter and get a lot of likes and retweets. Your own regulatory employees, who have an eye on their next private-sector jobs, want to be leaders in crypto innovation rather than just banning everything.

    When crypto is going down and so many projects are evaporating in fraud and bankruptcy, you can kind of say “I told you so.” There is just a lot more appetite to regulate, or I guess just to shut everything down. “You are stifling innovation,” the indicted founder of a bankrupt crypto firm can say, but nobody cares. 

This is unsatisfying, first of all, from a rule-of-law perspective: The SEC used a light touch in regulating crypto on the way up, which encouraged a lot of companies (like Coinbase) to get into crypto, invest a lot of resources, hire a lot of people and build big businesses. (And which encouraged lots of people to invest in crypto, on the theory that if it was really bad the SEC would have stopped it.) If the SEC now says that was all illegal, it seems harsh and arbitrary. As Armstrong says, the SEC had plenty of opportunities to object to Coinbase in the past; it didn’t, and Coinbase relied on the SEC’s acceptance in building its business. The answer — “we would have objected in 2021, but crypto was cool then and people would have gotten mad at us for getting in the way, but now crypto is bad and we can do whatever we want” — does not feel like great regulatory procedure.

It is also bad substantive regulation — bad consumer protection — to encourage crypto on the way up and crack down on after the crash. Stopping people from investing in crypto after they’ve lost all their money doesn’t do them any good! You want to stop the crash! You want to “take away the punch bowl just as the party gets going,” but that is easy to say and hard, politically, to do. When the party is over and everyone is nursing a crushing hangover, no one cares what you do with the punch bowl. “Ugh that punch bowl, get it out of here, what even was in that,” they will retch.

I think from all angles this is going to be a money pit.

For once I’d like the US government to take one of these “break the law now and rewrite the laws later” companies to task.

Sounds like the free lunch is over. Maybe my view is too simplistic, but Coinbase facilitates the sale of "assets" that the buyer expects to increase in value. By definition, that's a security, right?

"Can we do illegal stuff please?" No "Can you explain why we can't do illegal stuff please?" No, that should be obvious.

Coinbase are muppets.

That's one way of looking at it.

The other way of looking at it is that everyone who went to the SEC and asked them if they could do something was told absolutely not. The people who didn't ask seemed to be getting away with it. So everyone stopped asking. However that didn't change the facts of the situation.

At some point even the mightiest ostrich must get rekt.

Complaining about regulation 101 is that rules are "unjustified" if the regulator has foresight, or "inconsistent" if they're reactive.

It's "regulation-by-enforcement". Instead of defining clear rules, the SEC just waits and brings actions against the activities it doesn't want to happen. Sen Toomey and others have called out Gensler for doing this:

https://www.banking.senate.gov/newsroom/minority/toomey-secs...

The slowness and deliberateness of USA regulators to respond is what has enabled the worldwide crypto economy to flourish in the first place. You think they should have just banned it CCP-style?

This is more akin to "You can have your fun but don't go crazy. But as soon as we start seeing your investors getting scammed we're going to step in."

Dangerous to side with crypto stuff on Hackernews...

I don't think the SEC can do much here, honestly. It's like asking a cop "is this illegal?" For stuff like murder they can say yes. For complicated issues like picking up your kid on Feb 29 when your ex complains about custody agreements only defined for non-leap-years, "we'll arrest and charge you for it, but there's a 50% shot it gets thrown out of court."

There's enough wiggle room between what each crypto product does and the original intent of the law, that this is really asking for a court case to resolve the matter. Hopefully with something clearer than "Apply Howey to this."

The court may end up saying "purely mined currencies aren't securities as long as they don't have X capabilities, ICOs are securities, etc."[0] Which would be very helpful.

[0] I have no idea what they'd actually say, or if the example is reasonable.

Perhaps you're just taking Coinbase at their word? SEC's assessment appears to be that a business like Coinbase should register as a securities exchange.

In 2021, SEC served Coinbase a Wells Notice over that their "Lend" product (yield in USDC) was likely in violation of established case law, US v Howey and Reves v Ernst and Young. Coinbase discloses this on their own blog, under the hilarious title "The SEC has told us it wants to sue us over Lend. We don’t know why"[0]

[0]https://www.coinbase.com/blog/the-sec-has-told-us-it-wants-t...

They don't want to reveal that they are treating all crypto assets as securities. So they are starting with the cases that are easiest for them to win, and building case precedent for them to go after bigger cases.

With the case they are giving there is no reason they don't eventually go after Bitcoin or Ether.

> We need regulation

> Ok, you're a securities exchange and have to act like one

> NOT LIKE THAT

They have clear rules, it's not clear to me why Coinbase does not think that those rules apply to them.

That's not what he said. He said "Bitcoin is the only thing that is definitely not a security", everything else is undecided. Big difference.

Terrible reporting from crypto slate even when it's an opinion piece.

Gensler's view is clearly wrong, as there are tons of coins with the same properties as bitcoin, with no premine/ICO.

Why did sec need anything to say when it was clear the product was a security from the beginning?

It makes more sense for this to be adjudicated by the court systems rather than an individual in an agency like the SEC. That is too much power for the SEC after all and we really need those separations in the US -- it's literally the foundation of the US.

Anyway, the fault here is with the US congress (all of the so-called elected representatives) since they haven't drafted legislation to clear said uncertainties now in over 10+ years. Gary Gensler is doing his job, no matter how difficult it is at this time. Congress people yelling at Gensler for example is akin to a boss yelling at his employee for an outcome that was determined by the system the boss created.

When congress isn't aligned with people (whether to draft legislation for or against cryptocurrencies) one doesn't need to go so far to determine what that person's agenda actually is -- if it's not the people's agenda, it's wrong.

Gensler has publicly said “everything other than Bitcoin” is a security.

https://cryptoslate.com/sec-chair-gensler-confirms-everythin...

Is that not a clear enough answer? I'm not saying Coinbase has to agree - but there's no way they didn't know he said this.

The Howey test requires that a security be (1) an investment of money (2) in a common enterprise (3) with the expectation of profit (4) to be derived from the efforts of others.

Cryptocurrencies very clearly meet (1) and (2). Many tokens are likely to meet (3), but it's not universal. But (4) is where you have the most room to argue.

I don't know what Coinbase offers for sale. But I'm certain that least some of the tokens it supports are going to be defined as securities under the Howey test. Hell, if Coinbase offers the ability to use your tokens for staking, I'm pretty sure that alone qualifies as a security, even if the token itself isn't necessarily a security. (Coinbase disagrees that staking constitutes a security, but their reasoning is extremely motivated and I do not find it persuasive.)

This is the crux of the endless argument. People speculate on currencies via Forex, are those securities? Is oil a security? People buy into oil, gold, etc hoping to sell later for a profit. Both the CFTC and SEC have claimed they have purview over crypto and there has been absolutely no clarity from lawmakers on it.

The definition of a security is found in the application of the Howey test. The SEC has a nice long explanation of how you apply Howey to crypto. Basically every token is a security. Always has been. With the possible exception of Bitcoin due to the way it was initially distributed. [1]

[1] https://www.sec.gov/files/dlt-framework.pdf

Yes and no. Gold isn’t a security, for instance. Unfortunately (for coinbase) ICOs and related grifts pretty clearly meet both the spirit and the letter of the SEC’s definition.

Depends on what you consider a "Security". Are "Securities" meant to be used as currencies?

> Coinbase facilitates the sale of "assets" that the buyer expects to increase in value. By definition, that's a security, right?

In terms of outdated US regulation based on some farm land, yes.