Is Lending Your Bitcoins a Security? (bloomberg.com) 61
Matt Levine, writing at Bloomberg: Oh, sure, yes, absolutely. The rule in the U.S. is that an "investment contract," meaning "the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others," is a security, and generally can't be sold to the public without registering it with the Securities and Exchange Commission, delivering a prospectus with audited financial statements, etc. A Bitcoin lending program -- in which (1) a bunch of people pool their Bitcoins, (2) some manager or smart contract lends those Bitcoins to borrowers who pay interest, and (3) some or all of the interest is paid back to the people in the pool -- is pretty straightforwardly an investment contract and thus a security.
I have been saying this for months, though that's only because the SEC has also been saying it for months. But I admit that the SEC hasn't been saying it in a particularly clear way. There's not an SEC press release saying "FYI crypto lending programs are obviously securities." And I gather that there are a lot of crypto lending programs -- they're a staple feature of decentralized finance platforms -- and roughly none of them are registered with the SEC. The SEC and state regulators have brought enforcement actions against a few of them -- we've talked about BitConnect and BlockFi and Blockchain Credit Partners -- but I suppose each of those is distinctive in its own way, and there are about a zillion others that haven't been sued by the SEC. So you could reasonably look around and be like "oh sure we can pool people's Bitcoins and lend them and pass along the interest, that's not a security that should involve the SEC." You'd be wrong, but I get where you're coming from.
[...] Look, I get it. From the perspective of Coinbase, and of its customers, and frankly of most normal people interested in crypto:
People would like to lend their Bitcoins.
It doesn't feel like a security.
It's kind of annoying and archaic that a 1946 Supreme Court case says that it is?
But look at it from the SEC's perspective:
The SEC really doesn't like crypto.
The SEC is a regulatory agency that has a general tendency to want to do more regulating.
Popular tokens like Bitcoin and Ether are not securities and so not subject to SEC regulation, which leaves the SEC feeling antsy.
But crypto lending programs are pretty clearly securities subject to SEC regulation.
So for the SEC to say "crypto lending programs are securities and need to be regulated" serves the dual purposes of (1) expanding SEC jurisdiction over crypto and (2) stopping those programs.
Also it's pretty clearly justified by a 1946 Supreme Court case.
I have been saying this for months, though that's only because the SEC has also been saying it for months. But I admit that the SEC hasn't been saying it in a particularly clear way. There's not an SEC press release saying "FYI crypto lending programs are obviously securities." And I gather that there are a lot of crypto lending programs -- they're a staple feature of decentralized finance platforms -- and roughly none of them are registered with the SEC. The SEC and state regulators have brought enforcement actions against a few of them -- we've talked about BitConnect and BlockFi and Blockchain Credit Partners -- but I suppose each of those is distinctive in its own way, and there are about a zillion others that haven't been sued by the SEC. So you could reasonably look around and be like "oh sure we can pool people's Bitcoins and lend them and pass along the interest, that's not a security that should involve the SEC." You'd be wrong, but I get where you're coming from.
[...] Look, I get it. From the perspective of Coinbase, and of its customers, and frankly of most normal people interested in crypto:
People would like to lend their Bitcoins.
It doesn't feel like a security.
It's kind of annoying and archaic that a 1946 Supreme Court case says that it is?
But look at it from the SEC's perspective:
The SEC really doesn't like crypto.
The SEC is a regulatory agency that has a general tendency to want to do more regulating.
Popular tokens like Bitcoin and Ether are not securities and so not subject to SEC regulation, which leaves the SEC feeling antsy.
But crypto lending programs are pretty clearly securities subject to SEC regulation.
So for the SEC to say "crypto lending programs are securities and need to be regulated" serves the dual purposes of (1) expanding SEC jurisdiction over crypto and (2) stopping those programs.
Also it's pretty clearly justified by a 1946 Supreme Court case.
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Technology is cool. Plus it makes everyone so productive that we live in abundance. We should be able to work 4 hours a week and that would be enough to get a house.
But we choose not to. Oh well, have fun running in your "American Dream/university degree/start a family/get in debt" hamster wheel.
You hate social programs too? (Score:1)
Socialism is cool. Plus I will not have to go to work anymore and the government will take care of me and buy me a house.
So you hate social programs too, like how the fire department will come and put out the fire in your house, without question?
It isn't a question of whether they like crypto. (Score:2)
The question is whether the law mandates the SEC regulate this business. If it does, the SEC not only *can*, it *should*. To give a crypto business a pass on a law because the investors weren't expecting regulations to apply to them is unfair to competitors who are stuck obeying the law.
Yes, regulation requires some judgment about what is practical for the regulator to enforce or the regulatee to comply with. And yes, there should be some regulatory leeway for leniency where it will encourage higher comp
it may be a problem for ada. (Score:2)
Since ada allows you to consign your voting shares to someone else it's highly similar to a stock. It's also simmilar to what coin base is doing.
However the issue may be one of reporting an options play not the options play itself.
Re:It isn't a question of whether they like crypto (Score:4, Insightful)
Basically the entire existence of cryptocurrencies comes down to 2 purposes:
#1 - setting up money laundering for illegal enterprises
#2 - setting up new "commodities" for pump-and-dump scams and pyramid scams, because the law has steadily cracked down on penny-stock versions and a new commodity was needed.
At their core, cryptocurrencies are scam enterprises that have done immense damage to other economic sectors (video cards and other chip manufacturing, all the stolen electrical power that ran many of the mining situations, the environmental damage done by people literally keeping old coal plants online solely to generate electricity to mine crypto, etc).
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That wasn't crypto's original purpose but the lesson is that without basic regulation and enforcement everything will be quickly taken over by bad actors until the entire space is dominated by them.
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a binary data designed to work as a medium of exchange
The only problem is that what is being done with bitcoin, as described, has nothing to do with it being a medium of exchange. It is being treated as an equity.
In fact, the cost of processing, delays in processing, and volatility of bitcoin make it a poor medium of exchange for average purchases.
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As far as #1 and #2 go, you could say the same thing about businesses and stocks. There is more than one reason to run an all cash business.
You are right, mining crypto is huge waste. Which is why there are many crypto implementations that use Proof of Stake, you hold resources in the network to make the network work rather than spinning your wheels on useless math.
Posts like your are really asking for regulation.
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also the SEC is considering the situation of securities and investments that might soon be deemed securities, where underlying assets are part cryptocoin. In short, they have reason to monitor crypto and will become more involved in it.
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Bitcoin is being used everywhere as an investment. The bitcoin fans all gush over how much it is growing and how much money it is worth. That's an investment. They can't then turn around and claim it's merely a currency. That's disengenuous, trying to have it both ways. However, even markets in currencies are regulated, so.. duh.
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That's disengenuous, trying to have it both ways.
It's also typical scammer behavior. Noting that exploitative pyramid scams have in the past tried to pass themselves off as "merely pyramid shaped" [youtube.com], no fucking joke.
Scammer: "It's not an illegal pyramid scheme, it's a Direct Selling Network Marketing Company."
Interviewer: "Is it shaped like a pyramid, the businesses?"
Scammer: "It's shaped like a pyramid yes..."
Re:It isn't a question of whether they like crypto (Score:4)
To give a crypto business a pass on a law because the investors weren't expecting regulations to apply to them is unfair to competitors who are stuck obeying the law.
I heard, "No expects SEC regulations to apply to them!" was in the first draft of a Monty Python sketch, but was ultimately replaced with something catchier. Can't remember what though. Luckily, the costumes didn't need to be changed...
Re:It isn't a question of whether they like crypto (Score:5, Insightful)
I'm really glad that the summary answered the question in the headline, because the answer really is obvious.
The CEO of Coinbase posted essentially the same question on Twitter and suggested that the SEC was being sketchy by not explaining Securities Law 101 to him. Every lawyer who chimed in said "You are pretty much issuing bonds, Mr. Fintech CEO." Unsurprisingly the Cryptbros who knew less than the Coinbase CEO disagreed.
At least the digital Magic the Gathering cards had some utility for players.
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Cryptobros are convinced that their pyramid and pump-and-dump scams are made magically legal by using the word "cryptocurrency" in place of "penny stock."
This is largely because cryptocurrencies managed to fly under the radar early on (when the amount of money involved was small), but it's now gotten to the point where a lot of marks have been fleeced and the artificial bubbles in the pyramid setups are regularly bursting.
Meanwhile, the pump-and-dump scheming around various "coins" (fly-by-night and oth
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I am less anti-crypto than you, but I very much agree with the sentiment re shady formalism and pump and dump.
There is so much IP licensing and abstracted computer resource usage that I think a cryptocurrency network could function as an exchange of resources that people actually want (I'm thinking of digital Bowie Bonds or something). But we can't know the value until we have seen the utility.
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I just find it fucking hilarious with the evasions Cryptobros use, because their evasions are EXACTLY the same "well if we substitute the honest truth with a word salad we'll get away with it" dodge you get out of other pyramid scammers. Noting that exploitative pyramid scams have in the past tried to pass themselves off as "merely pyramid shaped" [youtube.com], no fucking joke.
Scammer: "It's not an illegal pyramid scheme, it's a Direct Selling Network Marketing Company."
Interviewer: "Is it shaped like a pyramid, th
Re:It isn't a question of whether they like crypto (Score:4, Interesting)
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The question is whether the law mandates the SEC regulate this business.
The question is "does the law ALLOW the SEC to regulate this activity", meaning does what is occurring fall under SEC jurisdiction. The SEC says yes. Coinbase says no. Now all Coinbase has to do is show the SEC is wrong by showing that the activity doesn't fall under SEC jurisdiction.
Duh (Score:5, Insightful)
This is like, "Can I haz cheezeburger?" level of conversation.
In the past idiots tried to get around regulation by using wooden nickels, and various local currency schemes. Most of those schemes lose interest once people find out that there is nothing magic about the dollar. Using a different currency doesn't change the regulations, the laws, or the taxes.
And it never will. But half the neckbeards on slashdot will still think, "Oh, but if I use a different word, that's a technicality, so blah blah blah." Courts don't give a shit about that. Just because the lawyers use words in a different way than you and you didn't understand, doesn't mean words can mean whatever you want. That's not the correct lesson from noticing the existence of jargon you don't understand. Using a different word never changes anything.
Re:Duh (Score:4, Insightful)
This pretty much. Remember when Slashdot was up in arms about people simply adding "on the Internet" to an existing business method and attempting to patent it or something? This is just everything that banks do but "with a different kind of currency" so of course it should be regulated like a bank. AFAIK banking and/or security regulations never said you get a loop-hole by swapping out dollars for foreign currency, a commodity, or any other fungible item to avoid regulation of investments, loans, etc.
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That's a great point, actually I think I remember during the .com boom in the late 90s there were lots of people prognosticating that simply having payments on the internet would allow them to escape all regulation. So perhaps it has made a complete circle from "on the internet" to "it's the same" and back to "on the internet."
Crypto has some differences from other currencies (Score:2)
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"profits" (Score:2)
It is not profits if it pays in "monopoly money". If that was the case, even real monopoly was a security.
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Until you start exchanging the monopoly money for something with value. Then it turns out to be worth whatever you're exchanging it for.
It can't be a currency AND a security (Score:2)
Based on 15 seconds of research, it looks like something can be a security, or a currency, but not both [stackexchange.com]. Since Bitcoin is the official currency of El Salvador, it is not a security. Buuuut that seems like a loophole. Using that logic, a nation could simply declare that any existing security is now the official currency of that nation, and that would suddenly impact US law - that's silly. Maybe it only would matter if the US considered it a currency?
They REALLY don't want it to be currency (Score:3)
And in the US the cryptocurrency people REALLY don't want it to be considered a currency - because if the US law considers it a currency, then it is subject to all of the banking and foreign exchange regulations (which require a lot of paperwork that would basically be impossible to have as a crypto trading market)
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Loaning is essentially an option (or commodity) contract and not a “loan.” It might be pitched just like a HELOC, but it is not; it is used as derivative speculation on the underlying asset.
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And in reality, there are obvious ways that currencies ARE treated as securities, the most obvious being Foreign Currency Exchange ("Forex") Trading [investopedia.com].
As has been pointed out in other parts of this discussion, "but I used a different word for the same thing" doesn't change that it's the same thing.
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If you think you're smarter than the SEC (Score:3)
You may be right. If you think you're smarter than Matt Levine, you're almost certainly wrong.
The Bitcoin scammers should register with the SEC (Score:2)
Remember all those scammers who say "Just us some BTC and we'll send you back double!"? Someone needs to tell them they forgot to register with the SEC!
The blogger misunderstands (Score:1)
But that's simply par for the course these days.
"Smart contracts" aren't investments, they don't make the portion you hold appreciate in value in and of themselves. They are code. And code is speech (Bernstein v. Department of Justice) and you cannot tax speech (Forsyth County, Georgia v. The Nationalist Movement).
Bitcoin "investments" merely execute your speech, in return you may get rewarded with more Bitcoin, but the Bitcoin itself doesn't appreciate in value because you executed some code. Hence those t
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Bitcoin avoids all that by [word salad blahblahblah], everyone has full information...
Noting that this claim, like virtually every claim in the preceding post, is absolutely fucking lying bullshit. [bloomberg.com]
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That article is speculation, it has competing opinions. The evidence presented could be coincidental, there are no facts that show anything beyond a coincidence.
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But aren't you also saying that mutual funds aren't regulatable securities? You put money in them with other people, the fund manager "lends" it to public corporations by buying stock, and it is the value of the stock that appreciates or depreciates, and in turn you are rewarded by having more money in the fund.
And aren't people actually using crypto more as an investment mechanism than an exchange mec
Of course you can lend bitcoins, pull a Uber (Score:4, Informative)
The point is, you can't run to SEC to enforce the contract if the borrower reneges. You can't use SEC's dispute resolution mechanism or use its eco system if you don't play by the same rules.
Same way, you can ask the gummint to go stick its fiat currency where sun does no shine and go with cryptos. But you can't run to the courts when things go awry. A precedent setting ruling from the courts, saying crypto transactions that do not obey the rules of US Govt will not be under the jurisdiction of US courts is needed. Without it treat it like a security when it is convenient that way, and claim it is not when it is not.
Time to read the riot act. Play by our rules, else our courts and law enforcement is not for you.
Crypto is a currency, obviously. (Score:2, Offtopic)
People tend to confuse Gambling, Investing and Working.
If it is a zero sum game, it is GAMBLING. This includes all commodities, including currencies, and Cryptos are currencies. It has no internal profit, unlike an oil company. (Zero sum game means that the money going in equals the money going out, i.e. no dividends or interest paid).
If it is a positive sum game that requires no more effort than deciding what to purchase, what to sell, and then carrying through with those decisions, it is an INVESTMENT.
Enough with the paywalls ... (Score:3)
Listen editors ...
I understand that you guys need to make money, and you may have agreements with sites to promote their content.
But this is counter productive!
Stop posting stuff from paywalled sites, like Bloomberg and the New York Times. Although the latter's content may sometime be available on other syndication sites (MSN, Yahoo, ...), the former does not do that.
We are bunch of geeks, and we will not subscribe to general news or financial web sites just because you keep posting article after article from them. It won't work, so stop aggravating your audience ...
From someone who has been on the site for over two decades ...
Maybe I'm reading a different quote? (Score:2)
As I read this it wouldn't apply to personal lending as in the borrower is taking a personal and not borrowing business capital/liquidity due to the word 'efforts.' If I'm borrowing to refinance credit card debt, taking a bridge loan until the insurance mon
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I think you're reading that completely wrong. If you give someone an asset to manage with the expectation of making a profit, and they lend it out to someone, THAT is the 'effort of others'. It has nothing to do with what the borrower intends to do with the money.
https://www.sec.gov/corpfin/fr... [sec.gov]
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"...When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an "Active Participant" or "AP") provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met...." -
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It is not the management of OTHERS, it is the management of your ASSETS that is the "effort". And that asset management (eg lending to others, investing in something, etc) is where the gains actually come from.
Not sure about lending clubs, but I would think 'mechanized criteria' would still count, as that criteria came from somewhere. An index fund could be considered 'mechanized criteria', but it is still a security.
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(1) a bunch of people pool their Bitcoins, (2) some manager or smart contract lends those Bitcoins to borrowers who pay interest, and (3) some or all of the interest is paid back to the people in the pool -- is pretty straightforwardly an investment contract and thus a security.
Pooling Bitcoin and having a manager to lend the bitcoins, and who then paying the interest back to the people in the pool is an investment contract.
Pooling Bitcoin and having a smart contract to lend the bitcoins, and who then paying the interest back to the people in the pool is an investment contract.
Part of where you are going wrong is trying to say "effort" only includes "productive work". Using your own example, you borrow to pay off your credit card. From
Your Mom (Score:2)
I sold shares of your mom to get my business off the ground. Part of the proceeds from pimping out your mom goes back to the investors. The SEC has not come after me.
Coinbase can skirt around the law if they worded . (Score:2)
Learn from a Chicken (Score:1)
Coinbase is in real trouble here, not even because of the potential lending plan. To find out more about the Wells notice and more, read Doomberg's take [substack.com].
Property (Score:1)
That or the various government bureaus, agencies, and commissions need to get together, make a ruling that's consistent across all of them, and stick with it. Is that too much to ask?
Re:Property (Score:4, Insightful)
The difference between this and loaning out you bicycle is that there is a third party (the exchange) who is doing the loaning. If you put your bicycle in some 'bicycle exchange' where the exchange would loan out your bicycle and you would expect a profit from that, that would also be a security.
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