“But the SEC let us go public” and other flawed arguments in Coinbase's defense

Some key takeaways: For historical reasons as well as practical ones (who would you sue) BTC and ETH are probably considered commodities. Most of the rest are very similar to ICOs which were securities and rife with fraud. But you can't really go after the issuers very easily for a lot of reasons. But there are two parts to the SECs laws. One part is the issuance of secuirties, the second part is the brokers (or in this case exchanges). FTX, Binance, Coinbase, do things that would be illegal to do with securities (conflicts, lack of disclosure etc.). The SEC is just pointing out that most coins are securities and what they are doing is illegal under current law.

https://news.bloomberglaw.com/mergers-and-acquisitions/matt-...

Coinbase wouldn't be the one to register the security - the company offering the security would be the one registering it. Coinbase may have some securities of its own - but it is unlikely that it would be able to provide the necessary information for much of them or take on the necessary responsibilities for providing the auditing.

https://www.investor.gov/introduction-investing/investing-ba...

    The registration forms a company files with the SEC provide significant information, including:

    A description of the company's properties and business;
    A description of the security to be offered for sale;
    Information about the management of the company; and
    Financial statements certified by independent accountants.

> In order to register a security under the Securities Act, a company must file a registration statement with the SEC. Typically the type of registration statement used for an initial public offering will be a Form S-1 Registration Statement (Form S-1). A Form S-1 includes two parts (Part I and Part II). Part I is the prospectus, the legal offering or “selling” document. In the prospectus, the “issuer” of the securities must describe in the prospectus important facts about its business operations, financial condition, results of operations, risk factors, and management. It must also include audited financial statements. The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities. Part II contains additional information that an issuer does not have to deliver to investors but must file with the SEC, such as copies of material contracts, signatures of management and other representations.

Most organizations providing cryptocurrency based securities are unable or unwilling to provide the required information.

It exists, in theory. Many people have tried, nothing has progressed even an inch. It's not even a matter of the SEC putting out a list of clear conditions that people deem unacceptable. Instead, the applications just seem to be mired in bureaucracy.

As I understand, there is deliberate gaslighting from the SEC and Gary Gensler.

Gary keeps telling the media "the law is clear" and "companies should come and register", but then never answer's even congress' own questions on what constitutes a security, and makes it impossible for crypto projects to register.

The organizations that created the assets have to register them as securities, Coinbase didn't create the assets.

A broker-dealer (a securities exchange) can only trade registered securities, broker-dealers have to register to exist. So even if Coinbase went through the process of registering as a broker dealer (to be a securities exchange), they could not trade unregistered crypto securities, and cannot unilaterally register things they didn't create as securities.

Registered crypto securities are a mixture of non-existent, or not the things people want to trade. There are zero popular registered crypto securities.

Those organizations with those "unregistered securities" quote on quote, also don't believe they are creating securities at all, just digital products, cryptoassets. A distinct asset class. This should be possible to do compliantly, but it is also not clear how to do so or where the line is.

Regardless, those organizations have not been approached by the SEC saying "hey you created unregistered securities and sold them, we're suing you".

The SEC has indeed tried a couple of those cases against different crypto assets and their creators and had mixed results, the well funded ones are dragging the SEC through court for half a decade now, for a single case. While the number of crypto assets continues to balloon every single day.

So the SEC changed its strategy recently and started suing exchanges using circular logic, claiming assets that they never said were securities to be securities and saying "these are unregistered securities and you are trading them in violation of Federal Securities laws", having never proved in court that these were securities.

and...

> The previous HN thread seemed to mainly be of the opinion that Coinbase wasn't registering the non-Bitcoin crypto, but that the problem was the SEC wasn't giving clear guidance on whether they needed to be.

See, this is why we need regulation. It's to deal with people like the HN crowd who will go up to the limit of the law with no consideration for ethics whatsoever.

A normal, ethical person would never run into the problem Coinbase has here. They'd see that the differing parts of their business had conflicts of interest which were pitting them against their own customers, and they'd do the right thing by splitting them up so that their customers are served. The law never has to get involved, because good people don't need the law to tell them to do the right thing.

But contrary to the end-stage capitalist beliefs of HN, corporations are not good people. Capitalism doesn't result in the best service for the lowest cost. If there's any way at all that corporations can make a profit by screwing over other people and getting away with it, they will, or someone else will. Without regulation to limit this, bad people bubble to the top. Coinbase has plenty of smart people who could have noticed the ethical problems here, but they didn't, because they didn't care. Coinbase has been successful monetarily because when they had a choice to do what's right or what's profitable, they chose to do what's profitable.

And as is typical of HN, the top comment identifies with the bad guys. The problem, in your eyes, isn't that what Coinbase did caused conflicts of interest which harm consumers. The problem, in your eyes, is that regulation wasn't clear enough for Coinbase to know exactly which conflicts of interest they could get away with. Like Coinbase, you're unconcerned with ethics, instead blaming regulators for getting in the way of the only thing you care about: profits.

This place has a serious problem.

In Ethereum, a centralized group of people put together a public sale of the token, promising great returns in exchange due to their visionary ideas. This is all perfectly fine, except they didn't register their sale as a security and companies touching Ethereum and other tokens continue to not follow security rules; which involve for instance disclosures about ownership and conflicts of interest. Ethereum is an extremelly centralized business with a few key figures with an interest in the appreciation of the asset, advertising it illegally to a US audience without following US laws.

https://www.bloomberg.com/opinion/articles/2023-06-07/when-i...

"Some of them did securities offerings, but by the time the SEC noticed they were too entrenched and decentralized and it would have been a pain for the SEC to go after them. Ethereum, most notably, very very clearly did an ICO in 2014, raising about $18.3 million by selling ETH tokens. If they did that today, or in late 2017, the SEC would have some serious questions. But by the time the SEC got around to cracking down on ICOs in 2017, Ethereum was big and decentralized and the SEC would have had a hard time, practically and legally, challenging its 2014 ICO. And so everyone sort of grudgingly concedes that ETH is not a security."

Bitcoin started out as a toy with no value, even perhaps a proof of concept, which eventually gained value and began to be traded. Even years after its' creation people gave it away for free, there were faucets. The creator disappeared and the protocol intentionally has been designed in such a way that making changes is difficult and there's a lot of veto power by users.

Ethereum has nothing like the same origin story. There was an expectation of value from the beginning, Vitalik is still around, and there are often huge centralized changes like PoS, the DAO rollback, etc.

The House Financial Services Chairman asked Gensler (Head of SEC) point blank half a dozen times whether Ethereum was a security.

Half a dozen times, Gensler refused to answer. :/

https://youtu.be/VhA1dZXeao0

Congress explicitly delegated these authorities to these agencies as part of the administrative state overhaul in the beginning of the 20th century. The reason was to help become more responsive, and less beholden to daily politics by putting neutral experts in charge, and by and large it works. Safety and security shouldn't be party politics.

  > clear requirements in black and white terms of what is and isn’t acceptable.

This document dates from 2019 and lays out in detail what constitutes a security wrt cryptocurrency from the SEC’s perspective. They’ve been quite clear about this for a long time. The relevant case law has been settled for 70 years.

https://www.sec.gov/corpfin/framework-investment-contract-an...

The SEC has repeatedly and publicly stated in no uncertain terms, what the definition of a security is and also identified specific coins traded on coinbase that they believe to be securities. Here’s an example from last year from an insider trading case.

https://www.sec.gov/litigation/complaints/2022/comp-pr2022-1...

  > For example, on November 12, 2021, Ishan learned that Coinbase would soon announce the listing of the crypto asset POWR. As alleged further below, POWR was a crypto asset security

  > A digital token or crypto asset is a crypto asset security if it meets the definition of a security, which the Securities Act defines to include “investment contract,” i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.

  > Coinbase planned to announce the listing of crypto asset AMP on its platform. As alleged further below, AMP was a crypto asset security.

  > Coinbase intended to announce on July 14 that the RLY token would be listed on its platform. As alleged further below, RLY was a crypto asset security. 

The real issue is that cryptocurrency companies hoped they had found a loophole —they wish the law and SEC guidance weren’t what it is, and they keep dishonestly claiming a lack of clarity exists in the hope that doing so will change things.

And note: Congress has the opportunity to reject rules passed by an agency that it determines conflicts with the intent of the governing law(s).

I don't doubt that the process could be improved, but insulating decisions about how to protect investors from political interference sounds like a fine idea.

In this situation, there exists a law that was passed by Congress. Coinbase is breaking that law. Is it not the executive branch's role to enforce that law?

So the SEC is saying "You are an unregistered securities exchange"

And coinbase is saying "Please give some kind of route by which we could possibly be compliant given the nature of cryptocurrencies"

And the SEC is saying "We have no obligation to give you such a route, just as we have no obligation to provide such a route for criminal black markets"

Who you interpret as being unreasonable here depends on if you think crypto is closer to the black market example, or if it's closer to being like regular securities but with a few tweaks to the rules to make it work.

We don’t do that kind of thing in America except for the occasional Enron when extreme levels of fraud are involved and someone takes out California’s electrical grid to boost profits.

IANAL but these SEC violations don’t seem to fit the bill.