They try to make it sound like they didn't expect Lend to be treated like an investment, but it's clear that's a load of bullshit. If they didn't think the lending program was a security, they wouldn't have gone to the SEC about it.
Theyre a public company (regulated by the SEC), offering SEC-regulated services. Of course they notified the SEC. The twitter thread that got merged with this thread was pretty clear about it: they notified the SEC, but they also notified other regulatory bodies and had the full expectation that the lending accounts would be regulated by another entity because they are not securities.
> the full expectation that the lending accounts would be regulated by another entity because they are not securities.
Why do they think they aren't securities?
Because they obviously meet the Howey test, and while they may have “expected” that they would be regulated by another body (and which and on what basis?), they obviously haven’t done what it would take to make them (for instance) FDIC-insured depository accounts rather than SEC-regulated securities.
The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security. You can't trade a lending account...you can either hold it, or liquidate it.
FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
> If it's not securitized and it's not tradable, it's not a security.
Neither securitization nor marketability are requirements for something to be a security.
> FINRA is an obvious choice. They already regulate securities lending, they already regulate margin accounts, they already regulate interactions with FDIC-regulated bank accounts.
I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
No, it doesn't. The Howey test applies to commercial paper, tradability is inherent. In that sense, the Howey test isn't the only test for a definition of a security...it is a test that applies to anything that is a tradable financial instrument.
If the Howey test was the only test used to define a security, your bank account would be considered a security. But your bank account is absolutely and definitively not a security, and it is regulated by the FDIC, which has no authority over securities.
> I suppose if Congress were writing a new law to specifically assign new regulatory authority for cryptocurrency lending accounts there might be an argument along those lines. But this isn't a matter of choice, its a matter of application of existing law, and if it meets the Howey test and no exception in existing law, such as assignment to a different regulator, exists, its an SEC-regulated security.
This is obviously and demonstrably false. Even if this product was a security, which it is not, the classification of something as a security does not mean that the SEC has authority.
Futures - a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Futures - a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Equity Future Options - a security of a security of a security, yet the SEC has no jurisdiction and the CFTC has regulatory authority.
Investment contracts aren't inherently tradeable. They may frequently be tradeable because of market preferences, but it is not inherent in the category.
«an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.» [0]
Could you give me an example of an investment contract that is not tradable? You have me straining at the imagination here.
Even if you are right that tradability is not a requirement of a security, and even if you are right that this meets all of the requirements of a security, I still don't see how the SEC has jurisdiction here. The Securities Exchange Act explicitly exempts bank notes with duration of less than 9 months from SEC regulation. Interest bearing bank accounts have the unique feature that they have no required investment term: you can deposit for a century, or you could deposit for a millisecond...the interest is paid for the duration of the deposit, and the duration is entirely determined by the depositor, and is not a term in the contract. The SEC admits that even short term CD's (undoubtedly an investment contract that passes the Howey Test for a security) do not meet its legal bar for jurisdiction, so why they would try to apply it to a unrestricted withdrawable account (regardless of the underlying asset class) is absurd to me.
> The Securities Exchange Act explicitly exempts bank notes with duration of less than 9 months from SEC regulation.
No, it is broader than that; it is not limited to bank notes or durations less than 9 months, but to any bank-issued security; but since Coinbase is not a bank as defined in the Securities Exchange Act [0], the bank-issued securities exception is immaterial.
[0] to wit, per 15 USC § 77c(a)(2): «any national bank, or banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term “bank” has the same meaning as in the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.]»
> but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
It is not required for it to be issued by a bank for it to be exempt.
You have taken the Howey test, which defines what is a investment contract (and therefore requires SEC regulation), and replaced it with "if it's not securitized and its not tradeable it's not", which is, strictly as a matter of US law, completely and utterly wrong.
The whole point of the Howey test is to focus on what the transaction does, not it's form, because it was trying to prevent people from tap-dancing around the regulation, exactly like what Coinbase is attempting to do here.
> The Howey test doesn't apply here. If it's not securitized and it's not tradable, it's not a security.
Do you have a reference for that? Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description (and, of course, the outcome was that they were considered securities).
The Howey case actually refers to them as "investment contracts", which I presume is language from the securities act itself. This seems like better terminology than "securities", if only because it doesn't so obviously conflict with the colloquial meaning. I'm not sure how we got here from there, although the "securities act" naming probably didn't help.
> Because that aspect doesn't sound relevant at all - the court case the Howey test comes from was about securities fitting your description
The property sold in Howey was marketable and the service contract was held out to any owner, so while I agree that neither securitization nor marketability are requirements, marketability was present in the Howey arrangement.
