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The SEC has told us it wants to sue us over Lend. We don’t know why

blog.coinbase.com

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Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#241

Post by imtringued »

paulgb wrote: post #223
Reason077 wrote: post #217

Earlier quoted context omitted.

> "capital is not in theory at risk. So it's more like a savings account than an investment account." But I guess if you want to offer a "savings account" then you need to be a licensed bank and meet all the requirements and regulations that come with that?

Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail) I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.

Banks want the deposit insurance to fail because once the government chips in they realized a profit on the bad loans they made. It's a well known moral hazard.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#242

Post by zaptheimpaler »

Its called a f**ing bond. Its probably the largest and most important piece of the global securities market. Coinbase is shocked that their bond-in-a-trenchcoat is going to be regulated like a bond?

I don't think there's any confusion at all to anyone remotely familiar with finance why it would be regulated this way. Crypto likes to rebrand decades old ideas and pretend they're new to confuse people who don't know better.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#243

Post by [deleted] »

gnee wrote: post #89
uncomputation wrote: post #23

I actually initially wanted to be on Coinbase’s side here, but after a quick google of “Howey test” and reading even just the introduction on Wikipedia, I cannot imagine how they don’t see the SEC’s reasoning about Lend wrt Howey. If you want to argue that Howey does not apply or fight the decision/lawsuit, then fine. But feigning ignorance of something a (non-legal expert) programmer can connect the dots of instantl…

When you put your money into a saving account, you're lending the bank your money with an 0.04% interest rate. Is that a security?

[deleted]

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#244

Post by rocqua »

JohnJamesRambo wrote: post #142
jtchang wrote: post #65

I mean why not go after Coinbase? The argument that everyone else is doing it why not go after them doesn't hold much water. Sometimes it makes sense to go after the biggest fish first. Also, is Coinbase saying Lend isn't an investment contract? It sure sounds like one to me. Lend my crypto to Coinbase and I get a 4% return? I like the idea but it sure sounds like an investment contract to me.

To me it sounds like banks can’t compete and just keep the 4%, so now they have the SEC go after their competition that can. I don’t see the difference at all between a USD that makes (pitiful) interest in a bank savings account and a peg to USD that makes awesome interest in a Coinbase savings account. When I invest my USD with Wells Fargo bank they are converted to Wells Fargo Bucks that are tied to how efficient a…

The difference is that the Bank has really tight regulatory requirements on how much collateral they need to have for each dollar in a savings account. There are much more regulatory requirements on banks that limit how effectively they can invest your savings account money. This all to ensure that the bank does not accidentally lose your money / cause a bank run.

Bank accounts count as a security. But they are regulated more tightly by bank-account rules, so they are exempt from the less stringent Security rules.

Meanwhile Coinbase is much free-er to do with your money as they like. If they play it too risky and go bankrupt, that is your money gone. To offset this risk, securities law requires they register as a security and make the required disclosures and limit speculative statements etc.

So "banks can't compete on interest" is maybe true, but not a fair comparison since banks also have to be much more careful with your money.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#245

Post by josefx »

mthoms wrote: post #185
tobias3 wrote: post #144

Maybe they should have asked Brett Redfearn (former SEC director working at Coinbase) about the SECs reasoning. He left Coinbase in July? I guess the revolving door corruption failed (and/or he figured out where the wind is blowing)... This is really all too transparent and obvious. A risk-free investment with 4% APY. What-aboutism about other exchanges (which are unregulated and off-shore). Not "understanding" the p…

As a kid I made over 4% APY interest on my savings account. Risk free. Yes, I realize their are important differences here but I don't think that getting a 4% risk-free return should be seen as an "obvious" problem.

Is the interest in case of lend actually risk free? The savings account was heavily regulated and insured so that even if the bank went out of business you would get your money back (up to a certain amount). What kind of emergency measures are in place to ensure that Lend costumers see their money again if coinbase goes out of business?

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#246

Post by Denvercoder9 »

imtringued wrote: post #241
paulgb wrote: post #223

Earlier quoted context omitted.

Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail) I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.

Banks want the deposit insurance to fail because once the government chips in they realized a profit on the bad loans they made. It's a well known moral hazard.

No, they want deposit insurance to kick in and succeed (in your view). If the deposit insurance fails, that'll create a bankrun (because their value proposition, risk-free interest, no longer exists), and they'll go under as well.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#247

Post by paulgb »

imtringued wrote: post #241
paulgb wrote: post #223

Earlier quoted context omitted.

Exactly. Capital lent is always at risk; effectively risk-free interest is an abstraction created by deposit insurance. (Which, too, could fail) I don’t understand where DeFi yields come from, but I can tell you they’re not risk-free, for the same reason a physicist can tell you your perpetual motion machine doesn’t work without studying the blueprints.

Banks want the deposit insurance to fail because once the government chips in they realized a profit on the bad loans they made. It's a well known moral hazard.

Privatized gains/socialized losses is a moral hazard, but it doesn't follow that it's in banks' interest for FDIC to fail.

E.g. if I borrow $1,000 from you to bet on a roulette table, you suffer the downside if I lose and can't pay you back, but it's still in my interest to win.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#248

Post by ckdarby »

subroutine wrote: post #214
mthoms wrote: post #210

Earlier quoted context omitted.

Very helpful, thanks. It sounds like you're saying the banks get a special carve-out to provide this service simply because the regulator is different. On a fundamental level though, I still don't see the difference. I do have to disagree with the last paragraph though. Consulting with relevant regulators when the legislation is unclear (or non-existent) seems like the opposite of a red flag.

Right, OP is saying that on a fundamental level, there isn't a difference (between LEND and a savings account), except that Coinbase is not a federally regulated FDIC insured bank. Metaphorically, Coinbase just went to the police department and explained in great detail their intention to sell hard liquor without a liquor license. Under sworn testimony, they explained... ' you see, we are just providing the same prod…

And it worked! Reading this and reading HN comments I realize I don't want the SEC involved in this. Crypto is more & more bringing to the front of the conversation about how protection should be the default but having the ability to opt out is the choice individuals should have.

FDIC is a perfect example! There are accounts I know and would expect that but there are times I'm willing to waive that for compensation. Welcome to the land of crypto where nothing is FDIC and the government isn't going to protect anything.

Public opinion matters because it can be the very conversation that gets politicians to challenge the existing laws to be changed.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#249

Post by Denvercoder9 »

mthoms wrote: post #185
tobias3 wrote: post #144

Maybe they should have asked Brett Redfearn (former SEC director working at Coinbase) about the SECs reasoning. He left Coinbase in July? I guess the revolving door corruption failed (and/or he figured out where the wind is blowing)... This is really all too transparent and obvious. A risk-free investment with 4% APY. What-aboutism about other exchanges (which are unregulated and off-shore). Not "understanding" the p…

As a kid I made over 4% APY interest on my savings account. Risk free. Yes, I realize their are important differences here but I don't think that getting a 4% risk-free return should be seen as an "obvious" problem.

It's not about the exact percentage, it's about it being significantly higher than the risk-free interest offered elsewhere in the market (which is <1%). That's a big red flag that it's not actually risk-free.

Re: The SEC has told us it wants to sue us over Lend. We don’t know why

#250

Post by imtringued »

alasdair_ wrote: post #118
fogof wrote: post #42

> They have only told us that they are assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves ... These two cases are from 1946 and 1990. Trying to make out like Howey is some obscure precedent from decades ago which the SEC is nitpicking over. The Howey test is the test applied to determine if something is an investment contract.

The Howey Test is absurdly broad. Two kids pooling their pocket money to buy the extra large bag of candy with a plan sell the extra gummy worms meets all four parts of the Howey Test and is unlicensed securities creation. Reminds me of the Bloomberg article "Everything Everywhere is Securities Fraud" https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...

Eating half the bag of candy is a loss though. You'd have to sell the other half for twice the price just to break even and if you promised the other kid that he gets back more than he spent then it is pretty damn close to a security.
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