So if some anonymous person invents cryptocurrencies, at what point are you supposed to be considered securities? If the first exchange had gone to SEC to register as a securities exchange, would the SEC not have laughed in their face? The headline itself really captures the ambiguity and uncertainty of all of this: "potentially unlawful".
The reason why many cryptocurrencies are considered securities is because there's a certain group of people promoting them as in investment. They are claiming that their cryptocurrencies will rise in value.
If you study the definition of money, and what makes a good currency, there's no kind of money that rises in value merely because you own it. Money is meant to be spent or invested, not hoarded. (Adam Smith's "Wealth of Nations" gives a much better explanation in the first few chapters than I can.)
So, the point that you have to register as a security is the point that you start convincing people to own your cryptocurrency as in investment. At that point, your cryptocurrency isn't money; because money is meant to be spent.
How do you keep the SEC out of your cryptocurrency? Invent a cryptocurrency that functions as money. You will need to figure out how to keep the value stable on a day-to-day and year-to-year basis. That means that the supply needs to expand and contract quickly based on demand. "Mining" based cryptocurrencies can not do this.
Very interesting idea. Have you heard about Basecoin and Seigniorage shares? They are trying to do exactly that: http://www.getbasecoin.com/ Are these coins securities in your opinion?
Why bother using a convoluted blockchain stablecoin rube goldberg machine where you need to jump though several hoops just to use it, when you could use a service like venmo, square, stripe, etc? What use case would justify the need for a stable coin if not for evading the law?
Simple, just look at ETH. ETH is fully programmable currency. It can be locked away in a smart contract and programmed to disburse based on various conditions. A stable ERC20 token would have all the benefits of ETH coupled with the stability of the dollar. That's an incredibly powerful concept, much, much more powerful than a simple payments API with 2-3% fees BTW.
Your comment makes me think of beanie babies during the bubble. They hardly seem like securities, or do they? Your definition implies they are if there are folks assuring you they will go up in value. Also less cray example, old cars, classic records, guitars, art etc. Is a van gogh a security? An antique first printing of moby dick? Thanks!
> You will need to figure out how to keep the value stable on a day-to-day and year-to-year basis.
This is a difficult problem that's being tackled by multiple projects, such as MakerDAO[1] (DAI) and Bitshares[2] (BTS). Also less reputable implementations like Tether[3] (USDT).
A good article for more detail is An Overview Of Stablecoins[4]
"You will need to figure out how to keep the value stable on a day-to-day and year-to-year basis. That means that the supply needs to expand and contract quickly based on demand. "
Of course they would have laughed in their face. Do you see Nasdaq trying to list Dogecoin? There is no ambiguity or uncertainty here - there is a big problem and they're trying to reign it in with gloved hands before it becomes one and it turns into a big economic mess that the government will have to foot the bill to eventually clean up.
This site likes to complain about wealthy inequality - common people like your grandparents and uninformed but good hearted relatives are providing liquidity for a growing number of new millionaires and billionaires to exit imaginary money who have provided less than zero benefit or service to our society and are leaving the country to avoid tax payments and taking money out of our economy.
The very idea that a random citizen in a modern country can invent their own notion of money is beyond problematic so it is confounding that this whole thing has been allowed to mushroom into what it is today.
Proponents like to drag skeptics into crypto debates but that is far off the mark when it comes to the real implications of the current situation.
Some questions to ponder:
When will the government decide it is illegal to create your own money? will those who have already amassed fortunes (even imaginary) be allowed to keep it? And if so why would the citizenry tolerate such a situation?
"money" is a representation of value that is recognised as such by a group of people. If a few people decide that a bunch of stones are now money[0] (in other words, represents value), should they be arrested? Similarly, when a group does the same not to stones but to seashells [1] or salt are they committing securities fraud? Someone decides to do the same for a few hashes on the internet and suddenly they can't? What's the difference?
What about doing the same with currencies recognised in countries other than the one you're in, is that illegal?
Is it really money if nobody's using it like money? When people started using sea shells as money, they were buying stuff with it, not just speculating about its value using some other currency.
The problem with these analogous argument about what money means fails to account for the implicit contract that we all sign as members of a society. If you buy your own island like Sir Richard Branson then by all means do what you please.
Legal tender is perhaps the most important corner stone of a modern nation state, if an entrepreneur can invent their own money and subsume the one issued by a government then you don't have a government. I for one prefer having a government.
This is not a trivial issue as cryptocurrency proponents seem to think it is.
>>if an entrepreneur can invent their own money and subsume the one issued by a government then you don't have a government. I for one prefer having a government.
Nonsense. We've had non-political money before. During the free banking era we had thousands of bank-issued currencies that competed in an open market, and the state was alive and well.
The state exists as long as it has a monopoly on force within its jurisdiction. It doesn't need to monopolize the control of money and imprison anyone who has wrong-think about what they consider to be money.
I understand that a lot of people here don't like cryptocurrency and the get-rich mentality around it, but understand that when you call for laws to prohibit various uses of it, you're calling for people to see the inside of a prison cell because they have different ideas about what money is than you.
So wait, okay, in the 1800s state-and-gold-backed banks issued legal tender in lieu of anything else, this is a fair analogy to cryptocurrency and anybody against cryptocurrency just wants to see people in jail
>Legal tender is perhaps the most important corner stone of a modern nation state, if an entrepreneur can invent their own money and subsume the one issued by a government then you don't have a government.
Legal-tender laws already prevent non-government currencies from subsuming fiat. Nobody is obliged to accept Bitcoin as payment of a debt, but they are obliged to accept legal tender.
And besides that, there will always be demand for fiat at least for paying taxes.
Firstly, I don't think it's likely a cryptocoin is going to destroy any major currency.
I don't agree having a non government issued currency means you don't have a government, for one there seem to be a few countries that use the Dollar or Euro as the de-facto currency.
When they allow a foreign currency to become the de-facto medium of exchange in a nation, the government is basically admitting that it's lost the ability to issue currency and manage its own economy. The loss of economic control involved is so extreme that you'd only do it if you had essentially no other options left - the government is close to failure.
Not necessarily. Government can delegate things up or down - the Euro is not an effect of Germany, the UK or France admitting economic defeat but a realization that a shared economy can benefit all.
Yes, but that's very different - the Eurozone countries are not allowing another nation's currency to become their defacto currency, they're creating a pooled economy where they all still have a voice in the management of the common currency. (And it's still causing a ton of problems, when you consider what's happened in Spain, Italy and Greece.)
It's radically different from allowing your defacto currency to be one managed by another country, particuarly one that has no common economic interest with yours.
There's an exception to that: most European microstates adopted the Euro but aren't part of the Eurozone (nor the EU) and have no power in decisions made about it. Of course I concede that microstates have unique properties that break away from most considerations that are applicable to "typical" sovereign nations but it's not as clear-cut as you describe.
I'd argue this isn't inconsistent; these states are so small they effectively have ceded control of their economy, as well as their national defense, to the larger European community. Kosovo and Montenegro, for example, previously used the German Mark. This seems pretty close to an admission that for whatever reason (scale, stability) they're not able to issue their own currency in a credible manner.
Does it really change that much though? I suppose they would not be able to control inflation, but taxes and tariffs would remain the same. It's not a total loss of control.
> If a few people decide that a bunch of stones are now money, should they be arrested?
As long as they pay (using real money!) the taxes owed on the economic transactions carried using this alternative currency, I think they will be fine.
I know a car dealership that had a customer attempt to purchase a vehicle with a cheque drawn on a currency called RA, or something similar. The customer said that they were paying the sum of $30,000 in comparable spiritual RA. Would you have taken the cheque?
The question is not whether or not someone would accept it. The question is, would it make sense for charges to be filed against you if you had accepted the cheque (or not accepted the cheque).
Obviously not everyone has this same notion about the role of government. Since we (at least aspire to) live in a society of democratic ideals and freedom, what do you say to people who want innovation in this space?
I prefer for government to be wholly uninvolved in the matter of decided which assets constitute currency; it seems to me to be an utter conflict of interest.
Cryptocurrency markets have absolutely nothing to do with forex markets and the suggestion that they share commonalities or should be compared together is both deceptive, ignorant, and perpetuates a volume of misinformation
I feel that's a hand-wavy explanation that doesn't actually explain anything, and is similar to patents being granted solely on being the same thing that was done before, but "on a computer".
> who have provided less than zero benefit or service to our society
Was following your argument up to that point. Making such a value judgment requires, in my opinion, a lot more data and deep analysis. Cryptocurrencies have the potential of loosening the grasp of oppressive regimes over their people. And it takes those other investors for the process to function.
But, the reality and therefore data is needed to judge whether these new currencies can deliver on that promise.
Edit: Want to clarify that I'm talking about *coin buyers/sellers. Not scam ICO backers. Agree that those folks are scum with negative value to society. If the parent was mainly talking about ICO scams, then please ignore my response and apologies for the misinterpretation.
I see the argument that cryptos reduce the grasp of oppressive regimes on here pretty frequently but the truth is that a) the null hypothesis (no effect) has yet to be rejected with any data and b) oppressive regimes are very good at eliminating or severely restricting internet access when it suits them.
A slight tangent -- you can't just take two options and say we don't have any data so we can't judge. We have a prior: most things do not have an effect in this case.
I think a better way to say it is that it helps to prevent turns of current regimes (that already have Internet infrastructure built and used) into oppressive regimes.
I don't know how is that relevant to what I'm saying at all. I never said it can't be used for evil. Also, North Korea doesn't fulfill the condition of being internet-developed area before the turn to an oppressive regime happened.
Do you honestly believe that would-be oppressive regimes with existing internet infrastructure will not turn oppressive because crypto? In the most optimistic scenario this argument deals with b but still suffers from a.
The burden of proof is on the new product, not the current society. I don't think he needs "data and deep analysis", that work needs to be done by the people trying to convince you cryptocurrencies are the future.
When the status quo is disrupted, it's perfectly reasonable to assume that it's a passing fad or won't work out. A product or asset, especially a radical step like cryptocurrencies, succeeding and being valuable is the exception, not the rule.
There's a reason accredited investors exist, because they're expected to know better.
Exchanges of the types prohibited by existing securities laws are not prohibited merely because they haven't proven to be socially beneficial, but because they have proven to be massively harmful.
The idea that cryptocurrency as a subject of trading changes that in any way is a claim which requires some substantial basis before it would warrant an exception to the general rules written into law.
There is absolutely no proof that it's "massively harmful". It's impossible to quantify all of the positive and negative effects of any type of exchange, let alone to "prove" the effects are net harmful.
>>the general rules written into law.
I'm arguing against the principle that we should ban anything not proven to be socially beneficial.
Not to mention the authorities have a dearth of existing legislation under which to already prosecute bad actors in the crypto space. Ponzi schemes, fake ICO's and outright theft and extortion are already thoroughly addressed by existing legislation / property law. Summarily banning the thing you fine inconvenient to investigate is just lazy regulation, at best.
The burden of proof is on the new product, not the current society
Why do you think that's how it works? Society is not a formal debate, and its members should be able to question any aspect of it at any time for any reason, whether or not they think they have a better idea. The entire concept of "burden of proof" is out the window here since many of its mores do not exist for rational reasons!
Though perhaps contrary to your parent commenter's point, the North Korean regime appears to be using Bitcoin speculation to circumvent international sanctions, making as much as $200 million last year ( which would be about 1.5% of its GDP, or 10% of its military budget): https://www.telegraph.co.uk/news/2018/03/05/north-korea-may-...
There's also Venezuela, a rare example of the hyperinflationary failed state cryptolibertarians insist their project is designed to combat, launching its own sort of cryptocurrency project as a way to get more dollars from foreign suckers so it can continue to import the stuff its leadership wants.
Regardless, the null position which assumes the least is not "crypto currencies run by folks seeking to exit into USD provide real value" but rather "do not provide value".
The claim that someone would prove, of course, would be that they provide value.
So that shouldn't offend you that the null position (and the position which satisfies occams razor) is the default stated position.
Instead of criticizing it, you could actually do the work of proving your claim that crypto has real measurable value to a society. Until that's proven, though...
Except it doesn't depend on any particular means of communication. You can print out Bitcoin on paper and physically trade it. You can embed it in an image and trade that. You can physically scan QR codes on each others phones to transmit it. Bitcoin and other cryptos can be transferred via sat phone. The Internet and exchanges are just conveniences.
There are also numerous projects to work around Internet censorship in the crypto space. Such as the Substratum Network (https://substratum.net) and Mysterium Network (https://mysterium.network).
I see you are trying to be clever, but that comment doesn't really bring anything to the table. Sure, you can try to filter/block crypto transactions but that will be A LOT harder than blocking dissident blogs. One of the biggest selling points of many decentralized systems is to be censorship resistant.
thats only true in theory really, because there are many ways to go around the same blocks. eg , by simply storing ur wallet node remotely.
nobody said that there is something special about the traffic, just that the system is set up in a way that does makes it impossible for governments to effectively stop you from enjoying ur rights to freely transact.
Are you implying that because someone lives in an oppressive country that they have no money to transact? I really dont understand your question.
Oppressive regimes tend to control money flow in/out of the country. So if you, for example, have an aunt somewhere outside that wants to send you money -> you just might not be able to receive it, or would need to give some official a slice of the pie. Bitcoin obviously can help as u can just move the money without government oversight.
Crypto is only effective in that regard if you're able to opt-in. The problem is, you eventually need to interface with the fiat currencies for your "wealth" to be useful. The first step an oppressive regime would do is to just ban exchanges.
Acquiring this "wealth" of crypto would be impossible in an oppressive regime in the first place.
If you look though the code and math behind Bitcoin and other cryptocoin projects it's quite evident that there is malice and a manipulative design with even Bitcoin.
OP was making a point about how easy it is to produce cryptocoins (in terms of both launching the software, and in terms of measurable capital cost to mine coins).
Coupled with the history of Bitcoin and what has predominately been the demographic attracted to an quasi-anonymous digital token for trading has been anarcho-capitalists who bought drugs and child pornography on TOR and silk road etc.
For the record, the SEC won't ban cryptocurrency. They want technology (in general) to stay here and potentially evolve into something that can be useful and provide jobs and value someday, so you can still free oppressed nations, but you will need to cooperate with the American government if it's being done on our soil.
The technology cannot discern the intentions of the nation attempting to regulate it. Tyrannical oppression and reasonable regulation both use the same punishment stick to beat those who step out of line.
Anything that can free people from tyranny must necessarily also be able to free them from the burden of obeying laws. The reasonable standards of conduct have to actually be built into the system in order for it to have a limit on what amount of external control is allowed.
Systems with smart contracts would be able to specify that a government actor could interfere--even retroactively--with any transactions that explicitly opted in to that jurisdiction. So you could sue someone over their Ethereum scam, and a judge could rule in your favor, and then a clerk forwards the order to the technical magicians for the digital circuit court, so that you get as much of your money back as is technically possible to recover.
If you don't opt in, you are in the land of caveat emptor, and the court tosses your case because it can't help you, even if you deserved it. Or people could opt in to private arbitration. But if someone wants their mathmoney to be outside the reach of government enforcement, it is necessarily also out of the reach of government protection. If you won't follow someone else's rules, you can't expect that your untrusted counterparty will follow them, either.
The first state to create a solid opt-in jurisdiction for network-based civil complaints will clean up, just as Delaware has for corporations.
>>they're trying to reign it in with gloved hands before it becomes one and it turns into a big economic mess that the government will have to foot the bill to eventually clean up.
The government has no obligation to clean up anything. Claiming otherwise is just an excuse to prohibit people from investing into high-risk assets.
>>common people like your grandparents and uninformed but good hearted relatives are providing liquidity for a growing number of new millionaires and billionaires
If the common good-hearted people are too stupid to control their own money, then they should be deprived of the right to vote and other semblances of legal persohood. What you're suggesting, which is to restrict the rights of everyone, is a disproportionate and illiberal response, characteristic of Big Brother states rather than free societies.
> The government has no obligation to clean up anything.
Sure they do. It's tasked with the ongoing operation and existence of the country, which can be threatened by economic instability. For example, Albania had a civil war literally over Ponzi scheme failures. https://en.wikipedia.org/wiki/Albanian_Civil_War
> If the common good-hearted people are too stupid to control their own money, then they should be deprived of the right to vote and other semblances of legal persohood. What you're suggesting, which is to restrict the rights of everyone, is a disproportionate and illiberal response, characteristic of Big Brother states rather than free societies.
Slamming "Big Brother states" while advocating for the removal of the right to vote and legal personhood is... special.
>>For example, Albania had a civil war literally over Ponzi scheme failures.
Albania is a lawless country where people are murdered across generations in ongoing blood feuds. In such a setting, any major social crisis can trigger a civil war. The solution in Albania is not to restrict private economic exchange. It is to institute the rule of law, by consistently prosecuting crimes like homicide, so that people don't think that extra-judicial violence is an appropriate response to disputes.
There is no chance that a cryptocurrency dropping in value in the West would trigger a civil war, because the rule of law presides in the West.
You're using the violence inherent to Albanian culture, that is independent of any financial phenomenon, as an excuse for putting cryptocurrency traders in prison.
>>Slamming "Big Brother states" while advocating for the removal of the right to vote and legal personhood is... special.
Obviously the comment was not meant to be taken literally, as evident from the comment right after calling the approach "illiberal" and characterisic of police states.
My comment was meant to equate advocacy for removing the right to freely transact with advocacy for the removal of the right to vote. Both are the natural implication of the principle that the subject is too ignorant, stupid, gullible, etc to be given full agency.
Think of it this way: you want the good hearted and gullible people to not be allowed to transact without gatekeepers, but you want them to have the right to vote, without gatekeepers to protect them from demagogues? That's inconsistent.
In other words, I'm saying if you really think the typical person is so incompetent that there should be laws to prevent them from investing into assets that have not been vetted by a government agency, then you don't have enough faith in their competence to give them the right to vote.
Incidentally, the poorest households spend 9 percent of their income on lottery tickets. The fact that this is not only legal, but promoted by state-funded advertising, yet investing in securities issued by non-public companies is prohibited, shows that protecting the public is not the real motivation beyond laws against purchase of non-public securities.
> The government has no obligation to clean up anything
And yet, when millions of individual investors lose more than they can afford that's often what must happen to preserve the peace. If Bitcoin went to $100 today, at the very least we'd see a massive hit to unemployment and disability rolls.
> As big as bitcoin’s market cap is globally, it doesn’t actually appear to be causing a lot of employment
Wealth effects are real [1]. Moreover, I know at least a handful of otherwise-intelligent individuals who used their credit cards to make leveraged Bitcoin plays. At the very least, they'll face collections and potentially bankruptcy as a result of the crypto crash.
It's not clear that the number of people holding Bitcoin gains, multiplied by the wealth effect, is creating any significant impact on the global economy. Similarly, even if everyone who used credit cards to buy Bitcoin went bankrupt, that still wouldn't be that big a deal for the economy.
Right now Bitcoin lacks the kind of leverage and interconnection with other asset classes that made the real estate crash have a big impact. In that situation, for example, you had banks running 30:1 leverage on some assets, which mean that a 4% decline resulted in a total loss of equity.
I agree. I do not believe the cryptocurrency crash will foment a global economic crisis. I do believe it will create temporary hardships for many Americans, hardships which will in some form flow onto state and federal balance sheets.
When you say "many", how many do you think, and what are you basing that number on? I'm not sure the total wealth from bitcoin to Americans is material to the national economy, much less the potential negative change in that wealth.
The stats I've seen indicate that essentially nobody owns bitcoin when you compare it to other commonly forms of wealth, like homes or traditional equities.
I think one estimate was that less than 500K people - worldwide - own more than one bitcoin, approximately worth $10K. Compare that to the US housing market, where there's 100M-odd homeowners with an average value of ~$220K. Let's say there's 200K bitcoin holders in the US with a bitcoin each, so that's ~2 billion dollars in value vs say 22 trillion in home assets, very rough calc. (And yes, some of those have a lot more than one bitcoin, but some houses are worth more than $220K, and the wealth effect tends to happen breadthwise, primarily.)
Nothing "must happen". This is just a cop out to avoid letting people suffer for their own mistakes. Instead the government dumps the cost on everyone else.
If there's no bailout at the taxpayer's expense, what do you suppose will happen? Riots? Revolutions?
Nothing will happen except millions of people learning a much needed lesson.
Really anything that gains value soley due to being promoted would be considered a security SEC v. WJ Howey Co:
> [a]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
The second half is important too: that the expected profits are from the efforts of the promoter. In other words if a company is doing work of some kind, and they are selling a token on the basis that it will go up in value due to the work that they are doing, then it is a security.
If the SEC takes enforcement action against a token, the case would go to the courts, and then the courts would be responsible for deciding if the SEC's interpretation of the Howey Test is valid or not.
It's not about the coins, it's about the intent. If you go to the SEC and say "I'm going to sell pieces of paper of dubious actual value as securities," they'll be interested. The mechanism that the securities use is not important.
The unlawful part is not the technology, it's how the securities are sold. If you sell something that looks like a security, sounds like a security, and smells like a security, and you're violating regulations around securities, then yes, it's potentially unlawful.
Worth noting that the first major cryptocurrency exchange, MtGox, had no accountants and stole a lot of customer money. Preventing that is precisely what the SEC is for.
The SEC generally applies the "Howey test"[0] when deciding is something is to be declared as a security or not. It is "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."
So a token from an ICO that might accumulate in value if the team delivers is a security. A pure utility token or cryptocurrency is not. This is a major reason why many ICOs shoehorn in some kind of use for their token in their platform (when they could just have used e.g. ETH for payment) in order to skirt being classified as a security.
Do not be fooled by fancy looking "whitepapers", professional websites, and cute mascots.
Whitepapers are bought usually from the lowest bidder who can bullshit technical keyword bingo. This person may not be involved with the company or even know much about the coin itself as often these job listings indicate the project manager themselves knows nothing about the coin they plan to offer except their own personal dreams of wealth. Same with every other part of these ICOs. The daily freelancer job listings are flooded with requests of this nature; I might estimate 1:25 to 1:50 of the offers are for ICO schemes.
There is no requirement that regulators avoid catch-22 like situations. It would be unsurprising if the SEC had responded in such a situation with "Yes, they are likely securities, but no we don't care to elaborate, and we can't undertake approving your exchange because of (insert plausible but kinda lame reason here)."
You have very little in the way of recourse.
However if they determine that you're illegally selling those securities, you better believe that they can and will come after you, in the name of protecting the little guy.
>So if some anonymous person invents cryptocurrencies, at what point are you supposed to be considered securities?
Through the long-settled laws, rules, and procedures used to determine whether anything is a security.
Even though cryptocurrencies are the new hotness, this isn't a new or particularly interesting area of law. The tools for analyzing what counts as a security have long existed.
