Coinbase facing legal reckoning as early as this week

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UltimaParadox

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l P2P with other crypto enthusiasts

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so they can unload it on the next guy for a nice gain on an exchange.

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Explain like I’m 5 why it’s illegal to facilitate the buying/selling of strings of digital code?

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The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

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“A really important question is whether a cryptocurrency is a security for regulatory purposes under the Howey or some other tests. Based on your public statements, it’s pretty clear that you believe that some are securities, but others are not. So I’m frustrated by the lack of helpful SEC public guidance, explaining how you make this distinction. What makes some of them securities, while others are not securities,” Toomey asked in his opening remarks.

For his part, Gensler said in his remarks that “a small number” of cryptocurrencies are not securities, but he believes many are.

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Second, assuming the instrument does not bear a strong resemblance to one of those categories, the presumption may yet be rebutted if the balance of four factors indicates the note is not a security. Those factors are:

The motivations of the buyer and seller: “If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a ‘security.’”[11]
The plan of distribution: If there is “common trading for speculation or investment” in the note, it is more likely to be a security.[12]
The reasonable expectations of the investing public: If the public reasonably considers the notes to be securities, the Court may consider them as such despite a different economic reality.[13]
Risk-reducing considerations: If some factor reduces the risk of investment, like an alternative regulatory scheme or underlying collateral, such that application of the securities laws is unnecessary, the instrument may not be a security.[14]

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While the legal analysis is fact-specific (and not very clear), it centers on one main question: Is the instrument both sold and purchased as an investment?

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The SEC then found further that the mTokens were securities under Reves. In its view, all four factors favored that result: (1) the mTokens were sold “to raise funds” for DMM’s business (purchasing income-generating assets and building out its smart contracts) and were purchased as investments (to generate interest from DMM’s investments); (2) the tokens were sold to the general public; (3) DMM promoted mTokens as investments; and (4) no factor reduced the risk of the tokens.[32]

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That same problem makes it difficult to analyze these functions under Reves’ multi-factor test. As noted, Reves analyzes whether a particular note is bought and sold as an investment. But in many DeFi protocols, a buyer-seller or investor-investee relationship is hard to identify. Even assuming the buyer is primarily interested in profit, a particular seller or entity raising money “for the general use of a business enterprise or to finance substantial investments”[35] may be absent. Often a party transacts directly with a liquidity pool operated by a smart contract, which is just computer code deployed to a blockchain. In fulfilling that function, the protocol does not appear to be “rais[ing] capital for its general business operations.”[36] And in that regard, the protocol does not appear to act as the kind of seller that concerns the securities laws: the transaction does not implicate the kind of information asymmetry or duty of disclosure that might traditionally exist between an issuer and a buyer, which is an animating concern of securities laws.[37]

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"legal reckoning"

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