originalCoinbase Trades Beanie Babies》, compiled by Odaily jk.
Original author: Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor at Dealbreaker, worked in the investment banking group at Goldman Sachs, served as an MA attorney at Wachtell, Lipton, Rosen Katz, and served as an associate judge on the U.S. Court of Appeals for the Third Circuit.
Editors note: This article mainly expresses some of the authors own views on the hearing, mainly expressing: Coinbase believes that they are only buying and selling/speculating commodities, while the SEC believes that they are buying and selling investment targets for the purpose of company financing. Although this legal argument is tenable, it conflicts with Coinbases own marketing; at the same time, for the blockchain and cryptocurrency world that yearns for stars and seas, Coinbase now advertises itself as just trading like stuffed toys Products somewhat defeats the original intention.
Lets say you want to start an Internet business and need funding. Here are two ways to raise funds:
1. You can register a company and sell shares. This is a fairly traditional method of raising capital, and people are familiar with how it works.
But it has some disadvantages. The main disadvantage is that you will be giving up some control and ownership of the business: if you sell stock to outside investors, then you will have a fiduciary duty to them and you will need to manage the company in their best interests, and they may By receiving voting shares and a board seat, they will also own a share of the companys value. Another disadvantage is that you will be subject to securities regulation. If you sell shares to the public, in the United States, the SEC will require you to register your offering and disclose a lot of information about your business. Even if you avoid registration by selling stock only to savvy venture capitalists, youll still be subject to securities fraud rules: If you lie to investors to get them to buy your stock, investors or the SEC can sue you.
2. You can sell crypto tokens that are related to your business in some way. This is a relatively new way of raising capital for a business, becoming popular around the late 2010s and early 2020s.
But it’s much less standardized than stocks, and it doesn’t even need to be clear exactly what I mean by “crypto tokens that are relevant to your business in some way.”Maybe you start an internet business, issue some crypto tokens, and commit a portion of the revenue from the business to buying back and burning some of those tokens, i.e., “buying and burning” the tokens. Well if you make a lot of profits you will buy a lot of tokens and therefore the tokens will be in demand and become valuable.People buy tokens today to speculate on the future profitability of the project. This is a common approach taken by actual crypto companies; we’ve previously discussed FTT, the stock-like token issued by FTX Trading Ltd. in connection with its crypto exchange. But you can imagine other ways to make the connection between your business and the token rather tenuous;You could just create a company called Gloobzorp Inc. and issue a token called Gloobzorp without making any commitments and just hope people buy the tokens, making an illogical bet on the success of your business.
Which way should you choose? Well, there are some very powerful advantages to taking the crypto-token approach circa 2021:
Compared to stocks, rules and regulations regarding fiduciary duties, equity sharing, etc. are relatively less mature in the crypto space. You can raise funds by issuing Gloobzorp tokens to investors,without having to give in too much in terms of control, profits, ownership interests, or other aspects.You can sell shares of a company without selling shares of the company—or rather, you can raise money by selling something that looks vaguely like shares of the company, rather than selling shares of the company.
Related, securities laws... shall we say? …does not apply to such matters. I mean, theres a lot of debate about this, and well talk about some of that. But you can at least imagine that these tokens are not securities, which means(1) You can sell them widely to the public to raise money to build your business without registering with the SEC or providing much disclosure, and (2) the SEC may not hold you accountable if you are committing fraud.
Theres a huge boom in the crypto space, money is pouring in, people arent asking too many questions, and its tempting to believe that every business with the word crypto on it will change the economy and make all of its investors rich. So you can raise a lot of money on pretty good terms without having to give up a lot of control or ownership without a lot of disclosure.
If you are free to choose (1) Raise money while being subject to many rules on disclosure, honesty, fiduciary duties, etc. and (2) Raise more money without rules or obligations, wouldnt you choose the latter?
But of course, this is not a long-term equilibrium state.All of the shortcomings of stock—fiduciary duties, sharing of business value, disclosure obligations—are not accidental; they are not merely arbitrary penalties for entrepreneurs who issue stock. They are the point.
The reason entrepreneurs are able to raise money by issuing stock—they can exchange for real dollars a piece of paper that says, “Here are shares of a business that doesn’t exist yet”—is because of a highly developed system of obligations. , convincing investors that the papers are valuable. Investors get some rights, some control, some economic ownership, some legal and regulatory protections in exchange for their money. This is why they are willing to invest their money.
And the specific set of rights that exist in the U.S. — Delaware corporate law, SEC disclosure rules, etc. — generally work so well that many foreign companies come to the U.S. to raise capital because they voluntarily accept the burden of U.S. regulation, making them Attractive to investors. Investors trust U.S. capital markets because they have a long tradition of being fairly well-regulated, which means they are an attractive place for companies to raise capital.
Meanwhile, in 2024, my description of raising capital for businesses by issuing crypto tokens rings false and embarrassing. You might be saying, “No one does it, it’s not a thing.” All I can say is: it sure is that way in 2021! But no one now believes that every business with the word “crypto” in its description will transform the economy, early investors in crypto products lost heavily when the crypto crashed, and crypto fundraising is now a fraction of what it was just a few years ago.
If people are willing to give your business money without expecting anything in return, then go ahead and take it!But they wont want to do it forever.
Meanwhile, today, the Securities and Exchange Commission (SEC) is pretty sure that U.S. securities laws do apply to this sort of thing, and always have. If you issue a crypto token to fund a business with vague promises that the token will participate in the businesss upside potential, the SEC considers this to be no different than issuing stock, and you should be held to the same standards as issuers of stock ( If disclosed, do not commit fraud). I think theyre right, but that doesnt matter right now.
The SEC’s crackdown on cryptocurrencies has been primarily achieved by going after cryptocurrency exchanges. The idea is roughly as follows:
If all of these crypto tokens are securities, then not only are they all illegally issued (by issuers that are not registered with the SEC), but they are all illegally traded (on crypto exchanges that are not registered with the SEC as a national securities exchange). traded on currency exchanges).
Crypto exchanges are fewer in number and larger than crypto issuers, shutting them down would shut down the crypto market more effectively than going after all issuers one by one.
One of the main targets of the U.S. Securities and Exchange Commission (SEC) is Coinbase Global Inc, a major U.S. exchange. The SEC sued Coinbase in June, and Coinbase is aggressively fighting the case. Yesterday, a New York federal judge held a hearing on Coinbase’s motion to dismiss the SEC case, and it sounds like Coinbase is in pretty good shape. The Wall Street Journal reports:
A federal judge on Wednesday questioned whether allowing the Securities and Exchange Commission to impose its rules on Coinbase would give the agency influence over markets it has no authority to regulate.
U.S. District Judge Katherine Polk Failla told SEC attorneys in court: “I want to understand how your standard does not include the collectibles market or commodities.” “One of my real concerns is that your argument is too broad,” she said.
Judge Failla is considering Coinbase’s request to dismiss an SEC civil lawsuit filed in Manhattan federal court. She did not rule at the end of Wednesdays five-hour hearing, but a decision is expected in the coming months.
But even if Coinbase wins, the victory will feel somewhat hollow. Bloomberg News reports:
William Savitt, an attorney for Coinbase, told U.S. District Judge Katherine Polk Failla that the tokens traded on the exchange are not securities subject to SEC jurisdiction because buyers do not acquire any rights when they purchase them, like they would if they purchased stocks or bonds. That way.
Its like the difference between buying Beanie Babies Inc. and buying Beanie Babies,Savitt said…
Attorneys for the government responded that purchasing items like baseball cards or figurines does not mean someone is buying a stake in the business that makes such items.
But thats not the case with the tokens sold on Coinbase, they said.
“When they buy this token, they are actually investing in the network behind it,” SEC attorney Patrick Costello said. The two are inseparable.
The SECs argument here is that a crypto token is an investment that promises some upside potential from a business building a network with the potential to do good things. Coinbases argument is that they are not, and that the tokens it lists do not give investors any rights or impose any claims on any economic activity.Coinbase’s argument is that crypto is a trillion-dollar market for rare stuffed animals,Its not about raising money to fund a real business idea, but simply a way to gamble on collectibles. “No, look, if you buy a crypto token, you get nothing, so the SEC has nothing to do.” That’s a good legal argument! But there’s something strange about Coinbase’s own marketing.
The problem with cryptocurrencies is that to have a large and attractive financial market over the long term, you need to take on obligations. You need to have a system in place to ensure that investors get what they pay for, entrepreneurs are held accountable to the investors who gave them money, people deal honestly, and investors are disclosed. To be clear,Coinbase is calling for these things: It wants to regulate cryptocurrencies because it would be good for its business in the long run; it has petitioned the SEC to create new rules for cryptocurrencies. I sympathize with its point of view and think some new rules would be good.
But the SEC rejected the request, saying, no, in fact, existing rules apply to cryptocurrencies and are good enough.But the cryptocurrency market mostly doesn’t want existing SEC regulations — disclosure and anti-fraud rules that apply to stocks — to apply to cryptocurrencies because they would be too restrictive. (This is why Coinbase is fighting the SEC in court, arguing that the SEC doesn’t have any jurisdiction over cryptocurrencies.) It’s good for cryptocurrencies to have some rules in place to eliminate some fraud and make the market more trustworthy, but if the rules are too So much, so much fraud has been eliminated...well, you might be worried, what will be left?
When Coinbase itself went public in 2021, its CEO Brian Armstrong wrote a letter to investors. The letter is full of grand statements:
Coinbase is a company with a big ambition: to create more economic freedom for everyone and every business. Everyone deserves access to financial services that can help them create a better life for themselves and their families, but today we are still far from that vision…
What started with Bitcoin has spawned an entire industry of countless different blockchains and tokens. We now have stablecoins, privacy coins, security tokens, reward tokens, governance tokens, and smart contracts. We are witnessing the digitization of all kinds of value, forming a new economy we call the crypto-economy.
Trading and speculation were the first major use cases for cryptocurrencies, just like people rushing to buy domain names in the early days of the internet. But we are now seeing cryptocurrencies evolving into something much more important. People are using cryptocurrencies to make money, spend, save, mortgage, borrow, vote, and conduct many other types of economic activities. The company is gaining funding, early customers, and will eventually go public on the blockchain. The crypto economy has only just begun. Its not meant to replace the traditional economy, but to complement it, like email does to paper mail. The crypto-economy provides a more global, free and fair alternative to the traditional economy and is a native product of the Internet.
Now, its a stuffed toy.