Regulation is Coming
The writing is on the wall. After blatantly ignoring blockchain and digital assets for the last decade, the US government is starting to show signs of locking down. Previous SEC official Jay Clayton had made rulings on the position of Bitcoin and Ethereum and deemed them not securities, which was a win for us1. Now the SEC is setting its gaze on Uniswap and Coinbase as potential investigation targets.
SEC says they are operating illegal securities exchanges and that these platforms in question may not pass the Howes and Reves security test. If you are unfamiliar with these tests, they stem from the 1933 securities act. These guidelines have been in place for a very long time and have been able to determine securities by if they pass the test. The test stands as follows: “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”2
The main issue with this test is the more decentralized the network is; there is no single entity to be targeted when considering crypto-assets. In the case of Uniswap, the tokens in question were given to participants on the platform for free, and this distribution now encompasses 255,417 unique holders. While this distribution is skewed and large holders own an ample supply, it was distributed to users and sold on the free market. At the end of the day, uniswap is run by no one. It is simply a piece of software linking buyers and sellers together that is updated by the community holders.
In the case of the Coinbase lend platform, I feel that this is possibly a security by this definition. Since this is an American-run company with shareholders, they ask people to invest within a joint enterprise of pooled funds to be lent. This money is gaining interest and borrowed on their platform without your effort and is therefore derived from the action of others.
BUT guess what?
Is a bank holding your money classified as a security? This is exactly the same mechanism. You deposit your money into your savings account and earn interest (disgustingly low rate, but hey, it is considered interest). The money is then lent to other people with the effort of other individuals.
I picture this as a last-ditch effort for banks to protect their unfair lending practices and dealing a blow to the software that will eventually eat away their market share. While this is all speculation on what will happen, I can see nothing of value coming from these investigations. Just look at the rulings on Robinhood and the Gamestop saga. They stopped the little investor from buying Gamestop on their platform, while Hedge funds shorted it to the ground. Robinhood has raised a total of $5.6B over 23 funding rounds. The most recent round was a $2.4 billion injection from Ribbit Capital. What this tells me is they can change nothing and still pay “The largest FINRA fine EVER” 34 more times. I wonder if they will change anything or keep making an insane amount of money off poorly informed investors and keep paying chump change in fees?
In my opinion, a new monetary system can't be held to the standards of laws developed in 1933. Hopefully, just like SEC V Howey in 1946, we will have a ruling that defines the stage for future regulation with protection to investors in mind while not jeopardizing the US Blockchain industry. A man can dream, can’t he?
U.S. Securities and Exchange Commission. "Statement on Cryptocurrencies and Initial Coin Offerings" Accessed September 15, 2021.
U.S. Securities and Exchange Commission. "Framework for 'Investment Contract' Analysis of Digital Assets." Accessed September 15, 2021.