Crapto thread: Going Blind to own the poors

[riverman]

[pvn]

lol amazing, I hope whoever invented the jpeg equity line of credit cleaned up on closing fees

[Jman220]

It’s tulips, all the way down.

[TheDudeAbides]

I want an ape so bad

[Surf]

At some level getting someone to loan you money with a monkey JPEG as the only at risk collateral kinda seems like a smart move to take them up on the offer

[goofy]

Probably a great time to buy!

[riverman]

Binance Unravels as Executives Flee and Layoffs Proliferate

[riverman]

LOLLL

Crypto Lender Celsius CEO Alex Mashinsky Arrested, Sued by Regulators

[goofy]

Either the banks are lying, or Celsius is lying!

[goofy]

@goofy

Either the banks are lying, or Celsius is lying!

[goofy]

Programming note: Money Stuff was supposed to be off today, but is not.

Levine with a special edition for a NY judge ruling Ripple’s token (XRP) is kind of a security but mostly not, first comparing the way traditional stocks now trade on open markets despite the companies not actively selling them…

That story does not really apply to Meta Platforms in 2023. Meta has not sold stock in ages. “We are not asking anyone to give us money for our stock,” you could almost imagine Meta saying, “and it just trades on an exchange totally disconnected from us. Why should we have to file all of these reports and get sued for all our misstatements, just because some people still want to trade this stock that we sold a decade ago? Maybe in 2012 we looked like one of those shady 1920s issuers, and the SEC needed to keep an eye on us and make us disclose everything about our finances to raise money, but that doesn’t apply now, not because we were shady then and aren’t now, but because we were raising money then and aren’t now.”

…to Ripple and the judge’s decision:

And then Ripple, to raise money to build its global payments network, and to create a market for the XRP token that would underpin that network, started selling XRP. It raised about $728.9 million by selling XRP in over-the-counter sales directly to institutional counterparties (hedge funds, banks, etc.), usually with legal documents governing the terms of the purchases. XRP became a popular and widely traded crypto token, listed on many crypto exchanges. And as it became publicly traded on crypto exchanges, Ripple also sold some of its XRP in the open market on those exchanges, raising about $757.6 million by selling XRP “‘programmatically,’ or through the use of trading algorithms.” Ripple also distributed XRP as employee compensation, and to “third parties that would develop new applications for XRP and the XRP Ledger.”

In 2020, the SEC sued Ripple, arguing that XRP is a security and Ripple was doing unregistered securities offerings. Ripple was selling this token to raise money to build its business, and it was selling the token by telling investors that it was a good investment. It was, the SEC reasonably believed, one of “the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits,” but Ripple did not register its securities offerings or file financial statements with the SEC.

Yesterday the federal judge in the case, Judge Analisa Torres of the Southern District of New York, issued an important and rather strange ruling in the case. Here is her opinion. Basically she ruled that sometimes XRP is a security and sometimes it isn’t. When Ripple sold XRP to institutional investors in over-the-counter trades, with due diligence and investment agreements, that was an “investment contract” and so a securities offering. When Ripple sold XRP to retail investors in on-exchange trades, anonymously and with no disclosure, that was not an “investment contract” and so not a securities offering.

That’s so weird!

But then she went on to say that when Ripple went around selling XRP on crypto exchanges with no disclosure, it was not selling securities. The disclosure creates the liability: If you go to an investor and say “hi, we are the issuer of this token, we think it is a good token, would you like some,” then you are selling a security; if you just anonymously dump the token to retail investors on a crypto exchange, then you are not. Judge Torres writes (citations omitted):

The Court next addresses Ripple’s Programmatic Sales, which occurred under different circumstances from the Institutional Sales. The SEC alleges that in the Programmatic Sales to public buyers (“Programmatic Buyers”) on digital asset exchanges, “Ripple understood that people were speculating on XRP as an investment,” “explicitly targeted speculators[,] and made increased speculative volume a ‘target goal.’” …

Having considered the economic reality of the Programmatic Sales, the Court concludes that the undisputed record does not establish the third Howey prong. Whereas the Institutional Buyers reasonably expected that Ripple would use the capital it received from its sales to improve the XRP ecosystem and thereby increase the price of XRP, Programmatic Buyers could not reasonably expect the same. Indeed, Ripple’s Programmatic Sales were blind bid/ask transactions, and Programmatic Buyers could not have known if their payments of money went to Ripple, or any other seller of XRP. Since 2017, Ripple’s Programmatic Sales represented less than 1% of the global XRP trading volume. Therefore, the vast majority of individuals who purchased XRP from digital asset exchanges did not invest their money in Ripple at all. An Institutional Buyer knowingly purchased XRP directly from Ripple pursuant to a contract, but the economic reality is that a Programmatic Buyer stood in the same shoes as a secondary market purchaser who did not know to whom or what it was paying its money.

Further, it is not enough for the SEC to argue that Ripple “explicitly targeted speculators” or that “Ripple understood that people were speculating on XRP as an investment.” … It may certainly be the case that many Programmatic Buyers purchased XRP with an expectation of profit, but they did not derive that expectation from Ripple’s efforts (as opposed to other factors, such as general cryptocurrency market trends)—particularly because none of the Programmatic Buyers were aware that they were buying XRP from Ripple.

Levine is skeptical of this argument, and with good reason:

Again: If you buy Meta stock on the stock exchange, there is a 0% chance that you are buying it from Meta, or that Meta will get your $313 and use it to improve the Threads ecosystem and thereby increase the price of Meta stock. And yet it is a security. What makes it a security is not that you have entered into a direct transaction with Meta, but that it was originally issued to raise money for Meta. It keeps being a security even as it trades.

Now I should say that there is a popular argument in crypto circles that this is not true for “investment contracts,” that an investment contract is only an investment contract when you buy it from the issuer, and that when it trades in the secondary market it is no longer a security.9 This argument is, for instance, very important to Coinbase Global Inc., which is being sued by the SEC for operating an unregistered securities exchange: If crypto tokens are never securities in the secondary market, then Coinbase is off the hook.

But notice that Judge Torres goes way beyond that claim: She seems to conclude not only that secondary-market transactions are never securities offerings, because the money doesn’t go to Ripple, but also that even when the money does go to Ripple it’s not a securities offering, as long as Ripple’s sales are mixed in with enough secondary sales that people don’t know that their money is going to Ripple. Imagine if that were the law for stock offerings! (It is not: Public companies do “at-the-market” offerings where they sell stock anonymously on the stock exchange, but they have to register them and announce them publicly.) The implication is that if a crypto issuer publicly and openly sells its tokens, that is an illegal securities offering, but if it sneaks in a few token sales on the exchange then it is not.
…
Third, it is … obviously … terrible … policy? “The securities laws protect only sophisticated investors who negotiate directly with the company, not retail investors who trade on public exchanges” is the exact opposite of the normal rule.

…but I dunno, both arguments make good points? What seems important here is, well, Meta stock *is* stock, and so it is clearly covered by laws that cover stock, whereas Ripple is *like* stock (but is not stock!) so securities laws have this gray area about Howey tests. It’s certainly interesting that applying this opinion’s same Howey test logic to Meta stock would draw the conclusion that it’s not actually a security, but also, that doesn’t matter!

But yeah given how…weird, and probably bad, this decision is, I have a feeling that higher courts are going to come to different conclusions:

More broadly, if you take this decision seriously, it means that the SEC has essentially no jurisdiction over crypto. Most token sales will either be (1) direct to institutional investors or (2) on exchanges. Sales on exchanges, says Judge Torres, are not securities offerings, because the buyer doesn’t know that she is giving money to the issuer. Sales to institutional investors are securities offerings, but anyone selling anything to institutional investors in 2023 can do so under an exemption from securities registration. (Securities registration is only for public sales, not sales to big institutions.) So basically no crypto sales will ever require SEC registration, no crypto exchange or brokerage will be a securities exchange or brokerage, and the SEC is out of crypto entirely.

But I am not sure that it is actually all that good for crypto in the long run. The message of this decision is that crypto companies can freely sell tokens to retail investors as long as those retail investors are uninformed and the companies are secretive about it; only if they sell tokens openly to sophisticated investors will they get in trouble. That’s bad.

In the 1920s, a lot of people started very shady companies and raised a lot of money by selling stock with bad and misleading disclosures, and so the securities laws were created to stop them. That did not have the result of stamping out stock issuance in the US. Quite the contrary! The US stock market was helped enormously by having disclosure rules and protections for retail investors. The basic rule of the US stock market is “you can kind of do what you like with sophisticated investors, but there are strict rules about how much you have to disclose to retail investors,” and that works out well. The opposite rule in this case — “you can do what you like with retail, but stay away from sophisticated investors” — seems likely to work out poorly. If the law encourages crypto companies to take advantage of the least sophisticated investors, then who would want to invest in crypto?

Whatever legal hoops you have to jump through, it is hard to imagine that courts are gonna end up in a state of “oh, funny, I guess the SEC can’t regulate crypto.”

[beetlejuice]

a completely backwards/inverse application of what the law is interesting though. we all agree crypto people are at the cutting edge when it comes to innovation. so clearly what they’ve created is a bizarro financial system with opposite laws and opposite logic, to compete with the traditional financial system, in a classic battle of wills. normal financial regulations couldn’t be applied to things that you’d THINK would apply to because it’s in bizarro land

[riverman]

[Jman220]

I have no words.

[boredsocial]

The last sentence means the rest of that was just a preamble for: I’m opening another tax haven first chance I get.

[LouisCyphre]

[Jman220]

We need nft’s of tulip bulbs.

[goofy]

Whatever “there should be NFTs of X” idea you have, it probably already exists.

[kerowo]

That is the dumbest thing I’ve ever seen.

[BriansHat]

But if someone burns the NFT of the diamond, I still have the diamond. People don’t understand what a revolutionary new asset diamonds are compared to NFTs!