The US Securities and Exchange Commission has charged Coinbase, Inc. Coinbase claims that the cryptocurrencies it offers for trading meet the definition of "securities". Because Coinbase has not registered its assets as securities and is not itself registered as a broker or dealer, the SEC says it has the authority to prosecute Coinbase for these securities registration violations. If the court accepts the SEC's position, the SEC will gain the power to regulate crypto-assets, which could have a major impact on the direction of cryptocurrencies as accepted currencies, investments and exchanges.
SEC v. SEC in the 1946 investment contracts decision of the US Supreme Court . WJ Howey [1] It has been applied to determine whether cryptocurrencies are securities.
On June 6, 2023, in a complaint filed in the federal court for the Southern District of New York, Coinbase, Inc. He is accused of operating a trading platform for buying, selling and trading securities in cryptocurrencies without being registered as a broker, securities or stocks. . exchange, or as a clearing agency"). [2] Coinbase's complaint is based on cryptocurrency "investment contracts" Coinbase SEC v. WJ Howey [3] Based on this finding, the SEC claims it has the authority to require Coinbase exchange under Exchange Act Section 15(a) is a clearinghouse under Section 17a(b) of the Brokerage and Exchange Act of 1934. The SEC alleges that Coinbase exposed investors to significant risks through the Act's registration, disclosure, audit - and circumvent conflict protection interests in securities [5].
An overview of cryptocurrencies and crypto markets
Cryptocurrencies are digital currencies traded on an exchange that do not depend on a central government or banking authority to protect or preserve their value. These decentralized systems eliminate the need for traditional intermediaries such as banks to verify cryptocurrency transfers. In general terms, a cryptocurrency is a digital currency represented by a "coin" or "token", the ownership of which is tracked by a "blockchain". Blockchains act as a ledger to track the withdrawal or transfer of coins. They are called blockchains because their records or blocks are linked and secured with cryptography. A coin holder can access, receive, exchange or transfer their coins using a "wallet" that uses their private key to access the blockchains that hold their coins. Owners of cryptocurrencies can buy and exchange them for cash or other digital currencies.
Cryptocurrency transactions processed by currency exchanges are verified through a process called "mining". When a miner successfully validates a transaction, the miner receives cryptocurrency as a reward. This verification process is essential to how blocks are added to the blockchain, as it creates a consensus among users about the existence of cryptocurrencies and their ownership, and mining rewards increase the currency's supply. The main mining methods in Blockchains are "proof of work" or "proof of agreement". It solves a complex mathematical problem by trial and error, using computers called validator nodes to "mine" cryptographic transactions into blocks. The first miner who finds a solution to this problem and it has been verified and accepted by other miners can update the blockchain and receive in return the most important cryptographic asset of the blockchain as a reward. Proof-of-stake involves choosing "tokens" for cryptocurrency holders, who then "send over" a minimum amount of cryptocurrency to guarantee mining performance.
A company can use an "initial coin offering (ICO)" as a way to raise funds for its cryptocurrency [7] .
Proof-of-work cryptocurrency mining solves complex mathematical problems that require complex computers and consume large amounts of electricity. Therefore, the cost of computer equipment and electricity can be high. Miners must consider whether the cost of receiving a cryptocurrency reward if their mining efforts are successful is worth it. This led to the pooling of resources and resources to "share" the cost of mining. Audet v. The Fraser case, discussed below, used the Hawaiian test to determine whether the mining price was purchased primarily from the company that owned the mining computers or from shares in the mining process. The computer successfully mines new currencies. If the value is created mainly by the efforts of the company, the assets are more valuable. If the value is primarily driven by the efforts of the miners, the assets are shares. The Chamber of Accounts decided otherwise in relation to many property objects.
SEC Hawaii Application of Coinbase Assets in Coinbase Complaint
Coinbase operates a trading platform where consumers can buy, sell and trade cryptocurrencies. The Coinbase platform has 108 million users, trades hundreds of crypto-assets and billions of dollars in transactions per day. Coinbase offers a brokerage product to transfer wallet orders through the Coinbase platform (Coinbase Prime) and third-party platforms (Coinbase Wallet). securities) that use Cryptocurrency shares are usually various native tokens available on different blockchains. The SEC says Coinbase attracts customers and facilitates the trading of cryptocurrency assets on its platform. These securities are available on the Coinbase platform and through Coinbase Prime and Coinbase Wallet. The SEC applies the § 126 Hawaii test to these cryptocurrency securities based on cryptocurrency issuers, promoters and Coinbase's representation of "investment contracts" of issuers and promoters of "management or business endeavors." [9]
The SEC also allowed Coinbase investors to apply Hawaii's "general risk" element to another class of cryptocurrency shares. Blockchains that rely on proof-of-stake to add blocks use "validators" to agree on which transactions on the blockchain are valid. This is done by validators pledging or "staking" a certain amount of the underlying blockchain asset held as collateral. When a validator starts issuing new blocks, voting for proposed blocks, or other consensus actions, the validator will be rewarded in the form of additional amounts of original resources. If the guarantor does not fulfill his capacity, he loses the security of the property. But gambling is expensive. In addition to bringing in a small amount of local resources to participate, verifiers must purchase and manage an “authentication node,” the computer software and hardware necessary to perform full participation functions [10].
Coinbase's staking program allows investors to pool their resources to reach a minimum stake for five cryptocurrency shares. Coinbase provides and operates its own verification node that it uses to perform token transactions. In exchange for the participation program, which gives investors the opportunity to use nodes to collect and verify bids, Coinbase charges a fee of 25% or 35%, depending on the rewards received for participation . The SEC offers investors nearly 30 paragraphs of Coinbase's complaint, which describes how the betting program implemented in five cryptocurrencies meets the elements of the Hawaii test. [11] Coinbase's complaint addresses 3 elements of the Hawaii test: 1) "Coinbase's interest." money from the participants of the program for investment"; 2) "Coinbase Strike Investors Engage in Joint Ventures"; and 3) "Investors in Coinbase's equity program reasonably expect to benefit from Coinbase's efforts".[12]
Coinbase's complaint in Audet v. Fraser , discussed below. For example, the SEC has stated that a deposit of qualified cryptocurrencies meets the "financial investment" requirements of the Hawaii test. [13] And while not naming Coinbase's complaint, the plaintiff describes two ways to satisfy the commonwealth. The body is described according to Audet :
Finally, the SEC accepts the third factor in Hawaii because Coinbase's public statements in marketing and investor materials instruct investors to "reasonably expect that Coinbase's efforts will result in a return on investments related to the strike program".[16]
As with the Coinbase complaint, the court will help understand how the elements of Hawaii apply to crypto assets and arrangements similar to the Coinbase complaint.
Audet vs Fraser : SEC vs Coinbase analysis model
The 2022 Connecticut federal court decision Audet v Fraser [17] illustrates how a court in Hawaii analyzed similar crypto-assets. In Audet , it partially reversed a federal judge's ruling that contracts to invest in a crypto-mining company's cryptocurrency-related assets were not "securities" under the federal Havi test. GAW Miners, LLC ("GAW") markets and sells a variety of cryptographic products: 1) "hashlets," which are computers that GAW uses to mine cryptocurrencies; 2) "PayCoin", GAW's cryptocurrency; 3) "Paybase" is a merchant-supported platform aimed at enabling consumers to quickly and easily use Paycoin in their stores with payment methods; 4) "Hashpoint" used as a GAW credit card where Hashlet machine owners can earn "Hashpoint" credits that can be exchanged for Paycoin. and 5) "HashStakers" use it as a wallet to lock the owners' Paycoins for a period of time and earn interest. A federal judge found that none of these crypto-assets passed the test in Hawaii to justify an investment contract. The court upheld the jury's verdict on all crypto-assets except Paycoin, which the court found to be securities, and thus ordered a new trial on the securities fraud claims related to Paycoin.
The Audet court instructed the jury on the three basic elements of the Hawaii test: "(1) investment of money; (2) joint venture; (3) income derived solely from the efforts of others."
Financial investments
The court ruled that cash is not the only type of investment that satisfies this Hawaii factor. The defendants did not contribute money because they paid Paycoin with Hashpoint credits they earned, not cash or other cryptocurrencies. The court rejected this argument, stating that "cash is not the only contribution or investment that creates an investment contract... [] The 'investment' may take the form of 'goods and services' or other 'exchange of value.' ." Hashpoints are used to earn Paycoins are exchanged for Bitcoin or mining Get paid.” At the same time, GAW paid Bitcoin or other cryptocurrency to the Plaintiffs and eventually offered Paycoin to the Plaintiffs in exchange for Hashpoints [21]
Collective work: horizontal and vertical society
As the court stated, the joint enterprise element requires a finding of "horizontal commonality or near vertical commonality." Vertical synergy occurs when the wealth of investors is linked to the wealth of the firm.
According to the court, there was no horizontal community between the owners of Hashlet, because "regardless of the wealth of the other buyers" they could make a profit or a loss. Daily Draw Even if both owners take the same pot, one owner can "tap" their hashes to win more. Because owners can receive different payouts depending on which pools they manage or which hashlets they reconstruct, the court upheld the jury's decision that a hashlet owner's wealth is not tied to the wealth of other owners.
The court found that there was no vertical community because the assets of the Hashlet owners were unrelated to the assets of GAW. Owners pay Hashlet a flat fee. GAW did not directly benefit from the owner's mining or extraction of mineral energy. In other words, "GAW's profit was not proportional to the Hashlet owner---the Hashlet owner received the same amount regardless of whether he made a large or small profit"[24].
But the court found a horizontal commonality between the owners of Paycoin. GAW's promotional materials claim that it has established a "Coin Adoption Fund" as part of its initial coin offering, which has been used to support the widespread adoption of Paycoin. [25] When a buyer accepts Paycoin, the value of Paycoin rises and falls simultaneously around the world. advice, give Paycoin holders proportional amounts of Paycoin. They earned profit and value. The court's findings are consistent with other cryptocurrencies where courts have paid investors to receive cryptocurrencies whose value is tied to the companies' success in developing a blockchain or other entity of the "digital ecosystem" if successful. [26] Here, Paycoin investors pooled resources to use with the GAW Coin Adoption Fund to promote Paycoin because, if successful, it would increase the owner's Paycoin value because the court found no horizontal commonality in Paycoin. Vertical commonality must be analyzed.
Expectation of profit from other endeavors
The court found that a reasonable jury could have concluded that the profits obtained by the Hashlecki owners "were insufficient as a result of GAW's entrepreneurial or managerial efforts." . ” [27] The court ruled that GAW's activities were limited to stockpiling mining materials and providing sufficient electricity for the equipment. But Hashlet owners choose how to allocate their mining pools and mining power. As a result, some hashlet owners outperformed other owners based on their mining decisions. According to the court, GAW's role was limited to the location and operation of the mining facilities used by the owners. Therefore, the Hashlett owner's income did not depend primarily on GAW management or entrepreneurial efforts. The court noted other cases where the value of crypto-assets depends almost entirely on the company's success in launching and operating a blockchain or digital ecosystem [28] .
The court ruled that the Paycoin owner's income depends on GAW's efforts. Paycoin's value has been attributed to Paycoin's unique efforts to expand market and merchant adoption. The more merchants use Paycoin as a payment method and the more users use Paycoin, the more valuable Paycoin becomes. GAW used three rounds of initial coin offerings to create the "world's first" coin adoption fund for Paycoin's value creation process. There was no evidence that non-Paycoin buyers of Paycoin had any control or role in this Paycoin value creation process. The court rejected the argument that Paycoin was not subject to GAW's efforts because it used open source software that anyone could recommend changes to, while Bitcoin and other proprietary developers could not. The court emphasized that GAW still controls changes to Paycoin's software and that these software changes have no effect on Paycoin's price growth, such as GAW's merchant acceptance efforts. [29] The court ruled that since Paycoin is traded on public exchanges, its price is not tied to GAW's efforts due to market forces. He said that he did not with. The court said it ignored evidence of GAW's "fundamental role" in creating the Paycoin market [30].
Finally, the defendants argued that GAW did not promote Paycoin as an investment. Instead, the defendants argued that Paycoin buyers were primarily interested in using Paycoin to make purchases from merchants. While some Paycoin owners had a "consumer interest," the court noted that the efforts of GAW merchants to accept Paycoin were attempts to build an ecosystem that would add value to Paycoin by making them owners and exchanges after have unlocked their Paycoin. For profit [31] The data therefore shows that Paycoin buyers were mainly interested in the profit associated with the price, "not because they were unhappy to be able to use it to buy products" [32].
Summary
While humans and machines can increasingly find intelligent ways to create and use technology for investment capital, efforts to prove that these complex assets are collateral have often been tested. It will be interesting to see if securities regulators and courts use cases like Coinbase to set additional or different standards for whether cryptocurrency assets should be considered securities and, if so, whether current securities laws and regulations are sufficient.
Footnotes
[1] 328 US 293 (1946).
[2] US Securities and Exchange Commission v. Coinbase, Inc. and Coinbase Global, Inc. , Case No. 23-Civ-4738 (SDNY June 6, 2023), available at http://www.sec.gov/news/press-release/2023-102. The SEC accuses Coinbase of operating as an exchange, broker and unregistered clearinghouse .
[3] See id . Appendix 6, 18, 103-10, 126
[4] The SEC also announced that Coinbase's public shareholder, Coinbase Global, Inc. As its subdivision "supervisor". Look at the identity card . No. 16:381-85.
[5] See id . to ¶1-3
[6] Exchanges often receive cryptocurrency tokens for your account entry and allow their users to trade one with another. Because these transactions do not occur in the middle of the transaction, they are called «transactions in a chain».
[7] See Coinbase Complaint , ¶¶44-59.
[8] See identifidatar . yes ¶1-6
[9] See ID. ¶126
[10] See identifidatar . ¶309-21
[11] See id . ¶339-67.
[12] See id . П.П. 89-90, 93.
[13] See id . ¶340-45.
[14] Ch. id . ¶346-53
[15] See id . ¶353-56.
[16] National identity card . У вершы 361.
[17] 605 and further. Sup. 3d 372 (D.Conn. 2022).
[18] Ідентыфикатар . Шлях
[19] The court noted the «mizernnya» evidence presented to the court that the products of Hashpoint or Hashstaker are valuable papers, and the verdict of the jury was confirmed by the names of the products. Подробнее пасвідчанне пасповік . У 399 рому н.э
[20] Ідентыфикатар . 395 на n6 (видавочна).
[21] National passport . У 389 рому н.э
[22] National identity card . 394 on n5.
[23] National passport . У 390 рому н.э
[24] Ідентыфикатар . У 392 рому н.э
[25] See id . yes 394
[26] See id . yes 394-95.
[27] Ідентыфикатар . yes 393
[28] See id . yes 393-94.
See [29].
[30] See id . yes 397
[31] See id . yes 397-98.
[32] Ідентыфикатар . u 398n7. Суд пастанавив, што разонане чеканне прибытку ју купары Peycoin не з'ајаја відходным для аб'ективных немерав купарты. Заместь доставка тест на Гаваях сканцентравани на праверцы хамена того, чаго мечать купурі. However, the buyer's main intentions are "wiedchennem tago, chago čakaў by reasonable buyer". id
© 2023 Miller, Canfield, Paddock & Stone Plc National Law Review, Volume XIII, Number 167