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Comment by dvt | Hacker News Reader

Maybe someone can explain this to me (not an expert in traditional finance), but how in the world are lending instruments not categorized as securities? Let's say I lend you 10 bucks (and I earn some interest on the money over time T), you give me a receipt/contract, and then I sell that receipt to someone else before T expires (the price I sell at is some complicated equation based on your chance to default, inflation, interest rates, the time left out of T, and so on). Can I do that? Is that receipt not a security? Seems this would trivially fail the Howey Test, but it's also completely ubiquitous in the crypto sphere (see stETH, CurveFI, Tomb Finance, etc.). So.. I'm confused.

Forget all the super degenerate stuff (shorting, options, yield farming, nth order derivatives, speculating on NFTs, etc.), this whole insanity is happening because people are seemingly allowed to lend willy nilly without any regulatory pushback.

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The answer is that they almost certainly are securities, but the precedent isn't established.

White collar prosecution is expensive and complex, and prosecutors care about their careers. They want certain wins, preferably fast.

So the SEC are waiting for slam dunk cases to establish precedent.

In practice this means they wait for something large and obvious to implode, and prosecute months/years after the fact.

> So the SEC are waiting for slam dunk cases to establish precedent.

But this might never happen. I can launch a lending protocol completely anonymously, pump it on Twitter/Telegram, and get 7+ figures TVL overnight. It might not even be predatory (even though a lot are), but who would the SEC even go after at that point?

There's probably something stopping you from getting actual 7 figures from that.

Not really. It's been done time and time again. Never underestimate the number of stupid people out there, desperate to break even with inflation somehow while their banks pay them negative interest rates.

https://youtu.be/C6nAxiym9oc?t=260

It's easy for "crypto companies" to inflate their apparent values by selling one token for $1 while they have a trillion. Consequently I am a little skeptical about how many of them have actually made a lot of money.

Has it been done by you?

If it's so easy with such high rewards, why don't you try an MVP the next weekend and see how it goes?

Obviously if I haven't personally done it, it isn't possible.

I could also get rich knocking people in the head with bats and taking their wallets. For a little while.

It's telling some people who let their true colors show, espousing ideas like "hey if I can make good money hurting others I'll do it, and why haven't you!"

Crime is not hard, most houses are easily broken into, many people can be tricked, the human body is fragile, and society runs on a shockingly large amount of trust. Do not conflate the fact that most don't engage in the worst of crimes with the actual difficulty in doing it.

I think you're missing the point, which is that even in the world of crime, most intending criminals don't succeed. For every successful rug pull, there were probably 100 others that didn't gain any friction.

Not contesting the possibility. Just the easiness to do it. I don't think it's easy and it probably requires some good level of intelligence to pull this off.

DeFi rug pulls were extremely common in the bull market, here's a list[1]. Obviously doing it "next weekend" is going to be much harder given that FTX just collapsed and all of crypto is going to hell in a hand basket.

[1] https://coinscreed.com/defi-top-10-list-of-crypto-rug-pulls....

This list is absolute rubbish.

1. OneCoin: Not even a cryptocurrency, a centralized currency. https://en.wikipedia.org/wiki/OneCoin

2. Thodex: A centralized cryptocurrency exchange. https://en.wikipedia.org/wiki/Thodex

Actual DeFi cannot be rug-pulled, by design. Not even the US can taken down something like Tornado Cash. What a smart contract can or cannot do is written in open source code. How are you going to rug-pull it, if it's not coded there?

Excuse my extremely informal and probably dumb thought process behind this, but can't de-fi be rug-pulled as follows

1) Create code with subtle but privately known "bug" that allows profitable behavior far outside the bounds of what you advertise to the public as your code doing.

2) Wait for liquidity pools within the contract to build up.

3) Exploit the "bug"

Yes according to "Code-is-law" you're not doing anything "unlaw(code)ful." But it's a rug pull in everything but name. De-fi is basically never introduced as "there's contract 0x343cdc.... on the blockchain, go read the EVM code as nothing will be explained" so intent in the way something is introduced is instrumental here.

Nothing dumb about what you said, that's a valid argument. A bug, either unintended or intended as a hidden "feature" for the scammer. Is one possible way to execute a rug-pull on DeFi or, in general, result in losses for its users.

But IMHO this is still a better approach. Serious contracts go through multiple audits, deploye hefty bug bounties and if you are very risk averse you can avoid a new deployed contract for certain amount of time until it's not only audited but battle-tested. As a user perhaps you don't know and shouldn't care about the specificities of the contract or its security but you can rely on the thousands of other eyeballs that do.

For instance, a few audits of Uniswap:

- https://github.com/ConsenSys/Uniswap-audit-report-2018-12/bl... - https://rskswap.com/audit.html

Bug bounty program of Uniswap (up to 0.5M USD per critical bug):

https://uniswap.org/bug-bounty

They could go after exchanges and apps distributed in app stores. That is, wherever normal people might go to easily buy such a thing.

Sure, people will use VPN's and side-loaded apps, but would limit the damage quite a bit.

There are no prosecutors in the SEC. Their attorneys can only bring civil enforcement suits. When they find evidence of criminal activity they pass that to the Justice Department for possible prosecution.

Somehow the SEC can’t even win a case against XRP which fails the Howey Test miserably. If XRP isn’t a security I don’t know what is.

is: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit and (4) to be derived from the efforts of others.

>Somehow the SEC can’t even win a case against XRP which fails the Howey Test miserably. If XRP isn’t a security I don’t know what is.

They're beholden to the established financial system and players and "regulating" crypto would also mean giving crypto a stamp of approval, which they seemingly do not want to do.

It's not a security, it's a bank. Sort of.

Genesis seems to have been acting as what's called a "non-bank bank" or "non-depository institution". They took deposits and lent them out. Whether this is legal in the US is open to question. "Non-bank banks", until now, were for qualified institutional clients, like other banks, brokerages, and such. They did not take retail deposits. They could make loans, from their own money. Anybody can make a loan. It's taking deposits that's regulated. Because, 1929.

I'd thought nonbank banks taking deposits was illegal. It may turn out to be. The Consumer Finance Protection Board is asking some questions.[1]

[1] https://www.consumerfinance.gov/about-us/blog/the-cfpb-final...

"A security" is not a concept that exists in nature where you can do a genetic test and figure out if something is a security.

Securities exist only in the context of legal systems and regulators that label things as securities. They have literally no meaning outside of that context.

If you can create a token in a way that either is not clearly in the jurisdiction of one of these bodies or in a way where it is impractical for those bodies to enforce those rules, then people can scream "security" all they want but it's not going to have any practical effect.

There are other ways they can do proxy enforcement and such but if your question is seriously "how can this exist", id say that's a pretty straightforward answer and the potentially interesting question is "what is the framework for preventing this" and "do we have/ are we willing to allocate the resources and manpower to actually do those things"

Until you figure that out, these things will be around

> how in the world are lending instruments not categorized as securities?

I suppose that the answer to this question generally, which applies to banks, is: I don't think anyone wants a world where you have to be an accredited investor just to open a savings account. The definition of a security is complicated enough that the US Supreme Court weighed in.

https://www.kramerlevin.com/en/perspectives-search/when-migh...

So, complex subject with lots of ambiguous legal precedent, grey zones, inconsistent enforcement. And new technology that doesn't perfectly fit into the previous system of rules. Yeah, it's a mess, and it will probably be decades before it all gets sorted out.

I don't know the real answer to your question, but a lot of products "aren't available in the US", which means the marketing site blocks by IP to try to avoid getting in trouble

The firm in question only lent to institutional investors and so they [likely] never pretended they weren't securities. They lent to accredited/qualified investors, just as the regulations prescribe.

This [likely] isn't one of the firms trying to squirm around securities laws. And those securities laws don't prevent losses or anything specific from occurring.

allowed to lend willy nilly without any regulatory pushback.

That's supposed to be a feature, not a bug.

At least that's what all the advertising posters and billboards and streaming audio commercials kept telling us.

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