Let's say I run a swap meet for people to buy and sell Pokémon cards. There are lots of scammers out there, but I promise people they are going to get good prices. And I even offer to buy cards off of people at good prices to drum up interest.
Tomorrow, the SEC decides that Pokémon cards are securities (far-fetched, but work with me here) Suddenly, anyone buying and selling them becomes a criminal. I tell people via text message "pish-posh - there's no way the SEC could enforce this". But people stop coming so I promise them that I can buy up all of their cards anyway. Especially the cards that complete my collection.
Then it gets enforced. Not only did I trade in illegal assets, I am now guilty of fraud for telling people it was safe. I am also guilty of market manipulation! And on top of it, I did it via text message so it's now wire fraud to boot.
As far as I understand reading the charges, this is mostly what he is guilty of. This is a bit different than the "true" type-1 frauds that exist in crypto - the blatant pump and dump schemes, et al. In fact, I would feel safe to say there might have been no fraud without the SEC classification. (EDIT: Ignore this since they also did a lot of legitimate fraud too)
Regardless, the writing is on the wall for crypto. I could not even fathom why you would want to be holding onto even Bitcoin or Ether right now.
I think the way to understand this is that the SEC is concerned about protecting unsophisticated regular folks from being scammed.
If you started aggressively marketing your Pokemon cards, presenting them as financially sound investments, and regular people started putting their entire pension savings into them lured by false promises and being scammed, then the SEC might well take an interest in Pokemon cards as well.
In short, what qualifies as a "security" and becomes subject to regulation is fluid and endogenous. As soon it starts involving real wealth for regular folks, chances are it will be deemed subject to regulation.
> I think the way to understand this is that the SEC is concerned about protecting unsophisticated regular folks from being scammed.
Keep in mind, the people the SEC are focused on "making whole" are the investors. The actual "unsophisticated investors" who make up the bulk of Celcius's customer base are going to get next to nothing out of the settlement. However, the sophisticated institutional investors who invested directly into Celsius will get most of their money back.
It would actually be a completely different legal case if they just said "Celcius misrepresented the security of their assets". In your Pokémon example where I am scamming people, they could bust me for fraud without having to reclassify all cards everywhere. But that's not the case they are making here.
The SEC is not focused on making the "institutional investors" whole. That is happening in bankruptcy court, because Celsius declared bankruptcy, and that is how bankruptcies work: the senior creditors get their money back first. If you have problems with that, take it up with the bankruptcy court and U.S. bankruptcy laws that classify customers as junior creditors.
In fact, the SEC does not ever get involved in "making investors whole." It leaves that part up to the investors themselves.
The SEC's complaint seeks to bar Mashinsky from future involvement in crypto trading, to bar him from being an officer or director of a publicly traded company, and for the disgorgement of profits arising from maintaining the price of crypto tokens through market manipulation tactics. [https://www.sec.gov/news/press-release/2023-133]
Also, in your Pokemon example you claim that buying up Pokemon that completes your collection somehow constitutes market manipulation. But that's a thing collectors actually do...so...by definition not market manipulation but a fundamental part of the market for collectibles (and in the Pokemon hypo Pokemons have instrinsic value because they can be used and valued in a Pokemon game independently of their trading value, in addition to their trading fair market value based on their rarity as a collectible item). This is very different from what the Celsisus guy did; he used wash trading to artificially increase the price of a crypto token whose only value was in being traded.
So...the SEC didn't try to make you whole...it recovered about a third of the money you lost to the Ponzi scheme through a disgorgement order.
The SEC can order disgorgement of profits from an investment scam (which are then returned to victims to the extent such profits are recoverable), but making victims whole for their losses is a very different thing.
The point of the receivership was to recover the money for creditors, not investors. Investors are quite literally the last people who get a recovery from a receivership.
I'm not going to keep arguing with a non-lawyer about something I've been involved with as a lawyer, so this will be my last comment on the matter.
While you are correct in the general sense, court-ordered receiverships due to SEC enforcement action are very much about recovering investor money in a fraud situation.
It was a pretty good scam. The scammer had a company that sold fractional profit shares in oil wells. Without getting too deep in the weeds, he sold the equivalent of more than 100%. He invested the proceeds of new investment in paying out old investors and buying new oil wells.
Eventually he ran out of new investor money and the scheme unraveled.
I don’t know how I would have caught it. The regulatory oversight in oil well finances is poor.
The guy was on the lam for a few months, then sentenced to 10 years in Federal prison. He then escaped and hasn’t been found.
Matt Cox talked his way out of imminent arrest, went on the run for 3 years, and was only discovered after his girlfriend slipped up and told something to the wrong person.
> For example I don't see the SEC going after Kilolo Kijakazi, who is actively scamming working adults under 40 every day.
Why would they? How is your social security contribution a fungible, tradable asset?
And agree or not, she's following government administration policy (which still may not survive legal challenge, but that's separate to 'securities fraud').
You may be aware already, but if you replace Pokemon with Magic the Gathering cards this actually becomes almost unbelievably close to a true story (minus the SEC story arc). The first "huge" bitcoin exchange[0] was originally a Magic card exchange which got extended to support cryptocurrencies. "Mt. Gox" = "Magic the Gathering online exchange". If it hadn't been hacked it would likely be in Coinbase's shoes right now and then your hypothetical would truly be eerily accurate. But of course it was hacked, it was a trading card exchange dealing in cryptocurrencies -- a major hack was basically inevitable.
Mtgox was not run very professionally, so I doubt they would have lasted this long. I had to deal with them on IRC to get my money out. I was told that the person with the keys to get my withdrawal was “in the bathtub”. This was on the last day or so before everything was shut down and during the actual crisis, mind you.
As an old coworker of mine said when MtGox imploded due to fraud and/or just abysmal security, “What? Don’t you do all your banking at the comic book shop?”
It would never have ended up in Coinbase's shoes. The founder is a notoriously bad programmer and business leader.
Even if he wasn't hacked he would've gone bankrupt because of his failing market manipulation bot that was making loss despite having full info to an exchange in the most over heated market of the past 50 years.
I don't think even A16Z would burn their money on MtGox.
This is a truly insane apologia for a firm which marketed a banking-like product with risk-free returns of up to 17%.
> Mashinsky explained that Celsius's rates were so much higher than bank deposit rates not because it was riskier than a bank, but because it passed along more of its earnings to customers. “Somebody is lying,” said Mashinsky: “Either the bank is lying or Celsius is lying.”
The physical collectibles market is over a century old for baseball cards. So far the SEC hasn't stepped in for places trading baseball cards, magic cards, pokemon cards, sneakers, etc.
So the burden of proof seems to be on the claim that they're the same, or that it's a meaningful analogy.
But hey, let's look at the this case - the accused did the following:
* created their own token (ok, so they aren't just a card swap meet or trading site like your analogy)
* pumped and dumped that token
* paid ridiculous interest rates (I sure haven't seen that from the places I get my Pokemon cards...) and advertised that the principal was safe (these are wildly mutually contradictory, and many people knew it at the time)
* lent money...
ok let's stop there, we're already clearly in a different universe of financial activity.
To be clear, I think Celsius committed actual fraud. I just want to talk about one particular point here.
> So the burden of proof seems to be on the claim that they're the same, or that it's a meaningful analogy.
I have a pair of “Dear Summer” Off-White x Nike Dunk Lows, the last collection released while Virgil Abloh was alive. The SNKRs (Nike) app randomly selected active users for the chance to purchase them; necessary, because they were guaranteed to sell out instantly. At the time of purchase nobody had any clue what the shoes would look like, nor which "n of 50" colorway they would get. We were presented with a picture of the shoebox, a size selection, a buy button, and a countdown timer. However, it's not far off to say that despite this, every single person (remember, only active users got this notification) that initially purchased the shoe did so knowing there was absolutely no chance that a limited edition Off-White/Virgil Abloh/Nike shoe would sell for less than a 100%+ premium over retail on the aftermarket. Completely risk-free, assuming $180 wouldn't hurt your pockets in the near term.
Under the SEC's reading of the Howey Test that omits the word "solely," the purchase of these shoes constitute
1. An investment of money (check)
2. In a common enterprise (check. Let's be honest, the majority of pairs sold hit the resell market immediately. Forman, 421 U.S. at 852-53 may not be applicable.)
3. With the expectation of profit (check, check, check) to be derived from the efforts of others (the ongoing reputation and marketing efforts of everyone involved),
making them unregistered securities.
Naturally, this means Nike has to "come in and register," for every limited supply drop, StockX and GOAT have to register as securities exchanges, and only accredited investors are allowed to purchase at retail. Anything else is clearly a violation of The Law.
All of this is perfectly reasonable because, "the law is clear, we’re obligated…to enforce the law as Congress passed it and how the courts interpret it," as Chair Gensler put it.
I'm probably not exactly reading the terms precisely how Congress intended or how any particular SEC agent or court might but the advertising and messaging all seems very different from anything in crypto outside of NFTs. There's no pitch of using these sneakers to make transactions, or a "sneaker savings account". The "be one of the only people to get this thing" core principle seems distinct. Yes, there's a resale market for that thing - first sale doctrine basically means they COULDN'T try to remove that, ya? - but how much is that their "fault" per se? To me this fails (2) or (3) for shoes (or Pokemon cards or what have you).
E.g. if we interpreted the test like that, wouldn't we end up with nearly any "limited run" product being a security? And that's never how the law has been interpreted or enforced, and certainly can't have been the intention.
So I'm unconvinced by the lay reading of the law of folks saying "this makes sneakers a security too" since it seems no more valid than a lay reading that doesn't and there's been no official indication that sneakers or trading cards are getting anything like the attention crypto did from regulators, despite being much older markets.
Except there actually are people who really do want the shoes not for resale. And that is a legitimate driver of value and it is a very limited market.
The SEC has argued in some crypto cases that even if just a few token holders buy for profit instead of for utility, the token is still a security. Of course that’s wrong, but it is the SEC official position.
2) and 3) don't seem to actually apply to sneakers here:
2) I've used the app before, the fact that someone else and I both want these sneakers doesn't make our purchase of a pair each a "common enterprise".
3) I didn't expect profit, and buying a thing which can be resold for profit doesn't mean every purchase of it was an expectation. All my sneakers are worn.
The buyer expects to derive profits from arbitrage to the existing market value. If Nike shut down the moment you bought the shoes the profits would still be realized, because they don't require any effort on Nike's part.
Uhhh, two brief examples of fraud:
Celsius said they had insurance to cover deposits - they did not.
Celsius said customer funds are not used for high-risk loans -- they were.
I think the normalization of criminal activity in the crypto space is largely due to regulatory ignorance but when there are clear cut cases of fraud, the SEC should aggressively prosecute these crooks.
The writing would definitely be on the wall if the SEC got to make the final decision. But they don't, and they just had a big loss in court with the XRP case. If XRP isn't a security, then most other things traded on exchanges aren't securities either.
Broader question: Given that SEC enforcement is speculative (eg: we think this might be a security) do they have to pay damages when they're wrong? If not, why? If so, how much?
That conclusion is an assumption of an assumption of an assumption.
First of all, SEC enforcement is both civil and regulatory. The SEC is an independent federal agency. Since it is not a member of a federal executive department it has no criminal enforcement capability. All matters of criminal conduct are forwarded to the Justice Department.
Secondly, SEC enforcement is not speculative. They can seize assets just the same as the Justice Department as a matter of regulatory enforcement and they do so regularly. SEC enforcement agents specialize in securities law which is a legal specialty.
Third, the law is unclear whether crypto, crypto exchanges, and transactions therein qualify as securities. If this activity were to become illegal tomorrow then that becomes a matter for the Justice Department to enforce, not the SEC.
Source: I have relations to a famous (in securities enforcement world) former SEC enforcer.
It looks a bit more nuanced than that. Torres is the judge in the XRP case. From the article:
——-
Torres, who is based in New York, on Thursday said the company's $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities.
But Torres ruled that Ripple's XRP sales on public cryptocurrency exchanges were not offers of securities under the law, because purchasers did not have a reasonable expectation of profit tied to Ripple's efforts.
Those sales were "blind bid/ask transactions," she said, in which the buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP."
——-
So it seems XRP was deemed a security just the sales on public exchanges weren’t a securities offering? A bit confusing IMO.
From reading over the decision, the judge emphasizes that a security is an investment contract. The institutional investors and Ripple formed a contract, in which the investors were promised that Ripple would do various things in exchange for the investment.
On the secondary markets, people were just speculating on the token price going up or down. They weren't getting any promises from Ripple, or even necessarily giving money to Ripple, so there was no contract. If there's no contract, there's no security. Just speculating on the price of something doesn't turn that thing into a security.
I don’t think it’s clear from that case that XRP is not a security - “The SEC won a partial victory as Torres found the company's $728.9 million of XRP sales to hedge funds and other sophisticated buyers amounted to unregistered sales of securities.”
It seems more that selling it on exchanges was not a violation of the law, but some of the activities around it still were.
(Edit - in fact it may not even be that, according to a footnote - "The court does not address whether secondary market sales of XRP constitute offers and sales of investment contracts because that question is not properly before the court." - so it looks like ripple aren't in trouble for selling XRP on exchanges, but that doesn't necessarily mean the exchanges aren't in trouble for it)
Conclusion of section 2: "the Court concludes that Ripple’s Programmatic Sales of XRP did not constitute the offer and sale of investment contracts."
If it's not an investment contract, it's not a security. That's one of the major points of the whole decision. Section 1 details ways that sales to institutional buyers did involve a contract.
The footnote just says the decision does not directly address exchanges. But it's hard to see how the arguments in section 2 wouldn't apply to exchanges just as well.
Sure - The point is it’s not as simple as “w00t Ripple won it’s not a security”, as the conduct of exchanges with respect to the token was explicitly not examined.
In order for your analogy to hold, you can’t forget about the part where you constantly push the idea that trading Pokémon cards is a better way to make money than banking, manipulating the prices of cards and lying about how the cards are priced.
Guys like Mashinsky bad-mouthed banking nonstop and touted their exchanges as more equitable platforms to store and make money.
> Tomorrow, the SEC decides that Pokémon cards are securities (far-fetched, but work with me here)
There’s a little bit of rhetorical sleight of hand here. It’s far fetched because the analogy isn’t actually very good. This isn’t hand waving a minor problem- why the SEC is calling crypto securities and not pokemon cards is the right at the heart of the issue.
As others have pointed out this analogy is kind of bad. But… also you seem to clearly acknowledge within the hypothetical that performing an action would be a crime, and then do the action. And then you’re upset because it wouldn’t have been a crime if it hadn’t been made a crime… but it was and you knew that and you did it anyway.
Yeah, these analogies are always terrible, but this one actually includes the "hey they ruled it was a crime and I decided that was bullshit and kept criming" part.
The SEC doesn't bring criminal charges. The SEC pursues civil action. The SEC tries to hold people liable for the damages they cause, and the bar here is relatively low—a preponderance of evidence (more likely than not) is all that's needed.
If they suspect something is criminal they will then recommend that the Justice Department seek criminal charges. Different legal case, and this has a much higher bar.
Reporting on the SEC often gets mixed up and convoluted. You read about the SEC "charges" and a not guilty criminal plea, but these are actually two separate legal cases happening simultaneously. This is the way it usually happens, since the SEC is unlikely to "enforce" the law (since they can't) unless they can get the Justice Department to bring charges. It's much easier to pursue civil litigation and hold people responsible if you can get a criminal conviction.
If you are facing a criminal trial for fraud there is likely substantial evidence that doesn't fully come through in the reporting. Criminal charges like this don't actually happen that often, which is why the SEC is said to be toothless. They only really pursue if they think they can get the Justice Department onboard AND they can get a criminal conviction. Yeah, yeah, innocent until proven guilty and all that… but if you are facing allegations from both the SEC and the Justice Department you've probably done something pretty heinous.
> Suddenly, anyone buying and selling them becomes a criminal.
No, people buy and sell securities all the time. You simply need to follow the regulations for handling securities which includes certain types of tax and risk effort.
If you keep selling securities while not following the KYC and tax stuff for those securities, you will in fact be breaking the law.
Nor did the SEC magically throw down one day and start calling crypto a security. It is plainly and obviously a security _and has always been one_.
The regulations for handling securities are through a brokerage. This is a HUGE deal because handling crypto through a brokerage would basically neuter it.
Imagine trying to buy a pizza with Bitcoin, but you have to go into your Charles Schwab account and wait 3 days for the Bitcoin transaction to settle. In a brokerage system you would get the ownership stake aspect of crypto, but none of the transactional ones.
The settlement time on stocks is minutes. There is no requirement that brokerages are slow to settle. That is your brokerage choosing to be risk adverse.
Imagine, for a moment, that I'm a literalist. Which exact part of the constitution prohibits them?
> The government should not be able to force private companies to do the work of LEA.
Good thing they aren't tasked with the work of an LEA, they simply have an obligation to report what they know.
But even if they were, there's nothing that precludes the government from conscripting people for service to the state (The draft). Or from empowering third-parties with LEA-like powers (Bounty hunters, for example).
Are those also prohibited by the constitution? Which part of it?
> The court sided with the SEC when it came to “Ripple’s Institutional Sales of XRP to sophisticated individuals and entities,” saying they were securities transactions and constituted an investment of money. Ripple won when it came to “programmatic” sales, however, or sales made through trading algorithms, as well as other distributions.
Which stands to reason. Doing an ICO and promising to issue a token is a pretty clear securities transaction, but that doesn't mean that the token itself is a security.
This was the view of William Hinman of the SEC, in 2018: "the token – or coin or whatever the digital information packet is called – all by itself is not a security, just as the orange groves in Howey were not."
If anything, holding bitcoin (with self custody) protects you from this sort of thing because there's no counter party risk. From that standpoint, holding bitcoin does not have counter party risk, unlike holding gold or equities in an online account.
Crypto assets are illegal if you try to dodge taxes. Or, as a trading institution, pretend that you have no duty to follow tax laws on reporting client transactions. They're no different than equities if you follow all the laws.
This all seems weird to me in Canada. Here, it's been acknowledged for years that crypto = equities.
That's more true for bitcoin than for some other projects, but even bitcoin has the Lightning Network which they're attempting to use for payments using BTC.
Playing Devil's Advocate - The Pokémon card is a thing. I'm not buying it because I think it is a fungible asset that I can use to transact with (the thing I bought has a physical condition that can be graded, it is unique).
No one was collecting crypto to complete their collection, they were buying crypto (not caring even a little bit about which particular unique token they bought) because they thought it would be a useful tool in future monetary transactions.
The real crime here is US regulators thinking "commodities" was a fix-all solution for regulating crypto when you can eat most commodities, but not crypto (since again, If I buy orange juice futures from someone, they can't deliver me any oranges, they need to be edible and of a certain grade).
Now regulators have come to their senses, but in a really confusing and unfair way TBH.
People aren't buying Pokémon cards to "complete their collection": they are buying them because they think someone else will pay more for them later, presumably because they want to "complete their collection", but that makes just as little sense... they too will be buying it from the first person in order to sell it to a third person. There is supposedly a game attached to Pokémon cards, but that excuse to establish "utility" is pretty flimsy: even the 10 year old I know who is obsessed with these cards is only in it as an amateur investor and it isn't clear to me he even knows the results; he's simply fallen for the marketing efforts of this company shilling their shitcards on an unsuspecting populace, many of whom will lose thousands of dollars by the time this particular collectible bubble is over.
> There is supposedly a game attached to Pokémon cards, but that excuse to establish "utility" is pretty flimsy
Playing the game is a game. (There are dozens of major tournaments, including national and world championships, of people playing the game.) Collecting the cards is also, in a different way, a game. They have made a product that people do things with. You are essentially trying to define all products with resale value as securities.
I am just drawing an analogy to the same BS arguments that the SEC--and the anti-crypto crowd on this forum--like to make against projects like Filecoin.
Why do you then believe that cryptocurrencies are somehow different? How about Axie Infinity, which is specifically a game similar to Pokémon cards?
Why is it somehow sufficient for Pokémon cards to say "a game is a game" but you say that for crypto and you are "shilling your shitcoin"?
Do you believe this to be different for baseball cards, which do not have a game, or for competing collectible card games which never got popular?
(After all, if you are willing to say that just wanting to collect and trade cards for purposes of making money is itself a game that establishes utility, what are you even trying to regulate in the first place? Aren't you then just making all securities into products?)
> After all, if you are willing to say that just wanting to collect and trade cards for purposes of making money is itself a game
Making money is not the reason that people collect and trade Pokemon cards, and if you think it is then your brain has been pretty badly poisoned by activities where making money is the only objective.
If you really look deep down into crypto, its really just Uber or Airbnb skirting the law with technical, and often mental loopholes. You need a license to drive taxi or rent out your place. But NO i'm just sharing my ride or i'm just sharing my house, no taxi/renting going on here! At the end of the day you are offering the same service that is regulated, calling it something else can only get you so far until you pay all the politicians off. The real issue here is crypto paid off the wrong people.
> Tomorrow, the SEC decides that [whatever] are securities
That's not really the way this works. "Security" is defined by law, not by the SEC. Existing stock markets and other trading entities have existing regulatory relationships with the SEC, but the SEC's enforcement powers aren't remotely limited just to the NYSE et. al. The question is why Celsius thought they didn't need to follow securities regulation, given their business.
Because, and let's be honest here, crypto coins and assets are really just obviously securities by any reasonable interpretation. They're abstract tokens of ownership, they're liquid, they're traded with others in the same kind of way (via an exchange intermediary), and for the same reasons (investment).[1]
Clearly this was the way things were going to shake out. Could the SEC have been clearer? Surely. But to pretend that Celsius couldn't have seen this coming is ridiculous.
[1] FWIW: note that trading cards and other collectibles fail most of these tests. While sometimes you buy them for investment or on exchanges, they remain primarily physical devices providing a means to play a game.
So yes, if finance were unregulated, then he wouldn't have been violating the securities regulations that didn't exist. But they did exist, and the Howey Test is from 1946, so it shouldn't have been a surprise. A lot of people tried to pretend that the existing financial regulations, many of which were created in response to previous scams, didn't exist. Or at least didn't apply to them.
Was this intentional fraud from the start? Or was it more like the sort of Ponzi scheme where some yutz starts off a business in hope, makes big promises, fudges the books a little, and then just gets in deeper and deeper? It's a good question for philosophers and spectators, but personally I don't care at all. And I doubt federal prosecutors care much either.
I have zero sympathy for any of these people. "Move fast and break things" is a dubious ethos even when for something as trivial as a website to post selfies. But when you apply it to the foundations of our vigorously financialized capitalist economy, it's about as smart as applying it to submarine design.
> It's a good question for philosophers and spectators, but personally I don't care at all
Please don't be so narrow sighted. Have you ever been charged with a crime you didn't know was a crime? You don't think overzealous sheriffs or prosecutors love pulling out old statutes on people?
Holding people accountable for laws they had no reasonable way of knowing is a miscarriage of justice. Our criminal system absolutely takes intent into account when determining criminality and sentencing.
I have no idea why people think the Howey test is so cut and dry when courts sometimes struggle with a legal definition for a sandwich.
"Ignorance of the law is not an excuse" is a well-established legal principle with precedent going back to Ancient Rome. It does get a bit tricky when regulatory statutes get involved, but c'mon: all these businesses save maybe Coinbase are run by criminals. We're not talking about well-meaning people acting in good faith here.
Also, that all only applies to criminal statues, not civil/regulatory ones. If you're a construction firm who doesn't know that houses have to be built to fire code, maybe you'll escape criminal prosecution, but the government is going to take an axe to your business anyway.
Mashinsky definitely has a "reasonable way of knowing" about these laws. More than that, anybody starting a company has a positive duty to clients and investors to make sure that it's legal before things get too far.
Maybe a better example would be the pot industry. Pot is blatantly illegal at the federal level. So everyone currently running a dispensary is theoretically operating fraudulently with their business partners.
Does that mean they have a duty to their own business partners or customers or investors to shut down their own business?
They are not operating fraudulently. Their customers are buying and getting marijuana. Their investors surely know the risks as well.
If we're looking for an analogy in this space, I think it's more like snake oil. So imagine a company started selling a new "nutritional supplement" or "herbal blend" that helped with anxiety. But it turned out the secret ingredient was weed. That would be a fraud on investors and they could well get charged for that on top of the base drug charges.
I think people running billion dollar companies with the ability to access effectively unlimited lawyers in an industry with constant news coverage in major papers about how it is dubiously legal while writing to the agency in charge don't get to use the "how was I supposed to know about an obscure law from 1841" excuse.
Courts never struggled with the legal definition of a sandwich. But yes, they had to come to a decision on what counted for legal reasons.
You should care (not saying it's bad you don't!), because the philosophy of it helps us distinguish between a system in which people participate in good faith but get mislead and cling to bad behavior out of fear, vs people participating in bad faith thinking they can get away with it.
The difference is in terms of punishment and enforcement mechanisms. The person who keeps doing something bad out of fear that there's no way out is, in a sense, a failure of society as a whole. The person who is doing something bad as a way to get a leg up thinking they can get away with it is a failure of themselves to understand that society comes with a social contract.
The end results and the ultimate suffering are the same. For the first situation, we want to educate people such that they are more aware and can avoid falling into that trap, and give them ways to get out of the trap that minimize damage. For the second situation, we want to isolate the damage they can cause and prevent them from causing more damage because they are fully conscious of what they are doing and what is going on, and that makes them more dangerous.
If you mess up and get into an inextricable situation, there should be a way to resolve that with the promise of personal growth (along with guard rails to prevent repeating the same mistakes). If you deliberately cause an inextricable situation so you can profit off of it, the only resolution is to isolate the person who caused it from committing further harm until they go through personal growth such that they don't want to cause that harm anymore because they understand that harming others also means harming themselves in the big picture.
There are some cases where I care about intent. Did somebody step on my toes? My reaction will depend on the extent to which I think they meant it.
But for large-scale financial crimes, I think worrying about that too much is not just unknowable and irrelevant, I think it's actively harmful.
As with toe-stepping, we can recognize that a whoopsie moment may not deserve punishment. E.g., if you're out hunting with your buds and accidentally shoot somebody in the face, as with Dick Cheney, that's different than intentionally shooting somebody.
But when somebody intentionally sets up or takes on a position of power, I think there are no whoopsies. Drinking a beer on the couch? Have fun. Drinking and getting in a car? Criminal. Drinking and getting in a car and killing somebody? It may be no more intentional than toe stepping. But at that point I don't really care whether they killed somebody because they meant to or not. The harm's the same.
I think this especially matters when we look at things like the 2008 financial crisis. It caused enormous damage, both in financial and human terms. Yet basically nobody was held accountable. Why? Because they didn't mean it. They were just greedy fuckers in positions of extraordinary power that they used for personal gain without regard to the human impact. Plus they were the sort of people who looked a lot like the people who made the laws. They went to the same parties and had nice friends. So they were all somehow let off the hook. And we did little to make sure they'd get held responsible the next time.
I think the personal growth bit is nice, but hopelessly naive. There are plenty of people who will do the right thing not out of love but of fear. There are worlds where those people are kept from doing harm, such that we can help them grow up to be decent. But we don't live in a world like that. And if we want to create that world, we need to stop the sociopaths and morally deficient goofs from causing massive trauma to those around them. Because I promise you, that will interfere with the victims' personal grwoth.
Which point of the Howey Test do you feel is not satisfied by Pokémon cards? (If your answer has anything to do with the existence of the game, I am curious what you think of baseball cards.)
You state that they don't satisfy the test with quite some certainty but left the reasoning to the reader; but, it would seem, to me, like Pokémon cards are no different from many of these cryptocurrencies the SEC is interested in:
In this case, some company decided to print a bunch of supposedly rare things that they pinkie swear are actually rare, even though this company can print more any time they want. People who buy these cards from the company don't even know what they are buying, which seems particularly egregious, and maybe should be regulated as an illegal lottery!
They then sell these things to people who are absolutely buying them with the expectation that they will go up in value. The people who print the cards insist they have "utility" in the form of a game people can play, and yet I have never heard of anyone actually playing this game... hell: the only 10 year old I know well happens to be obsessed with these cards and is presumably in the target market, and I'm not even certain he knows how to play the game!
Instead, this kid just keeps his cards in binders and talks constantly about their rarity and potential later sale value, as even our children are being turned into amateur investors by the marketing efforts of this company; and the reality is that--like other so-called "collectible" crazes--most of these cards are going to be near-worthless in the long term as this is just a bubble being held up by the company's management efforts designed to shill their shitcards.
(If your answer has anything to do with the existence of the game, I am curious what you think of baseball cards.)
Yes, if you ignore the primary reason for Pokemon cards (the game), then they can magically be made to look like securities....
They then sell these things to people who are absolutely buying them with the expectation that they will go up in value.
No, completely false and this betrays a complete lack of understanding of why people buy collectibles. People buy collectibles to collect them; the value is in possessing the collectible; rare collectibles have value because it is harder to acquire them to add to one's collection.
With respect to baseball cards: they are collectibles. They have value because people collect them. To keep. They don't represent an interest in a common for-profit enterprise, and they don't derive their value from the efforts of others. The value of a card is derived from the card itself: the quality of the print, the rarity of the card in its respective printing run, and (most importantly) its physical condition. Popular players' cards are usually more valuable because more people want to own the card, not because owning the card will somehow make you more money from that player's efforts. (I still have a few baseball cards from when I was a kid. My Ken Griffey Jr card is worth about a penny because it is not in good condition; my mint Tim Belcher card is worth $1.35 because I never had a reason to look at it. But even though nobody knows who he is outside of hardcore Dodgers fans, some people out there still want to have a complete Dodgers lineup from the 1987.)
And this is why analogies to collectibles always fail for crypto bros: collectibles have value in themselves, but crypto only has value to the extent it might represent something else.
In a 50 mile radius around me there are 44 officially sanctioned Pokemon tournaments happening this month. If you look outside your social circle you'll find that a lot of people play the #2 TCG in the world
There were (maybe even are) a ton of people playing Axie Infinity (an NFT rip-off of Pokémon) also; does that mean it isn't a security, because some people actually play it? When I was a kid I certainly knew people (including myself) who played Magic: The Gathering, and yet most of the reason we all bought as many cards as we did was the lottery and collectible trading mechanic.
If you are willing to admit that there are "utility" to these cards, then what makes them different from cryptocurrency projects that do the same? If the game weren't so popular--maybe it is one of the numerous card games we wouldn't quickly be able to name that are all rip-offs of the concept, but didn't have the juicy IP of Pokémon--would you then suddenly consider it a security?
If a crypto token has any utility other than being a balance on an account that can be traded (which some do, or at least purport to do), I think it should be a lot harder to call them a security. As most of them are though, they don't actually exist other than as an entry in a ledger.
The common enterprise here is, similar to the argument against cryptocurrencies, the efforts to make money off of these cards; and the efforts of others here is the work being put in by the company which printed these cards to market them and design this game. If the company suddenly disappeared tomorrow--or began to mismanage their product line, potentially suddenly printing a bunch of cards they previously claimed were rare--the value of these cards would plummet, as people aren't just buying them for their prior established value: they expect that this company will defend their IP portfolio, release expansions with new content, and continue the efforts to market this game in stores.
If you disagree with this analysis, maybe you can show how this is (or is not) different to, say, Axie Infinity (a crypto company even I actually do feel is a security under this test--with centralized servers managing centrally minted NFTs--and which is very similar in nature to Pokémon as it is clearly a rip-off of their IP) or (to take a more standard example) Filecoin (one which the SEC claims is a security in their lawsuit against Coinbase)?
The common enterprise test doesn't work for things where the primary purpose for most owners is to own the card (for playing, as with Pokemon, or for display, as with baseball cards or most other collectibles). That a small fraction of owners acquire collectibles to trade in them as valuable assets doesn't taint the fundamental character of the collectible for everyone else. (Contrast to crypto, where everyone buys crypto for the purpose of ultimately selling it for higher value since it has no other use or reason for existing.)
Axie Infinity might run afoul of the Howrey test because of deliberate design decisions in the game which make it nothing like Pokemon: the ability to cash-out in-game currency, and the ability to loan out axies to other players and make money from their in-game efforts. Unlike Pokemon cards, which can be loaned out by players without any involvement from the company printing the cards, loaning out axies and earning money from other players' playing required the active involvement of the company behind the game. Moreover, making money (and especially making money pyramid-style from loaning out your axies to other players) was marketed as the primary selling point for the game for over a year, in contrast to Pokemon and baseball cards where the printing companies have never made claims about the value of the cards or the putative income that could be derived from engaging in a career trading them.
"Through the efforts of others" is the activity of the block chain itself, which is engaging in economic activity in pursuit of profit. So, Axie infinity and FileCoin clearly fall under that.
There's no common enterprise for ordinary collectibles. A truly analogous situation would be if pokemon represented a share in the pokemon company where you could participate in the profits derived from pokemon merchandising or something like that.
I play the actual card game and it is does indeed have a very popular competitive scene. In fact the most valuable modern cards are the ones that satisfy both of 1) appealing artwork and 2) high usage in competitive play.
For older cards though I disagree that the the pokemon company can just reprint more any time they want and dilute the value. The most valuable card out there is the original first edition Charizard from the 90s. They can never really reprint this card and have it be treated in the exact same way. And they do regularly "remaster" or reprint the original set from the 90s in order to cash in on the nostalgic 30-somethings who now have a disposable income (I believe there is another one coming later this year). But these are just replicas and not the "real" thing. Kind of like an original antique/book/currency/artifact vs a replica.
However I'd say at least 50% of the cards in any printed set are not useful in gameplay if you are actually trying to build as competitive a deck as possible, and are really only good for collecting a complete set. They will also print "alternate artworks" of common cards which are the exact same gameplay-wise but visually different and artificially much rarer.
I deeply disapprove of Magic and honestly think that it shouldn't be allowed to be marketed to children if cigarettes aren't allowed to be marketed towards children. But an enormous number of people actually play the (shockingly boring) game. And while there's little doubt that most of the cards being purchased now are going to end up worthless, the "long term" in Magic has already been reached because it's been around for 30 years.
Magic is being held up by the early cards having been driven up in price by millennial and young gen x players who became adults with real incomes and social lives that revolved around the game. WoC manipulates the market as much as it can manage, trying to maintain the hope that one can strike it rich, but they make their money off the new cards, not the used ones.
It's the same thing that happened with comic books and baseball cards: people who bought baseball cards in the 50s and early/mid-60s found themselves with small fortunes, because there were wealthy nostalgic baby boomers to sell to. People bought baseball cards in the 80s and 90s trying to cargo cult the price increases of those classic cards, and the people who printed baseball cards played into that. That doesn't make baseball cards a type of security where one is investing in the growth in the community that buys baseball cards any more than buying a washing machine makes you an investor in the growth of the community that buys washing machines, although washing machines also have a resale value.
Buying crypto gives you nothing but a line in the distributed accounts of the people who are coining crypto. It's nothing but an obligation. There's not even the token value that a 10 cent stock certificate might provide.
> But an enormous number of people actually play the (shockingly boring) game.
Boring?! That's very subjective, don't you think? It's 'boring' in the sense that chess is boring.
There's an entire market around the cards, yes. You don't _need_ that if you just want to play and have fun, but people will try to min max everything. I used to play with borrowed decks since I figured out as a teen that building decks out of booster packs was far beyond what I was willing to spend.
Cigarettes are the only (legal) product it is illegal to market (in the US) except in very limited ways. The poster was saying that MtG should also be illegal to market, and therefore has to be compared to cigarettes in that limitation.
Much like if they had talked about an age limit on purchasing them, it would be related to cigarettes or alcohol (in the US).
Stellar point. I especially like the notion that cargo culting historic price increases is involved. You could look at so much of the cryptowhatever space as a series of cargo cults around different aspects of financial history. It seems like a crucial ingredient in any bubble, really.
... Pokemon cards were only used as an example to explain what happened, almost like an ELI5. Whether they'd pass they Howey Test or not is irrelevant.
Absolutely agreed. Back in college I met some very sincere, thoughtful, and kind libertarians. I occasionally imagine how horrified they'd be to learn that their considered and nuanced political philosophy had become a popular fig leaf for "I do what I want without regard to harm for others".
The problem is libertarianism has always been this way. Typically when you're younger it sounds like a good idea. It would likely work if people weren't assholes. Then you grow up and realize people are assholes. Most people grow out of their libertarian phase, but the ones I worry about are those that don't. All I can think about when I see an old libertarian is "That asshole would install a toxic waste dump beside my house and make me spend the rest of my short life suing them for damages"
Could be. But for me there's a difference between "we have to limit harm, but let's do it in ways that otherwise lean toward freedom" and the maximalist "I DO WHAT I WANT! YOU'RE NOT MY REAL DAD" types. So I agree the absolutist libertarians are somewhere between dangerously naive and sociopathic. And I think the volunteer billionaire defense squad is ridiculous. But I have met reasonable ones who saw it more as a direction to lean, a counterbalance to authoritarian approaches.
In this analogy you also had a service where people staked their Pokémon cards and advertised an APY% rate of return on those Pokémon cards, and had a service wherein people could use borrow and lend their Pokémon cards with the intent of financial gain.
Got me curious now, indeed a lot of people in the US have crypto however on the big scale the US is just a small fraction Of all crypto holders.
Assuming that in a lot of these countries crypto is no big issue and others have long banned it and still a huge adoption I really doubt the US alone would make a huge lasting dent banning it.
More interesting idea: tomorrow Microsoft delists from public exchange and only allows OTC to buy/sell this now private company — but you can only do so with Pokémon trading cards. And anyone that owns some is now a MS owner as well.
Now do you decide the Pokémon cards are securities?
Maybe I’m misunderstanding the analogy, but I thought wire fraud only applied to abuse of the bank wire system? Is unsavory advice really categorized as wire fraud?
A legal "wire" is any communication or signaling system allowing for the propagation of information across State lines, at least as far as I can tell from how it is regularly enforced.
You could use TCP over carrier pidgeon to implement your criminal communication network, and it'd still be eligible for wire fraud. The deserialization from what I assume would be message packets strapped to the pidgeon nets you as still using "electronics".
> Let's say that your analogy has zero actual bearing on what actually happened in this situation, and end the conversation there.
Yes.
Here's Celsius's web site archived in early 2022.[1] See what they claimed. They went all the way to being a fake bank. In their own words:
"Meet Celsius: a community of over 1 million users that
earn up to 17% yield on their crypto. Get paid new coins
every week and borrow cash at 1%. Buy coins, earn yield,
borrow, and transfer with no fees. Available on web
and mobile apps."
Tomorrow, the SEC decides that Pokémon cards are securities (far-fetched, but work with me here) Suddenly, anyone buying and selling them becomes a criminal. I tell people via text message "pish-posh - there's no way the SEC could enforce this". But people stop coming so I promise them that I can buy up all of their cards anyway. Especially the cards that complete my collection.
Then it gets enforced. Not only did I trade in illegal assets, I am now guilty of fraud for telling people it was safe. I am also guilty of market manipulation! And on top of it, I did it via text message so it's now wire fraud to boot.
As far as I understand reading the charges, this is mostly what he is guilty of. This is a bit different than the "true" type-1 frauds that exist in crypto - the blatant pump and dump schemes, et al. In fact, I would feel safe to say there might have been no fraud without the SEC classification. (EDIT: Ignore this since they also did a lot of legitimate fraud too)
Regardless, the writing is on the wall for crypto. I could not even fathom why you would want to be holding onto even Bitcoin or Ether right now.