Is Lending Your Bitcoins a Security?
Matt Levine, writing at Bloomberg: Oh, sure, yes, absolutely. The rule in the U.S. is that an "investment contract," meaning "the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others," is a security, and generally can't be sold to the public without registering it with the Securities and Exchange Commission, delivering a prospectus with audited financial statements, etc. A Bitcoin lending program -- in which (1) a bunch of people pool their Bitcoins, (2) some manager or smart contract lends those Bitcoins to borrowers who pay interest, and (3) some or all of the interest is paid back to the people in the pool -- is pretty straightforwardly an investment contract and thus a security. I have been saying this for months, though that's only because the SEC has also been saying it for months. But I admit that the SEC hasn't been saying it in a particularly clear way. There's not an SEC press release saying "FYI crypto lending programs are obviously securities." And I gather that there are a lot of crypto lending programs -- they're a staple feature of decentralized finance platforms -- and roughly none of them are registered with the SEC. The SEC and state regulators have brought enforcement actions against a few of them -- we've talked about BitConnect and BlockFi and Blockchain Credit Partners -- but I suppose each of those is distinctive in its own way, and there are about a zillion others that haven't been sued by the SEC. So you could reasonably look around and be like "oh sure we can pool people's Bitcoins and lend them and pass along the interest, that's not a security that should involve the SEC." You'd be wrong, but I get where you're coming from. [...] Look, I get it. From the perspective of Coinbase, and of its customers, and frankly of most normal people interested in crypto: People would like to lend their Bitcoins. It doesn't feel like a security. It's kind of annoying and archaic that a 1946 Supreme Court case says that it is? But look at it from the SEC's perspective: The SEC really doesn't like crypto. The SEC is a regulatory agency that has a general tendency to want to do more regulating. Popular tokens like Bitcoin and Ether are not securities and so not subject to SEC regulation, which leaves the SEC feeling antsy. But crypto lending programs are pretty clearly securities subject to SEC regulation. So for the SEC to say "crypto lending programs are securities and need to be regulated" serves the dual purposes of (1) expanding SEC jurisdiction over crypto and (2) stopping those programs. Also it's pretty clearly justified by a 1946 Supreme Court case.
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