Is purchasing crypto an investment?
Is purchasing crypto an investment?
The most important question wasn’t even asked during the SEC v. Coinbase oral argument
We haven’t seen the transcript yet but we sat through five hours of oral argument in SEC v. Coinbase last month. Judge Failla was prepared as she had 14 pages of questions! Yet, the most important question was not asked:
Is purchasing crypto an investment?
We will probably never understand why a litigant can take inconsistent positions, yet they are not called out on that. The doublespeak we refer to is Coinbase wanting to have its cake and eat it too: Their commercial position hints at crypto being an investment vehicle, yet their legal stance is that purchasing crypto is not investing. We did bring it to the Court’s attention in our amicus brief; however, it did not make its way into the 14 pages of questions.
If one has spent significant time with legal proceedings, one must know that it’s precisely these types of inconsistencies that take one closer to the truth. Our level of curiosity is sky-high and we are dying to know what Coinbase’s official position is on this. Is purchasing crypto on their platform investing or not?
The decision tree that this question leads to is literally what this case is all about. Here it is:
That is the ballgame right there! Other matters are important, too, we don’t want to minimize them, but the line of questioning proposed above results in four questions at most (depending on the answers). The fact that there was a five-hour hearing and we didn’t even come close to hearing a satisfactory answer to these questions (because they were not asked) represents a missed opportunity of grand proportions.
How would Coinbase answer these questions? We don’t know and unless somebody asks them, we may never know. As mentioned, their official legal position is that purchasing crypto is not investing. Further, we believe that Brian Armstrong (Coinbase CEO) may have been instructed to not call it investing. We don’t have any evidence of that, but that’s the most logical inference one can make given he was on air with CNBC for more than eight minutes and never uttered the I-word (even though Andrew Ross Sorkin did).
In a strange twist, this is not that different from Satoshi’s position. According to one of the emails that was recently released in a London-based suit, he also was not comfortable pitching Bitcoin as an investment. He suggested that people should come to their own conclusions on that:
People certainly came to the conclusion that crypto is investing, despite Buffett/Munger, Aswath Damodaran and Jamie Dimon ringing the alarm bells, and that’s the ultimate dream scenario for Coinbase. By not explicitly promoting crypto as investing, they probably think they are one step removed from the investment contract determination. We disagree - the answer to the finance question does not demand a symmetrical answer to the legal question - but it's pretty clear that Coinbase believes that arguing that cryptocurrency is just another version of beanie babies, and not investing, is good for them from a legal standpoint.
Yet, the conclusion that crypto is investing is good for them from a commercial standpoint; it undoubtedly increases their customer base, and therefore, revenues. It is in Coinbase’s (and other similarly situated parties’) best interest for cryptocurrencies to be perceived as being on par with stocks, and the “investing” label is needed for that parity.
Amazingly, their counterparty in this suit, the SEC, helps them with creating that perception. When legal scholars look at this case 25 years from now, they will likely shake their heads and wonder how Coinbase, and not the SEC, argued that purchasing crypto was not an investment. It is the best argument, and presumably the only one that leads to an investment contract determination. Coinbase started to paint itself into a corner by practically admitting (correctly) that crypto purchases on secondary markets are not investing, and instead of leveraging that against Coinbase to argue its point, the SEC is giving them a helping hand by taking the position that they are investments. The SEC could still pivot, and potentially start winning all these cases. They probably won’t, and, as a result, they might win some battles (they could survive motions to dismiss) but they might lose the war.
To be clear, it is not the case that Coinbase never took the “investing position.” Their website still has references to investing; this is the example we memorialized in our amicus brief (“When is the best time to invest in crypto?”), and there is at least one more reference on their homepage as of today (“Coinbase Prime is the first choice for sophisticated investors and institutions that want to invest in digital assets”):
In addition, Paul Grewal, Coinbase’s Chief Legal Officer, despite officially taking a beanie baby/not investing position, called it investing in a recent X post:
The line of questioning suggested above would force Coinbase to admit at least one inconvenient truth. That they contradicted themselves between their commercial and legal positions is a given no matter how they answer (questions in red font in the image above point out those inconsistencies). Beyond that, they would either:
Officially take the undesirable (and wrong) position that beanie babies are investments (Y, then Y); or
Break the link between crypto and beanie babies, the similarity they desperately need for their legal argument to have a shot at working (Y, then N); or
Admit that our proposed regulatory solution is solid and lose a portion of their customer base (N).
Unless one takes Coinbase to task on the decision tree above in a forum that matters (live TV, in a courtroom, etc.), Coinbase will likely continue to have its cake and eat it too. Is crypto purchasing an investment? We are convinced that the day will come when people will realize this is the question that matters the most. The longer it takes society to get there, the likelier it is that more people will get hurt in some fashion. Remember, we are not anti-crypto, we don’t favor a crypto ban, and we would never tell anyone whether or not to buy crypto. Our only ask is that people be told what they are buying. Let it be known, loud and clear, that crypto purchasers are speculating, not investing, so they can make an informed decision.
