What is a Security?
Malt Liquidity 102
It was around the time when “summer” became a verb to most of the deep-pocketed East Coast crowd, and I was on my fourth watermelon mimosa before noon when my thought filter was diminished enough such that I could vocalize my thoughts once more:
How the fuck is this a thing?
My friend, sitting across from me and well-versed in this line of thought coming from me over the past ten years, replied “Who cares dude? We made money.”
He was, of course, talking about PepeCoin, where a group of people we knew had cashed out enough to buy a mansion in Montauk with straight cash.
Later that day, I had a late lunch with a friend who had made enough to pay his rent for his apartment in Manhattan for the entire year on HarryPotterObamaSonic10Inu (ticker: BITCOIN) during the prior weekend.
Look, this is nothing new. We’re about 5 years into the “no brain, all gain” market, so this really shouldn’t surprise me — as I noted prior, it’s clear that speculation is a societal addiction that wasn’t really intended to be so instantaneously accessible, and that is simply the society we live in nowadays:
In the smartphone-driven instantaneous information access age, there's virtually no ability to remove the prior of access. One imagines Dostoevsky's Gambler would be much less interesting to read about if he existed in a nation that had no roulette. Beyond the sports betting ads shoved ad nauseam in every broadcast, nook, and cranny of ordinary society, it's never been more impossible to avoid it all. The securitization of everything was not made to withstand seamless speculation. The endless operation of markets, and markets on those markets, and markets on those markets, means that no matter where you are in the world, as long as there is internet access available, you can place a trade, having done so myself 35,000 feet above the Pacific Ocean on my way to Singapore.
Notice the language I use there — securitization. Beyond placing bets, we need something to trade, and it’s actually quite hard to define what exactly a security is, because the definition (in the US) is intentionally vague so that it can exist as a regulatory catchall. Beyond the actual text of the Securities Acts of 1933 and 1934, let’s think about the motivation: the Great Depression had just occurred, and with it, a calamitous bank run that destroyed a lot of the economy and stretched the financial system to its absolute limits (or collapsed it, depending on how you think about it.) Note that while speculation is the foundation of the financial system, too much of a useful thing is still, in fact, a bad thing. Two principles arise out of these pieces of legislation:
The government wants to prevent false, unrealistic promises that don’t quite amount to fraud from being marketed to investors
The government wants to know what exactly is being offered as an investment
Recall what I wrote in November:
Pretty much all cases involving token sales revolve around whether said tokens were unregistered securities. To determine whether an offering is a security, the courts developed a test called the Howey test, from a 1946 SCOTUS decision in SEC v. W.J. Howey, which states that “an investment contract … means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
This, naturally, is intentionally vague — the proliferation of the administrative state basically means that the SEC can go after whatever they want to. As I predicted back then, due to the ruling…
it seems that any token created for utility that has been sold as having value will be chased after and sued. It’s hard to see how any token with utility that has a fluctuating value can avoid being categorized as a security if the company makes any comment regarding its potential valuation. It really seems like we’re on the pathway to any tradable token being regarded as a security
and I highlighted that this is the enforcement route that the SEC chose.
Someone offered me a hypothetical interpretation underneath the Howey test which really does highlight how ridiculously vague this interpretation can be:
Did Investors invest money? Yes, Chiquita bananas were sold for money, to raise money for Chiquita
Was there a common enterprise? Yes, Chiquita is an enterprise; it is a major fruit distributor that competes with Dole Fruit Company.
Is there an expectation of profits? Yes, people bought Chiquita bananas hoping that it would go up, and it did
Do the profits come from the efforts of others? Yes, Chiquita Bananas went up because of the marketing efforts of Chiquita and Chiquita promoters encouraging the purchase of Chiquita Bananas
Look, the subtext of securities regulation is that the government wants to make sure that market volatility that’s going on in whatever speculative instrument doesn’t lead to a fucking bank blowing up, which is exactly what happened to Silvergate. Hilariously enough, the original Howey case was about orange groves. But the wrong way to look at it is “if bananas can qualify as a security, then the Howey test shouldn’t apply to cryptocurrencies because it’s too broadly applicable.” The construction and precedent of Howey is built such that an administration can pick and choose what is and isn’t a security. As I’ve noted before, you should have a problem with all this:
this kind of administrative overreach, along with the FDIC’s behavior, is why you should care about the usurping of power in the executive branch through the interplay between Chevron deference and the major questions doctrine.
Under the SEC’s current interpretation, I think I could easily argue that Nike shoes and Pokemon cards are securities, and sites like StockX are operating an exchange of unregistered securities. But these things aren’t blowing up banks. The reason I bring this up is due to the recently filed complaints against Binance and Coinbase, which, as I noted, is the “writing on the wall” that crypto will essentially be made illegal in the US (other than Bitcoin, as I’ve pointed out.) In no way do I think that Binance is an innocent party here,
but it would be nice to have some clarity on what exactly a security is at this point. In our postmodern hellscape, while we can treat words that function politically with variable, personal, and fluid definitions, there is the fact that when the forces of regulatory enforcement exist, there needs to be strict, consistent guidance on what the agencies are treating as a security, because the actions of people display the inherent meaninglessness of the Howey test. From the video linked in the sentence prior:
Now this token is the ENDGAME. It’s the Shitcoin of Shitcoins. Imagine telling your coworkers that you’re QUITTING because HarryPotterObamaSonic10Inu Coin MOONED. Imagine the media reporting on HarryPotterObamaSonic10Inu. Ticker is BITCOIN breaking 1 BILLION market cap. Now unless you hate money, go ahead and visit [url].
There’s a passage I often reference from Don DeLillo’s White Noise:
We drove twenty-two miles into the country around Farmington. There were meadows and apple orchards. White fences trailed through the rolling fields. Soon the signs started appearing. THE MOST PHOTOGRAPHED BARN IN AMERICA. We counted five signs before we reached the site. There were forty cars and a tour bus in the makeshift lot. We walked along a cowpath to the slightly elevated spot set aside for viewing and photographing. All the people had cameras; some had tripods, telephoto lenses, filter kits. A man in a booth sold postcards and slides—pictures of the barn taken from the elevated spot. We stood near a grove of trees and watched the photographers. Murray maintained a prolonged silence, occasionally scrawling some notes in a little book.
"No one sees the barn," he said finally.
A long silence followed.
"Once you've seen the signs about the barn, it becomes impossible to see the barn." He fell silent once more…
What was the barn like before it was photographed?" he said. "What did it look like, how was it different from other barns, how was it similar to other barns? We can't answer these questions because we've read the. signs, seen the people snapping the pictures. We can't get outside the aura. We're part of the aura. We're here, we're now.”
The “security” itself has become recursive. Let’s take a quick rundown:
Did Investors invest money? Yes, HarryPotterObamaSonic10Inu was sold for money by its founders.
Was there a common enterprise? Yes, HarryPotterObamaSonic10Inu is an enterprise; it is a rising currency that competes with other products to disrupt the global financial system.
Is there an expectation of profits? Yes, people bought HarryPotterObamaSonic10Inu hoping that it would go up, and it did
Do the profits come from the efforts of others? Yes, HarryPotterObamaSonic10Inu went up because of the marketing efforts of the official promoters and HODLers encouraging the purchase of HarryPotterObamaSonic10Inu through memes.
I repeat, How the fuck is this a thing? Once something starts trading, realizing volatility, and liquidity develops, it becomes impossible to see how the Howey test is supposed to matter. Everything that isn’t consumed fluctuates in value due to supply and demand, and everything is “traded” if there is sufficient liquidity to transact beyond an individual scale. Purportedly deadstock Nikes are sold with the intention of being utilized as footwear, but let’s be honest, I’d be willing to bet that 80%+ of “in demand” sneakers never see the light outside the shoebox. And yet these aren’t securities, but HarryPotterObamaSonic10Inu is? When we lose the tethering to reality that profit-seeking is supposed to beget — when the wealth creation mechanism becomes the source of wealth creation itself, and the ends of “having made profit” justify the means of deploying the capital in the first place — we have to take a hard look at what allowed that system to proliferate. Certainly, I’ve highlighted the interest rate angle, but this sort of regulatory framework where nobody can properly answer “what is a security?” doesn’t make for a viral twitter documentary, but it does lead to the logical course of action that “if everything could be a security, then everything can be speculated on like a security.” And so gobs of capital are punted into utter nonsense for no reason other than the fact that we’ve lost sight of the roots of the speculative financial system in the first place. I mean, seriously. PepeCoin did more volume today than T.Rowe Price, a 25 billion dollar investment management firm with 1.6 trillion AUM and 6+ billion revenue.
What is a security? I’m not sure I can answer this — I’m not a regulator. What I can do is leave you with this quote, from Gerald Murnane’s The Plains:
5TH LANDOWNER: You know the story of the man who was born too late to be the conventional sort of explorer. But he insisted that exploration was the only activity worthy of a plainsman. He marked out a square of his property and spent years drawing the most detailed maps of it. He named hundreds of features that you or I would have walked over without noticing. And he made notes and sketches of plants and birds as though no one before him had seen them. Then in his last years he locked away all his notes and maps and invited anyone who cared to explore the same place after him and write a description of it. When the two descriptions were compared, the differences between them would reveal the distinctive qualities of each man: the only qualities that he could claim as his own.