Thread by @msantoriESQ

1/ BREAKING 🚨 popular crypto app Abra charged by and settles with SEC for offering securities swaps. This is interesting for a few reasons. Short thread follows.
sec.gov/news/press-rel…

2/ According to the SEC's order, Abra was offering Robinhood-like securities trading, except there were no actual stocks under the hood.

Users would simply bet on the price movement of the stock without actually owning it (or owning an entitlement to it)

3/ This in itself isn't shady of course. They were offering a "derivative" - a product that is useful for many purposes including (i) hedging and (ii) betting.

In this instance, SEC seems to take the position that it was mostly the latter.

4/ Again, nothing shady about that. What do you think Robinhood users are doing all day? So what upset the SEC?

5/ It was a pretty straightforward system: If a US user buys a stock derivative from Abra (a securities-based "swap"), then Abra takes the risk that the price of the stock goes up, but hedges the risk with a third party. ezpz lmnsqzy

6/ From a product perspective, this strikes me as a terrific system. Retail users don't care if they actually get a security. They don't care if they're trading potato chip or microchip stock. You think they're reading 10-Ks? They're just trying to turn dollars into more dollars.

7/ *Insert point right about here how crypto users actually care about sound money and decentralization and that's actually kind of an important difference because maybe just maybe we can change the world*

...but I digress

8/ According to the SEC, Abra was only permitted to offer these swaps to "eligible contract participants" (i.e. rich people with companies, not retail investors)

9/ OK in fairness there's more to the standards than that but nobody is citing my tweets in law review articles.

yet.

10/ At some point, Abra started engaging with the SEC, who presumably communicated their position that ABRA had failed to satisfy the ECP standard. Abra stopped for a couple months and dialogued with the SEC (and CFTC as well, apparently).

But that was just an intermission.

11/ Abra begun offering the service again, but to users outside of the US, via a non-US entity. Not an uncommon approach.

But SEC wasn't having it.

12/ Apparently Abra's firewalling efforts weren't airtight and a handful (5-7?) US persons still used the service. The company ended up settling with SEC for about $150,000.

(the Order notes that Abra generated no direct profit from the swaps)

13/ But was all of this because a handful of americans got through Abra's firewall? Unlikely.

14/ Pure conjecture begins here:

If Abra had offshored the business from the beginning and never serviced or solicited US retail users, the blood pressure level at SEC would probably not be so high.

but that wasn't what happened.

15/ Instead, according to the order, they seemed to solicit generally (including the US) from the outset, only modifying this activity once the authorities got involved. Then, during this period, still solicited broadly via promotional activity and accidentally served Americans

16/ I'm sure the inside baseball here (of which I possess none) would be fascinating, but somber.

Innovators want to innovate - crypto swaps are potentially game-changing products - but SEC has a mandate and there are relevant laws on the books.

17/ Will be interesting to see what the new crypto-focused securities brokers come up with! @brucefenton