US securities law and mAssets

I am not a lawyer or a securities expert, but the topic has crossed my mind and I know some people are wary of joining due to the murky guidelines provided by the government.

So, can the synthetic stocks provided by mirror be construed as illegal derivative offerings? Additionally would that open mir to being considered an illegal security in the eyes of the US government?

I’m familiar with the howey prongs and the hoopla surrounding xrp but mir is different. Does anyone have any thoughts on this?

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I am also neither a lawyer nor a security expert. I am not even living under US tax law.

But I can give you some insights from my European tax lawyer. She specializes in crypto.
I talked to her about mirror protocol. She said if the asset that you are holding doesn’t give you voting rights, you don’t own a part of the company, and you also don’t have an interest claim, then that asset can’t be a security. It is a crypto asset. That the asset mirrors the price of a stock, coffee or the weather does not matter in Europe.
Of course, I don’t know if that could be similar under US law and I also don’t know if the mAssets could still be considered as illegal derivates.

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I believe the way Do/TFL launched MIR causes it to not be classified as a security under the Supreme Court’s Howey Test.
Regarding mAssets, Abra is an example of what happens when you have centralized and unlicensed/unregistered issuance of synthetic US securities.
MIR is obviously KYC-less and decentralized. Do/TFL/“Mirror”/anyone does not have the ability to move the price of the mAsset up or down without interacting with the market (or interfering with the oracle, which is a different topic entirely).
Reading through these comments from an SEC Director, it doesn’t seem like Mirror or mAssets classify as securities. With that being said, AMMs like Uniswap and Terraswap might one day be targeted by the US government for skirting regulatory purview - this might be the angle from which the Mirror.finance frontend might be closed off to US IPs, much like how Solana’s Bonfida is not available to US investors out of similar concerns.
Do has expressed that he wants Mirror to avoid US-jurisdiction entirely. The Mirror app and Saturn are not available in the US - when you combine untested new crypto-asset classes (mAssets) and tradfi banking you might run into unwanted regulatory attention. For the time being, there are much more glaring fish to fry in the crypto ecosystem (I question Synthetix’s governance and token distribution model [ICO]) for regulators. I assume TFL has sought out legal opinions on Mirror before; maybe they should, in the interest of transparency, release a statement of their stance on regulations and how Mirror does/doesn’t run afoul of them?

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The US laws are very different, the Howey Test (named after a case involving sales of orange orchards owned by a guy named Howey that went to the Supreme Court). From FindLaw:

A transaction is an investment contract if:

  1. It is an investment of money
  2. There is an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Any profit comes from the efforts of a promoter or third party

It has to meet all of these requirements. I personally (I’m not a lawyer) find 2. a real stretch to apply to a mAsset since they don’t give any right to the underlying stock, do not pay dividends. Anyone’s “expectation of profits” comes purely from their personal opinion of the underlying asset and its price. Certainly no one at TFL is saying any specific mAsset will give profit and if third parties make that claim it’s not anything to do with TFL.

In fact both 3 and 4 also seem like a stretch - is a mAsset a “common enterprise”? That doesn’t seem to be true any more than buying any good that has a market price is a “common enterprise”. And do any profits come from the “efforts” of a promoter or third party? The only “efforts” there are is providing the infrastructure, but that does not provide the actual profit, that comes from market prices of the underlying asset and that owner - Apple, GME, etc. is not involved in TFL or the mAsset existence in any way.

Another person has mentioned to me that mAssets could be deemed illegal under laws that concern “bucket shops” which date from the 1920s and before. From Wikipedia:

"A bucket shop is a business that allows gambling based on the prices of stocks or commodities. A 1906 U.S. Supreme Court ruling defined a bucket shop as “an establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in”.

I haven’t researched that much but it seems a little far fetched to classify buying a mAsset as “a bet”. I do know that in the 2000s the CBOE did allow creation of “binary futures” which sound awfully like these bucket shop instruments. They are an all-or-nothing instrument that depends on if an asset trades above or below a certain number within a certain time. One interesting quirk of that decision was they decided to only allow binary futures on events that affect things you could actually own as an asset, that allows them to be used as a hedge which they deem a good thing. So binary option on stock or index price - yes. Binary options on house price indexes - yes because you can own property and use it to hedge against a price crash. Binary options on hurricane season severity - yes, because hurricanes damage crops and property. Binary options on election outcome - no, too difficult to define how that impacts your real world assets in any general way. Binary options on sports events - no, ditto.

But such binary options were regulated and had to be approved by the CBOE. In Europe they are much freer - binary options are freely available on sports results, political events, and many other outcomes. Remember that sports betting “against the house” is not widely legal in the US except for in Vegas and on tribal reserves. Anyway IMO mAssets are in no way “binary options” so it’s a moot point IMO.

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Thank you for the elaboration and rundown. I agree: mAssets don’t pass the Howey Test (or do they pass? whatever, you get my point).
The actual stock would definitely be a common enterprise (“an enterprise in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those offering or selling the investment or of third parties.”), but since mAssets are just tokens that can be minted based off of a potentially arbitrary oracle price, they are not an investment in a common enterprise.

My understanding of bucket shops are firms that would take orders, but instead of sending orders and shares to the market, they’d be internally matched with shorts or longs made by other clients. When your broker is a bucket shop, your dollars or shares don’t actually reach the market orderbooks. mAssets don’t represent ownership in an actual stock, and all trading of them is currently decentralized, so I don’t see how the colloquial definition of bucket shops could apply.

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Yeah I think you have the bucket shop definition right. You’re literally betting on what the price will be not buying the stock or an actual listed future (not sure if they had futures back then anyway), any more than when you bet on a horse race you’re buying a stake in the horse to get the winnings - you’re not.

I think the comparison to bucket shop regulations is that it’s a bet on an outcome of something else and in most states betting other than person to person is illegal - presumably because spots teams are afraid of players taking bribes or losing out on sport related revenue. In the world of stocks not such a problem although sometimes a company might do a “hold back” to avoid blowing out one quarter’s numbers and then apply them to the next. I worked for such a company and it’s also apparently a no-no. Maybe the reasons for that are related to stock market manipulation fears, too easy to hold back revenue then unexpectedly blow out the next quarter allowing someone to make $$$ with a futures position.

But I don’t see the connection - holding a mAsset is not a bet any more than holding the asset is a bet. So if you’re going to outlaw mAssets as bets then you should really outlaw holding stocks.

Oh course to the extent that your government (which every country that is) likes to regulate anything you can buy and sell, and that markets use their government influence to protect their exclusive status, then I guess that will continue to happen even if it requires inventing new regulations.

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Well, we have a problem. Probably thanks to the idiots at Bloomberg that published the story about Mirror and Synthetix:

mTokens are exactly what the last part of the message are referring to.
We need to think about SEC enforcement and how to mitigate/fight back/prevent panic.

First of all they can’t do anything about mAssets. They want you to believe they can. Second it would be in their best interest to play ball to capitalize on tax revenue. As the saying goes…when there is blood in the streets…you know what to do.

Yeah, doing nothing in the face of the SEC is not a good strategy. Need to be on the defensive. Mirror.Finance is not blocked for US IPs. This is probably not popular with SEC: many, many defi webapps restrict US users (on paper). It seems stupid to keep this window of attack open.

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Great topic. I’m not a lawyer either. But I’m quite sure this has been discussed and even judged in the past already. Maybe the mAsets could be classified as “contract for difference”.

Looking at Investopedia page about CFDs, it says these are illegal in the US and links to a case of SEC vs 1Broker, which was a platform where you could buy various CFDs (for stocks, forex, etc.) with Bitcoin. SEC basically killed it. Might be relevant reading Contract for Differences (CFD) Definition

mAssets are CDP’s (collateralized debt positions), not CFD’s (contracts for difference).

Perpetual Futures are much more similar to CFD’s.

I was looking at this and still not 100% sure I understand. If you come in from the outside and buy an mAsset with your UST, you don’t mint anything, you don’t even understand how it works under the hood, aren’t you de-facto buying a CFD? Thank you for sharing your thoughts on this.

Without any knowledge of what’s under the hood, it would behave essentially the same as a CFD (except that you can only go long and you don’t have any access to leverage). Those differences are pretty critical, though; you lose most of the advantages of trading CFD’s that way.
The only advantage to Mirror over CFD’s (if you have access to them) is that with Mirror you can yield farm your positions while you wait for the market to do what you expect.

A community bank borrows (takes deposits) at variable rates, and then lends at fixed rates (auto loans and mortgages). It will behave in the same way as an interest rate swap, and the cash flows will look the same if you don’t look under the hood, but it is NOT an interest rate swap, because what’s under the hood matters.

Certain types of online gambling like sports betting, and horse racing are legal within the United States, along with other high risk casino games within various states. Mirror Protocol is none of the these.

With the definition of crypto broker (or whatever) still yet to be defined, why would the US government be concerned about what is being developed outside of a regulated equities exchange within an allied nation?

That’s a decent way to look at it. The problem is that CFDs are illegal in the US.
Rumor is that Do Kwon was served by the SEC today. I’d bet that it has to do with mAssets.