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Cryptocurrency and the Howey Test: Are They Securities?
(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)
Are Cryptocurrencies securities? Should cryptocurrencies be regulated? Why? If so, by whom? These are just some of the questions with which regulators and the cryptocurrency industry are struggling. One of the key drivers behind the success of blockchain is its libertarian, anti-establishment set of beliefs. Fitting in with the regulatory bodies would seem to go against the beliefs upon which the blockchain ecosystem was built. (1) Historically, the so-called Howey Test has been used by the Securities and Exchange Commission (SEC) to determine if something is a security and, therefore, subject to securities regulation. (2) In 1946, the Supreme Court in S.E.C.
v. W.J. Howey Co. stated that “an investment contract for the purposes of the Securities Act mean 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.” (3) The SEC has used the Howey test to declare various items as securities, significantly outside the typically stock and bond realm. In fact, Howey involved a Florida citrus grove farmer who was selling portions of the acreage with investors to immediately lease back the acreage to Howey. (2) Nonetheless, cryptocurrency still lacks a single regulatory body. (3)