From what I have seen is it’s difficult to discern if it is a security because there are four prongs of the Howey Test, which determines what is and isn’t a security, and not all four can be met in regard to many blockchain projects. The prongs are:
(1) an investment of money
(2) in a common enterprise
(3) with the expectation of profit
(4) to be derived from the efforts of others
The reason the law is unsettled is that blockchains are often decentralized so it becomes difficult to determine WHAT the common enterprise is and who’s “effort” is being relied upon.
For example, if you have one blockchain that hosts 100 different projects (so, 100 different companies are using the blockchain to build different products), who/what is the common enterprise? Whomever holds the most of that blockchain’s tokens? If so, what about when that changes over time?
The SEC argues that BTC is the only “commodity” cryptocurrency because no one knows who Satoshi is (the person/persons that created it). But there are large holders of BTC and groups that champion BTC that, collectively, have some of the largest holdings of BTC.
So, because of the lack of legal clarity regarding decentralization/securities laws, the SEC effectively made up a fifth prong of Howey (see: Hinman Speech) where they randomly determined - without legal precedent or congressional approval - that a cryptocurrency is not a security, but a commodity, when the blockchain is “sufficiently decentralized.”
Now, aside from the fact that they completely made that up, what does “sufficiently decentralized” mean? They won’t say. Cryptocurrency companies have been asking for years and they never get an answer. They just randomly get Wells Notices saying they’re selling/trading illegal securities.
All we know is this: they say BTC is sufficiently decentralized, and, randomly...Ethereum (ETH).
Ethereum, an organization that, at launch, held an open ICO (which is crypto’s version of an IPO) and, on camera, encouraged their investors to disguise their identities to evade securities laws. Yet, in 2018, Bill Hinman, the Director of Corporate Finance at the SEC, was the SEC official that gave a public speech declaring BTC and ETH were not securities.
To make matters worse: Hinman is a partner at a law firm that is part of the Ethereum Alliance, which is a large holder and effectively a governing body of Ethereum.
So the SEC is suing everyone except for ETH and large BTC holders, and the companies being sued are arguing:
1) You aren’t giving us fair notice that we’re selling securities. Even when we reach out and work with you you won’t tell us what is and what isn’t.
2) You can’t tell us how our projects are, legally or logistically, different than BTC, or, especially, ETH.
To the lawyers here: if you are not familiar with this (the Hinman Speech, how it affected markets (ETH boomed), and its unlawful expansion of Howey), trust me: you will find it fascinating.
(1) an investment of money
(2) in a common enterprise
(3) with the expectation of profit
(4) to be derived from the efforts of others
The reason the law is unsettled is that blockchains are often decentralized so it becomes difficult to determine WHAT the common enterprise is and who’s “effort” is being relied upon.
For example, if you have one blockchain that hosts 100 different projects (so, 100 different companies are using the blockchain to build different products), who/what is the common enterprise? Whomever holds the most of that blockchain’s tokens? If so, what about when that changes over time?
The SEC argues that BTC is the only “commodity” cryptocurrency because no one knows who Satoshi is (the person/persons that created it). But there are large holders of BTC and groups that champion BTC that, collectively, have some of the largest holdings of BTC.
So, because of the lack of legal clarity regarding decentralization/securities laws, the SEC effectively made up a fifth prong of Howey (see: Hinman Speech) where they randomly determined - without legal precedent or congressional approval - that a cryptocurrency is not a security, but a commodity, when the blockchain is “sufficiently decentralized.”
Now, aside from the fact that they completely made that up, what does “sufficiently decentralized” mean? They won’t say. Cryptocurrency companies have been asking for years and they never get an answer. They just randomly get Wells Notices saying they’re selling/trading illegal securities.
All we know is this: they say BTC is sufficiently decentralized, and, randomly...Ethereum (ETH).
Ethereum, an organization that, at launch, held an open ICO (which is crypto’s version of an IPO) and, on camera, encouraged their investors to disguise their identities to evade securities laws. Yet, in 2018, Bill Hinman, the Director of Corporate Finance at the SEC, was the SEC official that gave a public speech declaring BTC and ETH were not securities.
To make matters worse: Hinman is a partner at a law firm that is part of the Ethereum Alliance, which is a large holder and effectively a governing body of Ethereum.
So the SEC is suing everyone except for ETH and large BTC holders, and the companies being sued are arguing:
1) You aren’t giving us fair notice that we’re selling securities. Even when we reach out and work with you you won’t tell us what is and what isn’t.
2) You can’t tell us how our projects are, legally or logistically, different than BTC, or, especially, ETH.
To the lawyers here: if you are not familiar with this (the Hinman Speech, how it affected markets (ETH boomed), and its unlawful expansion of Howey), trust me: you will find it fascinating.
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