Distinguishing Securities From Non-Securities in the Cryptocurrency Market

The cryptocurrency market raises many questions concerning its financial and regulatory status, including whether cryptocurrencies are securities. Securities are typically negotiable financial instruments with monetary value issued by companies or governments, which are also well-regulated, and investors must be informed about potential risks.

On the other hand, cryptocurrencies are largely unregulated, and their status as securities remains debated and unclear. Exchanges and crypto developers exercise caution to operate within the law in various financial jurisdictions. However, these laws and requirements differ from one jurisdiction to another, contributing to the issue’s complexity.

What Is the Howey Test for Crypto?

Classifying cryptos as securities or commodities is a topic of ongoing debate in many jurisdictions. This is primarily due to the unique nature of cryptos and the fact that they do not fit into traditional asset classifications.

The US Securities and Exchange Commission (SEC) proposed the Howey Test to determine which offerings qualify as securities. This test posits that for a transaction or an asset to be classified as a security, it must involve an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Applying the Howey Test to cryptos generates mixed results:

Investment in Money: Cryptos pass this criterion as investing in them involves money.
In a Common Enterprise: This criterion is met to some extent. For instance, in crypto lending services, clients lend out their money expecting a fixed or variable profit based on how an exchange uses it.
Expectation of Profit: While many crypto investors aim to profit, there are exceptions, like stablecoins, which are used as a store of wealth, not for profit, classifying them more as a currency than a security.
Efforts of Others: Here, cryptos generally do not pass the test, as no third party is typically involved in ensuring investors’

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Author: Bary Rahma

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