{"id":541388,"date":"2023-01-20T16:00:00","date_gmt":"2023-01-20T13:00:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\/"},"modified":"2023-01-20T16:00:00","modified_gmt":"2023-01-20T13:00:00","slug":"is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\/","title":{"rendered":"# Is \u201cThe Howey Test\u201d outdated? Modernizing regulations for the digital age"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a28a8bfd3ca7\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a28a8bfd3ca7\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\/#%E2%80%9D_Is_%E2%80%9CThe_Howey_Test%E2%80%9D_outdated_Modernizing_regulations_for_the_digital_age_%E2%80%9C\" >&#8221; Is \u201cThe Howey Test\u201d outdated? Modernizing regulations for the digital age &#8220;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\/#Fully_decentralized_vs_fully_centralized\" >Fully decentralized vs. fully centralized<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\/#Additional_categories\" >Additional categories<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/buradabiliyorum.com\/en\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\/#The_solution_Transparent_regulatory_framework\" >The solution: Transparent regulatory framework<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1><span class=\"ez-toc-section\" id=\"%E2%80%9D_Is_%E2%80%9CThe_Howey_Test%E2%80%9D_outdated_Modernizing_regulations_for_the_digital_age_%E2%80%9C\"><\/span>&#8221; Is \u201cThe Howey Test\u201d outdated? Modernizing regulations for the digital age &#8220;<span class=\"ez-toc-section-end\"><\/span><\/h1>\n<p><img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjMtMDEvYWQ2MjBjMWUtZTAyNS00NjBkLTkxY2QtNjEzY2U3MzMzYzk2LmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-5a4050f8>The rate and reach of cryptocurrency adoption in recent years signals the dire need for modern regulations that simultaneously safeguards investors and enables innovation to flourish. As it stands, most crypto tokens fall within a regulatory gray area as they don\u2019t fit within the confines of the traditional financial system \u2014 so why should they fall prey to in<a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>licable, outdated rules?<\/p>\n<p>Presently, the SEC applies \u201cThe Howey Test,\u201d a legal analysis <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/supreme.justia.com\/cases\/federal\/us\/328\/293\/\">based<\/a> on a 1946 U.S. Supreme Court ruling, to differentiate between securities and non-securities. The SEC asserts that securities are an \u201cinvestment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.\u201d<\/p>\n<p>However, there is a glaring void of regulatory clarity on who determines this classification and how it applies to today\u2019s constructs. The majority of digital assets resemble <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.investopedia.com\/terms\/c\/commodity.asp\">commodities<\/a>\u00a0and some were specifically designed to avoid securities laws.<\/p>\n<p>Furthermore, in contrast to the citrus grove investors involved in <em>SEC v. Howey<\/em>, who had no intention of buying or eating the fruit they were backing, crypto enthusiasts are often looking well beyond the return on investment (ROI). Today\u2019s crypto buyers see a future in which consumers use tokens to transact on the blockchain and for entry into decentralized apps, among other use cases.<\/p>\n<p>I\u2019d like to propose an alternative process to characterize crypto coins and tokens below.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Fully_decentralized_vs_fully_centralized\"><\/span><strong>Fully decentralized vs. fully centralized<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>There is a sliding scale when it comes to digital assets, ranging from fully decentralized to fully centralized. Where assets fall on this spectrum plays a huge role in whether both industry leaders and government officials see them as either a security or non-security. If a holder of a particular crypto token does not have the expectation of profit based on the efforts of a centralized team, then that crypto should not be considered a security.<\/p>\n<p>For example, the SEC\u2019s former Director of Corporate Finance, William Hinman, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.sec.gov\/news\/speech\/speech-hinman-061418\">stated<\/a> in a 2018 speech that based on his understanding of the Ethereum network\u2019s decentralized structure, Ethereum offerings and its associated sales would <em>not<\/em> be considered securities transactions. The debate about whether Ethereum can be labeled a security has reemerged following the network\u2019s switch to a proof-of-stake (PoS) model, which greatly changed how the blockchain functions. However, I\u2019d argue that shifting to PoS should not affect the assumption that Ethereum (ETH) is effectively and directly decentralized, given the extensive holding of Ethereum.<\/p>\n<p>Most blockchain startups initiate their projects with a native coin or create a native coin derived from their original ERC-20 offering. Native coins fall under the category of centralized currency because they have their own designation, and acquiring significant decentralization is hard to achieve.<\/p>\n<p>Since the Howey Test is not a \u201c3 out of 4 is not bad\u201d test, if any of the four aspects are not met, then the asset in question is not a security. Given Hinman\u2019s statement, any asset that can show that it is decentralized is clearly not a security.<\/p>\n<p>You can read more about decentralization determination\u00a0<a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/arietrouw.medium.com\/decentralized-crypto-assets-are-not-securities-910e12cb4c9b\">here<\/a>.<\/p>\n<p class=\"has-black-color has-text-color has-background\" style=\"background-color: #fabf2c;padding: 20px 30px\">Join the community where you can transform the future. Cointelegraph Innovation Circle brings blockchain <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/technology\/\" data-internallinksmanager029f6b8e52c=\"4\" title=\"Technology\" target=\"_blank\" rel=\"noopener\">technology<\/a> leaders together to connect, collaborate and publish.\u00a0<strong>Apply today<\/strong><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Additional_categories\"><\/span><strong>Additional categories<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>While an asset may not meet the requirements to be deemed a decentralized currency, it is not automatically deemed a security. The asset may contrarily fall into a number of other buckets such as centralized currency, contract or organization.<\/p>\n<p>As more and more individuals lose faith in the U.S. Federal Reserve, some are <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.investopedia.com\/terms\/s\/stablecoin.asp\">placing<\/a> trust in centralized stablecoins, like USDT or USDC, that keep reserves of cash off-chain\u00a0to ensure that their coins are always valued at $1. Those holding these stablecoins are simply looking to protect the value of their money and not expecting significant profits. But because stablecoins like USDT and USDC are backed by securities, the SEC <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.nasdaq.com\/articles\/sec-chair-hints-some-stablecoins-are-securities-2021-07-21\">believes<\/a> that they should be regulated.<\/p>\n<p>Decentralized autonomous organizations (DAOs) are governed by smart contract algorithms without a centralized authority. Oftentimes, DAOs issue tokens so that users can participate in the decision-making of the organization. While many believe that these decentralized collectives don\u2019t qualify as securities, lawmakers have <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/qz.com\/crypto-companies-can-t-avoid-legal-liability-by-forming-1849590766\">issued<\/a> stark warnings that crypto companies can\u2019t hide behind DAOs to avoid regulation.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"The_solution_Transparent_regulatory_framework\"><\/span><strong>The solution: Transparent regulatory framework<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The landmark case against <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.sec.gov\/news\/press-release\/2020-338\">Ripple<\/a> underscores how different agencies within the U.S. government aren\u2019t even in agreement on this issue, as FinCEN <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.fincen.gov\/sites\/default\/files\/shared\/Ripple_Facts.pdf\">declared<\/a> it was not a securitywhile the SEC argued that it was. All various modes of tokens and crypto coins should be analyzed by the SEC according to which unique category they\u2019d fall under, as this dilemma isn\u2019t black or white.\u00a0<\/p>\n<p>In the interim, there is a lot at stake for the future of crypto either way this case falls. If Ripple can prove that the SEC has taken an unclear, arbitrary approach to regulating crypto, then an important precedent is set that places the power back in the blockchain. If the SEC reigns supreme, then the governmental agency has legal say in the procession and development of regimenting decentralized finance.<\/p>\n<p>Ultimately, digital assets are notoriously difficult to place into buckets, and until we have new guidelines for the crypto securities market, there will continue to be disagreement and confusion, which could, in tandem, stifle the industry.<\/p>\n<p><em>The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.<\/em><\/p>\n<p><em><a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/arietrouw.com\/\">Arie Trouw<\/a>\u00a0is the co-founder of XYO and founder of XY Labs.<\/em><\/p>\n<div class=\"wp-block-columns\">\n<div class=\"wp-block-column\" style=\"flex-basis:100%\">\n<hr class=\"wp-block-separator\"><\/div>\n<\/p><\/div>\n<p><em>This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.<\/em><\/p>\n<p><em><strong>Learn more about Cointelegraph Innovation Circle and see if you qualify to join<\/strong><\/em><\/p>\n<\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong>\n<\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/innovation-circle\/is-the-howey-test-outdated-modernizing-regulations-for-the-digital-age\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8221; Is \u201cThe Howey Test\u201d outdated? Modernizing regulations for the digital age &#8220; The rate and reach of cryptocurrency adoption in recent years signals the dire need for modern regulations that simultaneously safeguards investors and enables innovation to flourish. As it stands, most crypto tokens fall within a regulatory gray area as they don\u2019t fit&#8230;<\/p>\n","protected":false},"author":1,"featured_media":541389,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/cdn-cgi\/image\/format=auto,onerror=redirect,quality=90,width=1200\/https:\/\/s3.cointelegraph.com\/uploads\/2023-01\/ad620c1e-e025-460d-91cd-613ce7333c96.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[],"class_list":["post-541388","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/541388","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=541388"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/541388\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/541389"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=541388"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=541388"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=541388"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}