Howey Test – How Does this Apply to Cryptocurrencies?
One of the major appealing features of Cryptocurrency is the decentralized form that renders it immune to governmental interference. Over time, people have sought to define the nature of cryptocurrencies as currencies or securities. If crypto is considered securities, it will be subject to governmental authority and regulations. However, to determine this, it must fulfil the Howey test, which this article expatiates below.
What is the Howey Test
The Howey test was a principle developed from the Security Exchange Commission v W.J. Howey Co. case in the United States, where the court sought to determine securities transactions subject to the Security Exchange Act. The court established that a transaction is a security if there is an investment in a common enterprise and there is a reasonable expectation of profits from the other’s efforts.
How does the Howey Test Apply to Cryptocurrency?
There have been several speculations as to the nature of cryptocurrencies over time. If crypto is determined to be a security, then it loses its autonomous character
- An Investment of Money
An investment means that an amount has been invested in the transaction regardless of the currency. Recently, some courts have interpreted ‘money’ as wealth. Usually, many coins initiate their cryptocurrency journey with an Initial Coin Offering (ICO). ICO often requires traditional money or Cryptocurrency, all of which suffices to be regarded as an investment.
- A Common Enterprise
A common enterprise can broadly mean a lot of things. The Securities and Exchange Commission has determined digital assets to be a venture of a common purpose. Courts frequently interpret it to be a pool of money or help in a project made by investors. Crypto involves a peer-to-peer reviewed platform upon subscription to a particular coin for a project. This purpose in itself proves that it is a common enterprise. Although some coins like Bitcoin are not regarded as a common enterprise
- A Reasonable Expectation of Profits
This requirement is a controversial requirement of the test. The intent of the parties is very important when considering this requirement. If the investor is in the project to trade and multiply tokens, it may be regarded as a reasonable expectation of profit. However, if otherwise, then it will not meet this instant requirement. Many coins fulfil this requirement except for stablecoins.
- Efforts of Others
The last requirement necessitates that any profit from the investment must come from the efforts of third parties and not be within the investor’s control. There is no hard or fast rule to fulfil this requirement.
Generally, some currencies, such as Bitcoin and Ethereum, are considered commodities, not securities. The reason is that they are not gotten from the efforts of third parties.
The jury is still out on the nature of cryptocurrencies as a security. Still, it is generally believed that many coins do not fulfil the last requirement of the Howey test and cannot be regarded as a security. Nonetheless, cryptocurrencies are not securities connotes that they are very high-risk ventures. You must be sure to embark on adequate research before investment.
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