With innovation comes the need to “define.” The need to ‘legally,’ define what Bitcoin, and the other cryptocurrencies is deemed as important to lawmakers as the disruption they were setting about. Thus the question was surfaced, “What is Bitcoin legally?” and more specifically, “Is Bitcoin a security?,” to answer that, the United States Securities and Exchange Commission [SEC] employed what would rattle the cryptocurrency world every time it was mentioned – The Howey Test.
Blast From the Past
Formed as a consequence of the 1946 Supreme Court case of SEC v. W.J. Howey Co, the Howey Test is now used as a litmus test to determine whether a financial asset is a “security,” or not. The test operates on a four-pronged approach, and each of the four points needs to be proven to determine the security. In order for an asset to be a security, it should involve an investment of money, operate with a profit expectation, be tied to a common enterprise, and the profits, in question, should be generated by a third party.
As the SEC stated,
“A hallmark of a security is an investment of money or value in a business or operation where the investor has a reasonable expectation of profits based on the efforts of others.”
The same issuance by the regulator suggested that other aspects of the law must also be adhered to. If the platform that is offering this is “operating as an exchange,” if the issuer can be classified as an “investment company,” and if any entity providing advice on the issuance, in question, is considered an “investment advisor.” On the question of the use of blockchain technology, the SEC stated,
“Structuring an offering so that it involves digital instruments of value or operates using a distributed ledger or blockchain does not remove that activity from the requirements of the federal securities laws.”
Clear the Clutter