A piece of bitcoin

Even BTC is a security

This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

The Securities and Exchange Commission (SEC) Chairman Gary Gensler recently commented that, except for Bitcoin, all ‘crypto’ are securities.

We mostly agree but would further argue that even BTC is a security, according to the Howey test, due to its base-protocol being controlled and frequently changed by a centralized entity (Core developers and proponents behind the scene), which in at least one major forking event resulted in a re-issuance of all existing bitcoin. The genuine Bitcoin (Bitcoin Satoshi Vision, BSV) alone satisfies that exception, thanks to its locked protocol that prevents control, re-issuance, and manipulation by any entity or group, hidden or apparent.

In addition, BTC does not have qualifications for a commodity exemption, while BSV does.

We are, in fact, encouraged by the SEC Chairman’s straight and courageous interpretation of the law. Given the pressure that comes from a misinformed public and motivated stakeholders, it is not easy for public officials and legislators to hold a correct understanding of the pertinent law and technology.

The risk is that lacking such an understanding, they could be impeded by self-doubt, fearing being viewed as backward obstructionists. But we would like to tell Chairman Gensler’s SEC that they are doing the right thing by enforcing the law, and what they are doing is helping to advance the technology, contrary to what some in the media are saying. This is because the crypto market has become cancerous and is the biggest obstacle to the true development of blockchain technology, and enforcing the securities law against illegal securities offerings and even Ponzi schemes makes a bit more room for the real technological and business innovations.

The Howey Test

The present legal standard in the U.S. for determining whether something is a security is summarized in the Howey Test according to a U.S. Supreme Court case SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

The Howey test has been quoted or formulated in various ways. For accuracy, the following is the exact quote from the original Supreme Court opinion:

“…an investment contract, for purposes of the Securities Act, means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party…”

The above statement became the Howey Test, according to which if an instrument meets all the following criteria, it is a security:

  1. people invest money
  2. in a common enterprise and
  3. are led to expect profits
  4. solely from the efforts of the promoter or a third party

It should be noted that (1) the term ‘investment contract’ has been broadly interpreted to not only include an explicit contract, but any transaction or scheme that fits the description; and (2) the subsequent case law has downplayed the word ‘solely’ in the above fourth prong but instead used a reality test of substantial reliance.

At the same time, it should also be noted that most opinions, commentaries, and analyses of the Howey test neglect the following two important sub-elements in the Howey decision:

(1) The actor and the act that ‘led” the investor to expect profits. That is, there has been an inaccurate overemphasis on the subjective state of the investor’s mind, neglecting the promoter’s objective acts to promote a suspect investment scheme.

(2) The need for a nexus among the factors (actors and acts) found in the Howey test. The requirement of such a nexus is completely illogical, albeit implicit. The courts never put it that way explicitly in the past only because they never needed to. But the situation with Bitcoin and crypto has made it necessary to consider such a dimension in order to discern the differences.

Applying the Howey test to crypto

Most digital currencies offered to the public meet all of the elements of the Howey test easily because they all have a common enterprise operating to promote the value of a coin or token, which are purchased by investors who invested money and were led to expect profits through the effort of others (who most likely are the identified common enterprise, but can be another related party as an active participant).

However, as will be demonstrated further below in this article, the four elements in the Howey test are not considered in isolation from each other. There must be a connection between them. That is, a nexus is required among the four elements. Especially to be classified as a security, the ‘investment,’ the actor or acts that ‘led’ the investors to expect profits, the ‘efforts,’ and the ‘third party’ identified in the Howey test should not be completely unrelated to any interest in the identified ‘common enterprise.’

We demonstrate that, under the Howey test and according to the principles of securities law, the only exception among the digital assets is one that satisfies all of the following conditions:

(1) did not do pre-mining;
(2) had no new issuance, re-issuance, secondary offering, and/or airdropping in its lifetime (through whatever hidden or clandestine means);
(3) is based on genuine Proof-of-Work (PoW); and
(4) has a locked base protocol according to the law.

Pre-mining by an issuer or a related party is relevant to the Howey test because it indicates not only the existence of a common enterprise, but also that there is a nexus between the common enterprise and the investment made by the coin purchasers. An issuer who does a pre-mining shows control and influence over the coin or token, and by the time when the coin or token was distributed to purchasers (investors), the investment by the purchasers clearly had a direct relationship with an asset (the pre-mined coin) of the common enterprise.

New issuance, re-issuance, a secondary offering, and/or airdropping may establish the issuer as a relevant common enterprise, even if this wasn’t the case before the new issuance or re-issuance. This matter will be discussed further below in detail in the context of Bitcoin history.

If the underlying blockchain uses Proof-of-Stake (PoS) or any other consensuses that use different names but are, in essence, still Proof-of-Stake, the coin is a security. This is because PoS places an owner of the coin in a position akin to that of a traditional shareholder of a corporation. This will also be discussed below in detail.

The SEC has in the past indicated that it does not see Bitcoin as a security, as Bitcoin has been sufficiently “decentralized.”

However, we argue that even BTC is a security and that the SEC has misapplied its own standard due to its misunderstanding of BTC.

BTC, a severely distorted version of Bitcoin, does not meet the nonsecurity standard. The following are some of the reasons:

(1) It does not have true decentralization. It is centrally controlled by a small group of Core developers, who in turn are subject to the control or influence of certain interest groups hidden behind the scenes. The centralized nature of BTC is strongly evidenced by the fact that it does not have a locked base protocol, and further by the fact that it has indeed frequently changed the base protocol by exercising the power of that centralization.

(2) Even though bitcoin was not a security to start with, BTC subsequently became one by covertly re-issuing the coin as a new coin, namely BTC, when the BTC blockchain forked from the original Bitcoin blockchain.

(3) Further, it has been deliberately transformed from the original bitcoin’s design of utility (a Peer-to-Peer cash system) to a purely speculative investment.

The original Bitcoin (BSV) is the only exception

The original Bitcoin, however, is an exception. Bitcoin is not a security, according to the Howey test.

But the reason why the original Bitcoin is not a security, according to the Howey test, is not because of what most people vaguely claim, that Bitcoin is sufficiently decentralized. That claim is very vague and quite useless, because the concept of ‘decentralization’ is far more complicated than most people even realize (See Decentralization – a widely misunderstood concept). Further, decentralization can be easily faked to mislead people who don’t fully understand the inner workings of the system.

With the above notion, we give a very simple and basic reason why the original Bitcoin is not a security according to the Howey test, and develop the thesis from there:

It is not a security because it does not have a ‘common enterprise’ as defined in the Howey test and the securities laws.

The SEC’s own use of ‘sufficient decentralization’ as a reason to exonerate BTC is actually also based on similar reasoning, specifically, there is no common enterprise whose effort is expected by the investors to promote the investment. But it is not fully and precisely reasoned due to its lack of sufficient understanding of how Bitcoin and BTC actually work from a deep inside viewpoint. As a result of the SEC’s insufficient reasoning, it may reach erroneous conclusions when it is applied to actual coins such as BTC and BSV.

Let’s begin with arguments that Bitcoin is a security from the law enforcement viewpoint, but then provide rebuttals to prove that BSV, not BTC, qualifies as an exception.

The prima facie argument why Bitcoin is a security:

Even with the original Bitcoin, a ‘common enterprise’ does exist, and therefore is a security. There are three candidates that could qualify as the requisite ‘common enterprise’:

  1. The coin issuer
  2. The developers who work together as a common law partnership, whether incorporated as one or not
  3. The miners who collaborate to maintain the blockchain as a common-law partnership, whether incorporated as one or not.

Any one of the above three, qualifies as a common enterprise, would be sufficient.

The rebuttal, why the original Bitcoin is not a security:

(1) The issuer is not such a common enterprise. Although the original issuer (Satoshi Nakamoto) could be classified as an ‘enterprise,’ it is not the kind of ‘common enterprise’ in the context of the Howey test, which requires more than a mere existence of an enterprise, but also that the enterprise is a common enterprise connected, or having a nexus, with the other elements in Howey test, especially ‘the investment’ and ‘the efforts of others.’ See the later section of this article for more discussions on the connectedness or nexus.

More specifically, as far as his role as the ‘issuer’ is concerned, the original issuer Satoshi Nakamoto himself was not and never became a common enterprise that received an investment in the meaning of the Howey test.

Firstly, Satoshi issued 21 million bitcoin tokens all at once, not to himself, nor to a treasury of his or his company, but to an automated unilateral contract to which he was bound. He did not do any pre-mining. At the initial issuance, he, as the issuer, did not sell any bitcoin to anyone. Further, when the tokens were issued, they had no value. When the tokens subsequently gained value, no proceeds of the token transactions went to Satoshi by virtue of his being the issuer (and Satoshi’s subsequently becoming a miner earning bitcoin is an entirely separate matter).

Therefore, unless Satoshi subsequently makes substantive changes to the automated unilateral contract, he cannot be a common enterprise in the meaning of the Howey test because there is no nexus between him and the investment (coin purchases).

Satoshi as the issuer essentially cut himself out of the loop where the securities law applies.

The fact that after the issuance of bitcoin, Satoshi himself became a miner on the same basis as any other miner in the world according to the automated unilateral contract does not change the above conclusion because even though it is the same person, a miner plays a different role. And whether the miners are a requisite common enterprise will be a different issue discussed below.

(2) The miners of bitcoin are not the common enterprise either. This is not only because miners are decentralized due to the Proof-of-Work consensus (as the SEC also correctly recognized), but more importantly because bitcoin miners are highly specialized by acting according to the terms of the automated unilateral contract. They do not participate in any governance, such as policies/protocol making. They have their own corporate structures, each with its own company shares as securities, but that has nothing to do with whether bitcoin is a security or not. The purchasers of bitcoin do not make an investment in the miners. The miners do not receive any proceeds from the coin purchases. They are just paid with bitcoin for their specialized service.

(3) Neither are developers are not a common enterprise. But this is not because they are merely individuals and not Incorporated (a misunderstood issue by most people, very likely by the SEC as well), but because they have no power to change the base protocol which relates to the terms of the issuer’s unilateral contract, as the base protocol is supposed to be locked and set-in-stone. Developers only work on improving the software to better execute the base protocol and the unilateral contract, which are fixed both in the technical sense and the legal sense. Unable to change the base protocol and the issuer’s unilateral contract, the developers have no power to carry out any kind of new issuance or re-issuance of the original bitcoin. They may have a fiduciary duty to the bitcoin issuer and the bitcoin owners, but they are not a common enterprise in the meaning of the Howey test that is connected to the investment from the bitcoin purchasers.

Therefore, the original Bitcoin is not a security because there is no requisite common enterprise in the meaning of the Howey test and the securities laws.

But it should be clear at this point that only the original Bitcoin, BSV, not BTC, satisfies the conditions laid out in the above rebuttal for an exception to the Howey test. Only BSV has kept the original Bitcoin protocol, locked it and set it in stone, and has never made any changes to cause a new issuance or re-issuance of the coin, intentionally or not.

BTC does not.

BTC does not qualify for an exception

To put it succinctly, history shows that BTC’s core developers, colluding with miners and “crypto” exchanges, effectively changed the nature of Bitcoin, and reissued the coins as a new and different coin.

The above conclusion may seem odd to people who do not have a solid grasp of how bitcoin works and what happened in the past. Most people’s attention is superficially on the name ‘Bitcoin’ and the ticker ‘BTC.’ They automatically assume that because BTC continued with the original name and ticker, it must be the original coin.

But the correct identity of which coin is the original Bitcoin is of legal, technical, economic, and financial significance, and must be investigated and determined as such, and cannot be based on a passive recognition by the misled public.

The fact becomes clear once one gets to the root of the issue to understand the actual definition, identity, and history of Bitcoin.

Here is the simple and straight fact:

Every time when the actual underlying blockchain changes the base protocol that not only affects transactions but also affects the automated unilateral contract originally issued and fixed by Satoshi, the coin is no longer the original coin. From that point on, any coin that continues on the changed blockchain is materially a new coin. It does not matter what name or ticker it carries, nor what the market price it receives. This is because the market is not the factfinder for this matter; it simply votes according to whatever information it was fed, and in this case, they were fed deceptive information.

Once such a new coin is issued, we have a new issuer. But unlike Satoshi, the original issuer who had completely and cleanly cut himself off the securities loop (see above), the new issuer is actively in the game and stays so.

More specifically, the new issuer is now clearly the requisite ‘common enterprise’ according to the Howey test and the securities law. Accordingly, the underlying coin (BTC in this case) became a security, even if it was not initially.

The above is exactly what happened in Bitcoin history. Among the multiple forks of Bitcoin, BSV is the only one that kept the original protocol unchanged. This can be proven beyond any doubt, not only in what it stands for in principle but also in exactly what it actually is and does.

The unchanged base protocol is critical in this analysis, not only because it is the only way to maintain genuine decentralization but also because it is the only way to maintain the nonsecurity nature of the original coin and not to corrupt into a new coin that effectively becomes a security.

BTC did exactly the opposite.

Without a locked base protocol, the BTC Core developers have always had control, both direct and indirect, over the blockchain and the coin. Even though there is a pretense of the full node consensus, the Core has acted with an effective dictatorship when needed.

For example, the major political change SegWit only had a limited voluntary uptake among the nodes when proposed. Only 20% to 30% of the nodes by hash power signaled acceptance. BTC Core developers responded by saying that if these nodes didn’t implement SegWit the Core would change the proof of work algorithm and bankrupt them. That threat was effective. It was just one example to show the kind of centralized control BTC is under, despite the false impression of being decentralized it has created.

After SegWit, BTC Core developers continued to make changes, including Taproot, that were not voted on by the majority of users or exchanges and were forced upon everybody.

Put aside the numerous protocol changes that BTC has made, the first major event of forking, which eventually led to BTC and BCH is an undeniable event that constituted a new issuance or re-issuance, as discussed above.

The moment when BTC forked by changing the original protocol, the coins became a different coin. Whether that new coin is a security or not must be determined by its own nature and characteristics, because it cannot automatically inherit the nonsecurity status from the original coin, given that the very substantial nature of the coin has changed.

The new issuance of BTC as a different coin had both a legal and technical character. Legally, as discussed above, it was reissued as a security because the new coin satisfies all four elements of the Howey test.

But it is also necessary to understand how it did it technically, not because the technical aspects would change the legal conclusion in this case, but because it is helpful to better understand it and to avoid confusion caused by the deep technical obfuscation.

Before forking, just one set of coins (bitcoin) existed on one chain. At the moment of forking, two separate blocks were generated each representing the different chain, let’s say chain A and chain B, the picture of the entire set of coins looks like the following:

Chain A: contains all the original UTXOs on the previous blocks before the fork, plus new UTXOs created in the first forked block on chain A. Let’s call them UTXO Prior, and UTXO Fork-A, respectively.

Chain B: contains all the original UTXOs on the previous blocks before the fork (identical to that of Chain A), plus new UTXOs created in the first forked block on chain B. Let’s call them UTXO Prior, and UTXO Fork-B, respectively.

That is, at the moment, the only difference between chain A and chain B is that between UTXO Fork-A and UTXO Fork-B on the new blocks, which are of a very small number compared to the unchanged UTXO Prior on the historical chain. UTXO Fork-A and UTXO Fork-B would have different addresses because they were generated in different blocks by different miners meant to build different chains. But all the UTXOs in UTXO Prior are identical on both chain A and chain B because they are the exact copies of the original chain, with just one difference: they are now on different chains.

But because there are two different chains, clearly, we now have two different sets of coins, including those in the identical UTXO Prior. Not only do they exist on different chains, but they are also presented to the market as two different assets.

With the above picture, now ask the following critical question:

Which of the above two sets of coins is the original bitcoin?

If one is not confused by the technical obfuscation, the answer is simple and clear: it has to be the one chain that maintained the original protocol. The one that has changed the original protocol becomes a new coin.

And technically, it became a new coin and was recognized in user wallets by way of ‘airdropping.’ This kind of airdropping may not be easy to tell because the users of the wallets may not explicitly observe an actual event of airdropping (i.e., new coin being dropped to the wallets for free), but in reality, what happened was exactly the same as an airdropping.

Just imagine the user of a wallet that has the original bitcoin. When the fork occurred, the original UTXOs owned by the user remained in his wallet, but something material had happened due to the forking: now those UTXO addresses suddenly became two different sets of coins, one on chain A (BCH and subsequently BSV), and one on chain B (BTC). The user automatically owns both. This has happened not because something has changed in the user’s wallet but because something has changed on the blockchains and further on the coin exchanges.

But since the coins on chain A are just a continuation of the original bitcoin, the coins on chain B have been simply created out of thin air, the equivalent of an airdropping.

We are, of course, not against, as a matter of principle creating and issuing new coins. But the key matters at hand now are as follows:

(1) as far as the securities law is concerned, which one is the original bitcoin that has established itself as a nonsecurity, and which one is newly created?

(2) is the new coin still a nonsecurity?

(3) does the market deserve to know the correct answers to the above questions?

We believe the answers to those questions are clear. BTC became a new coin at the fork, and the new coin qualifies as a security. And as it continued to be offered to the market without registration, it violated securities law.

And the fact that BTC was able to fool the market into believing that itself was the original bitcoin not only lends no relief to the above conclusion, but in fact, it aggravated the offense because not only did it become an illegal security, but it also committed active fraud against the investors.

Here, the exchanges were also involved because it was their decision in collusion with the Core developers to assign the then-existing ticker BTC to chain B and call it Bitcoin when they should have done the opposite if they followed the principle of the base protocol set by Satoshi. Other than that principle, there was no other self-evident truth in determining which was which. Doing the opposite of what the original base protocol indicated, their only explainable motivation then was ulterior.

In addition to creating a new coin that was a security, the airdrop also triggered a taxable event, as the new coin was no longer the original asset that had been held, unsold, not transferred or exchanged, but a materialized profit from the original asset, thus a taxable income.

BCH did the same at a subsequent fork between BCH and BSV, and, therefore also became a security.

Below in this article, we discuss further the difference between Proof-of-Work (PoW) and Proof-of-Stake (PoS), and also the important matter of nexus.

PoW, PoS, and the Howey test

In this article, we explain the legal reason why the ‘specialization of services’ in PoW has an impact on whether the underlying asset is a security or not.

It is mostly because the ‘specialization of services’ separates the investment from the requisite common enterprise and therefore yields a negative result according to the Howey test.

However, this ‘separation’ can be destroyed if the issuer pre-mines the asset (coins or tokens), because once the issuer pre-mines, a nexus exists between the money investment and the issuer which is now a suspect of the requisite common enterprise according to the Howey test.

The genius of PoW is deeply and widely misunderstood. The PoW as originally designed by Satoshi maybe essentially described as follows:

A competitive economic system that requires nodes to each perform and demonstrate a signal-work in order to prove both its honesty and ability to perform a utility-work.

The bifurcation of work into two different kinds of work in PoW, namely a signal-work, and a utility-work, is critical not only to the overall design of Bitcoin as a scalable and secure system but also to the question of the Howey test. The bifurcation of work leads to specialization and labor division, which in turn, along with a locked base protocol, causes the nonexistence or disappearance of a common enterprise requisite, according to the Howey test.

Therefore, the original bitcoin that is based on PoW and has a locked protocol is not a security because the buyers of bitcoin do not invest in a common enterprise.

In contrast, a crypto asset based on PoS is a security under the Howey test because the stakers are analogous to shareholders of a company, and the stakers (shareholders) bought the tokens (1) as an investment of money (2) in a common enterprise (3) with an expectation of profits (4) predominantly from the efforts of others.

The common enterprise

It is clear both PoW and PoS satisfy the first element of the Howey test: investment of money.

It is also quite easy to identify a common enterprise working behind any crypto asset, be it PoW or PoS. The common enterprise may be the issuer of the asset, a group that maintains a consensus, a group of developers, a company that builds the common infrastructure, or the mining business as a collective whole in their effort of operating the blockchain according to the rules set by the issuer, etc. Legally speaking, the ‘common enterprise’ does not need to be an incorporated legal entity. The common law standard applies.

If the above two are established, it is also fairly easy to establish the other two elements of the Howey test as well: investors also have an expectation of profits predominantly from the efforts of others.

Therefore, it may appear that even bitcoin with PoW meets the Howey test, is thus a security suspect.

However, it is the existence or absence of a nexus between the investment and any common enterprise in the ecosystem that is important. It makes the genuine bitcoin based on the original PoW consensus different from other coins. See below.

Nexus required in Howey test

Concerning the Howey test, a focus has been on the existence or lack thereof of a “common enterprise.”

However, there is an implicit nexus among the four elements required in the Howey test. The nexus is especially important between the first test element and the second one (“investment of money” and “in a common enterprise”), meaning that for the Howey test to be positive, investors must have invested the money into the common enterprise.

If there is no common enterprise for investors to invest into, the transaction does not meet the Howey test. Or, although an enterprise does exist in the ecosystem, the investment has nothing to do with the enterprise (but is rather related to something else), it still does not meet the Howey test. The mere existence of both an investment and an enterprise somewhere in the ecosystem does not qualify for the Howey test.

In other words, if the investors have invested money into something that’s different from the identified “common enterprise,” the Howey test would result in a negative, and the asset would not be a security.

It is the absence or existence of this nexus that is the most important difference between PoW and PoS.

The requisite nexus exists in PoS

A PoS system not only has a distinctive “common enterprise,” it also has the requisite nexus.

With PoS, once a common enterprise is found to exist (which usually does), the nexus is inherently there, and it is quite obvious. There is no separation, not even an essential and substantive distinction, between possessing coins and performing validation by the validators in PoS. The validators derive their acting power and benefit directly from the very fact that they hold “shares” of this common enterprise. The shares, in essence, are non-distinguishable among all shareholders, except for a nonessential difference in the manner in which they receive a ‘dividend.’

Whether they are staking to become a validator or not, they are all investing into this same enterprise (the common enterprise). This makes the PoS coin holders essentially the same as any shareholders who have shares of a conventional enterprise and therefore are holders of a security.

In other words, with PoS, coin purchasers effectively buy shares of a common enterprise which runs the PoS-based blockchain creation and validation business. They are all shareholders of the common enterprise. When some shareholders happen to also stake for validation using the shares and thus receive an extra benefit, they are nonetheless still shareholders of the same common enterprise and do not change the non-staking coin purchasers’ role as shareholders either.

This is akin to a company’s equity shareholders who are also workers or employees of the company receiving an extra benefit in wage compensation, except that PoS ties the stakes even more directly with the compensation by not even requiring the “shareholder-employees” to perform real work other than exercising voting rights proportional to each one’s shares.

No requisite nexus in genuine PoW

In contrast, with genuine PoW, mining nodes derive their benefit by performing real work. The fact that a mining node may also own some coins (bitcoin, for example) is merely incidental. The ownership of the coins does not constitute the business of mining. Performing the mining work does. There is a fundamental separation between possessing coins and performing mining work by the PoW miners.

In other words, even if one could characterize holders of bitcoin as some kind of investors who have invested in something, that ‘something’ is not an identifiable “common enterprise” in active operation. Rather, they just purchased a thing (a commodity), not the share of a common enterprise.

The case is particularly clear and strong with the genuine bitcoin based on genuine PoW.

First, the investors did not invest in an issuer to create more coins. The issuer of bitcoin, namely Satoshi, issued all the coins all at once in the beginning without having any coin purchasers’ participation. The bitcoin issuer isn’t a continuing enterprise that needs investment. In the case of bitcoin, the truth is that Satoshi, the issuer, would have received no money either directly or indirectly from the investments by others had he, not himself mined coins as a miner on exactly the same terms as the other miners. And the fact that the issuer did also do mining is coincidental and has no inherent relationship with the issuer’s identity.

In this respect, any secret arrangement, such as pre-mining, that gives the issuer an unfair advantage makes the asset a suspect. The genuine bitcoin had no such arrangement.

Second, bitcoin purchasers did not invest in the mining business. It is the shareholders of the mining companies who have invested in the mining business, and these shareholders are a different category than the coin holders. The company shares of a mining business are clearly securities, and no one could honestly argue they are not, but there are different from bitcoin.

Third, bitcoin purchasers did not invest in a common infrastructure development business. Shareholders of the blockchain infrastructure development companies have invested in the development business, but again they are in a different category than the coin holders. Likewise, the company shares of an infrastructure business are clearly securities, but they are different from bitcoin.

An example of a nonsecurity digital asset

One distinct example is Bitcoin Satoshi Vision (BSV).

BSV is the original Bitcoin, according to the whitepaper “A Peer-to-Peer electronic cash system. ” It is based on genuine Proof-of-Work (POW); and has a locked base protocol according to the law.

Not only the legal theory but also the actual evidence supports the lack of a gravity center acting as a force to attract speculative investors.

Due to its emphasis of Peer-to-Peer (P2P) cash payment utility (versus “digital gold” and “store of value” narratives) by design, BSV clearly has far less attraction to pure speculative investors. The way the market has treated BSV is, in fact, a harsh and bitter showing that BSV can only succeed on its having developed real utility and not by merely selling a narrative. (But is it not what it should be like in a real world of business?)

But at the same time, this rather peculiar phenomenon is also circumstantial evidence that BSV is not a security but a commodity which lives or dies based on its utility.

As BSV’s ecosystem further develops, coin purchasers are more and more purchasing the satoshi tokens for the utility (to actually use them) rather than with a mere expectation of profit.

In the case of BSV, the empirical behavior and the legal theory are in harmony. Both the lack of an investable common enterprise and the lack of nexus in an actually invested common enterprise, along with the asset’s being centered around utility, clearly demonstrated a nonsecurity asset.

The spirit of the law

Lastly, looking beyond the letters of the law, it is relevant to consider the spirit of the law as well. The spirit of the securities law, including the Howey test, is to protect investors from issuers/sellers of certain things that have a strong speculative nature.

There is a twofold reason why “securities” as a category are particularly risky:

First, those behind securities are strongly motivated to get investors’ money; and

Second, the investors, on the other hand, are strongly drawn to a prospect of receiving a return without actually doing any work because all work is done by others in the enterprise that is supposed to create the underlying return.

Therefore, when a common enterprise exists as a center of gravity to pull many investors in, you want some protection for the public. This gravitational pulling is critical in assessing the reality and is also reflected in the Howey test’s use of the word ‘led’ in the phrase ‘led to expect profit’, a word that deserves much more attention than it has had in the past.

The securities law does not make fundraising illegal per se. It just subjects fundraising process to certain regulatory requirements.

However, almost none of the existing crypto coins and tokens were issued and exchanged in a manner that satisfies such regulatory requirements. Therefore, to be legal, a crypto must pass a negative Howey test and be thus considered not to be a security.

For this purpose, a digital asset that runs on a genuine decentralized PoW consensus with a base protocol locked according to the law passes a negative Howey test and may not be required to register as a security because such an asset does not have a common enterprise that exists and acts as the center of gravity.

Especially, if the digital asset is further designed to primarily serve as a nontrading utility, it tends to be even less likely to form a center of gravity that is in itself speculative and also attracts speculating investors.

BTC and the other cryptos do not have such qualities in reality.

To reveal the reality, an empirical demonstration that is more than mere theoretical considerations would be necessary to show such nonspeculative characteristics. To this end, the factfinder is encouraged to compare the messages that run deep and run on top of the ecosystem and the mindset of each coin, and ask these questions:

Is it not the main message of BTC to the world ‘the number go up’?
Is it not the main message of BSV to the world, ‘utility and value only, not the price’?
Is it not the main message of BTC to BSV ‘enjoy staying poor’?
Is it not the main message of BSV to BTC ‘wake up and do something useful’?

Securities, commodities, and currencies

In the U.S., securities, commodities, and banking products are placed under different jurisdictions. Securities are under the SEC, commodities under the CFTC, and banking products under the FDIC. Because the SEC has the most strict and burdensome registration and reporting requirements, it is usually advantageous to be classified as a commodity or a banking product rather than a security.

To escape from the Howey test, a digital asset must either prove it is an exception that does not fall into the definition of a security according to the Howey test or prove it is a statutory exemption.

For coins and tokens that were created from nothing and further promoted by an identifiable entity or people, it is very hard to argue for an exception of the Howey test. As a result, the focus has been on arguing that the thing is either a commodity or a currency as an exemption.


Historically, the enactment of laws such as the Commodity Exchange Act of 1936 and CFTC Act of 1974 did provide legislative exemptions to commodity trading, such as the futures and options from the securities law.

However, these laws have quite restrictive definitions of ‘commodities’ under the jurisdiction of the CFTC. The legal definition of ‘commodities’ is quite different from that in economics.

It is a misunderstanding that anything that can be classified as a ‘commodity’ in terms of economics would be automatically exempted from securities law. To be statutorily exempted, it would have to literally fall within the legal definition of a ‘commodity’ with no ambiguity, and this certainly does not include bitcoin, nor any crypto coins.

At the present time, barring new legislation that clearly brings bitcoin and certain crypto coins under the jurisdiction of the CFTC, an ambiguity exists between securities and commodities and, accordingly, between the jurisdictions of the SEC and CFTC. For example, just because the CFTC claims certain crypto asset are commodities does not exclude the SEC from claiming the same as a security. Without clear legislation, there could be competition and even conflict between the two branches of the government agency.

But we also argue that a true commodity should not clearly be a security according to the Howey test in the first place. We note that the purpose of the commodities law was to eliminate unnecessary litigations due to ambiguities in the securities law interpretation rather than simply carving out exemptions in contradiction with the securities law.

Therefore, the statutory exemption should be sought and provided in a principled manner. This is necessary to bring harmony to the two sets of laws, which are meant to serve the same society.

It is important to note that the commodity laws in the U.S. were created at a time when all commodities were physical, and as a result, only the derivatives (such as futures, forwards, and options) based on commodities had significance to the financial markets and therefore needed to be regulated. The spot market of physical commodities did not have such needs and certainly did not have an effect of speculative investments to impact investors.

With digital assets such as bitcoin and crypto coins, this has all changed. Regardless of whether you see them as securities or not, these things can be traded directly (i.e., without forming derivatives) on exchanges with the same level of investor participation that of stocks, and clearly with even higher level of speculations. The entire crypto mass is a testament to this dire effect. See The Cancerous Crypto.

The law, therefore, must look at the substance instead of form. If investors need protection on the stock market by securities law, they certainly also need the same kind of protection on speculative offering and trading of digital assets if what’s being offered and created clearly meet the Howey test.

In this sense, just because something is a commodity in an economic sense should not result in an automatic exemption from securities law.

On the other hand, if something does not clearly meet the Howey test (or even clearly does not meet the Howey test), while at the same time clearly has characteristics of a commodity, it should be regulated under the CFTC. This should not only include the derivatives but also include spot trading on exchanges.

Applying the commodities law to BTC and BSV would show that BTC does not have strong qualifications for a commodity, but the genuine Bitcoin BSV does (see below).


Alternative to commodities, currencies is another potential exemption of securities law.

Ripple, for example, argues that its XRP is a currency, and therefore is exempted from securities law.

However, as the SEC has clearly argued in its case against Ripple, the currency exemption applies only to legal tender such as a fiat currency.

The Ripple case is another example of confusion over terminologies. The word ‘currency’ has different meanings in different contexts. When it comes to securities law exemptions, it is the specific legal definition, not the definition in economics or technology, that applies.

Again, what is important is the substance, not the form or words. The reason why a conventional fiat-based currency isn’t a security is not because it is a currency in an economic or technical sense but because it does not meet the Howey Test. Specifically, (1) a conventional fiat-based currency is not issued by an enterprise but by the government; and (2) obtaining a conventional fiat-based currency is not an investment, nor with an expectation of profits predominantly from the efforts of others, but to get a reliable medium of value exchange.

Currently, no cryptocurrency, including bitcoin, has really become legal tender. A convincing argument can be made that the genuine bitcoin BSV is a currency in a technical sense, but it would still be hard to persuade a court that it is a currency in a legal sense (i.e., legal tender).

However, we do believe BSV is a true commodity and, therefore, should be exempted from the securities law, an alternative to finding an exact exception to the Howey test. See more discussion on this point below.

The genuine Bitcoin BSV qualifies for the commodity exemption, but BTC does not

Applying the commodities law to BTC and BSV, it is clear that BTC is much less like a commodity than BSV is.

The most important characteristic of a commodity is standardization. A commodity is standardized both in its substance (as a good or service) and in its contracts.

For bitcoin, there would be no standardization if its base protocol kept changing. The base protocol affects the substantive nature of bitcoin. The change in the base protocol is analogous to a change in the manufacturing process that results in a material of different chemical properties, thus destroying the standardization of the substance, as the thing you buy the next time might be different from what you think it is today. The fact that it is always labeled and packaged under the same name does not mean it is the same thing when measured by its properties, such as what it can or cannot do.

In addition, a base protocol change directly affects transactional contracts, resulting in less reliable contract standardization. To the users, when a script created for a transaction could be rendered unusable sometime in the foreseeable future (which has already happened with BTC), there would be no reliable standardization in contracts. Besides, if the base protocol is changed in such a manner that it alters the original automated unilateral contract between the bitcoin issuer and miners (which again has already happened with BTC), it destroys another aspect of standardization.

In comparison, BSV does not suffer any of those problems thanks to its locked protocol.

Therefore, from a commodity viewpoint, there is a sharp contrast between BTC and BSV. BSV has the most evident characteristics of a commodity, but BTC does not.

We also note that BSV being a true commodity is congruent with it being a non-security according to the Howey test. It ought to be.

As illustrated above, BSV clearly is not a security. In consideration of the harmony between the two sets of laws, a true commodity should not clearly be a security according to the Howey test in the first place. The purpose of the commodities law was to eliminate unnecessary litigations due to ambiguities in the securities law interpretation rather than simply carving out exemptions in contradiction with the securities law.

The same is also why Congress passed laws treating traditional commodities differently than securities in the first place. An apparent characteristic of a commodity is that it is a standardized good or service with standardized contracts. But it also has implicit characteristics that are related to the Howey test.

Specifically, a typical commodity does not read on the Howey test to behave like a security. People buy a commodity primarily for its utility, not as an investment, or at least are not actively led by others to believe it is an investment, to expect a profit from the effort of a recognizable third party (a common enterprise). This line is blurred when people buy derivatives such as futures of a commodity, but such futures are still underlined by a real commodity whose main property is utility rather than speculations. It was precisely for this reason, the commodities laws were created to avoid unnecessary litigation in securities law.

In addition to utility, the production and promotion of a commodity should not be under the control of a single entity or an effective global partnership acting in coordination (the common enterprise). Otherwise, the thing would look more like a security. This would be the case especially when the controlling common enterprise is able to create among the investors a belief in speculations that are detached from the actual utility. Besides, imagine a producer being able to create a virtual commodity out of thin air and ‘issue’ it to others. It would make the producer more of an issuer of a security than a producer of a commodity.

In conclusion, BTC does not have good qualifications for a commodity and should not enjoy the commodity exemption. But if BTC could even be remotely considered as a commodity, the genuine Bitcoin (BSV) is certainly much more so. As a commodity, BSV should be regulated as such instead of a security. This means BSV is an exemption from the securities law, an alternative to finding an exact exception to the Howey test.

Legislation considerations

At the same time, new legislation could further clarify the legal definition of a commodity to properly take digital realities into consideration.

With multiple bills being introduced in Congress (for example, S.4760 – Digital Commodities Consumer Protection Act of 2022, and H.R.7614 – Digital Commodity Exchange Act of 2022), it is important that legislators understand not only the apparent issues but also the nature of the new asset class well. Currently, two opposite types of risks exist at the same time. One is the risk of inaction causing prolonged uncertainty, and the other is herd action hyped by misunderstandings.

The risk is that, given the public pressure, the legislators may be too eager to please the crowd, desiring to be viewed as heroes protecting technological advances. But in reality, the opposite is true. The crypto market has become cancerous and is the biggest obstacle to true development of blockchain technology.


The only digital assets that are not a security are ones that satisfy all the following conditions:

(1) did not do pre-mining;

(2) had no new issuance or re-issuance in its lifetime;

(3) is based on genuine Proof-of-Work (PoW); and (4) has a locked base protocol according to the law.

Except for the genuine bitcoin (BSV), other cryptos, even BTC, are all nonexempt securities.

The genuine bitcoin BSV is not a security. It is also a true commodity. Having harmony between the laws of commodities and securities on a utility blockchain that serves as an authentication layer in a global data network is for everyone’s good. See Blockchain as the New Global Data Network’s Authentication Layer.

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