The U.S. Securities and Exchange Commission (SEC) has finally made some real progress in helping to provide definition to the cryptocurrency space in the country. It released a statement on Wednesday that is meant to provide guidelines on how to determine whether or not a digital asset is considered a security in accordance with federal securities laws, and the move is seen as a huge step forward for digital assets in the U.S. and, potentially, the world.
The statement was prepared by SEC Director of Division of Corporation Finance Bill Hinman and Senior Advisor for Digital Assets and Innovation Valerie Szczepanik. They begin by saying, “Blockchain and distributed ledger technology can catalyze a wide range of innovation. We have seen these technologies used to create financial instruments, sometimes in the form of tokens or coins that can provide investment opportunities like those offered through more traditional forms of securities. Depending on the nature of the digital asset, including what rights it purports to convey and how it is offered and sold, it may fall within the definition of a security under the U.S. federal securities laws.”
To help the process, SEC’s FinHub is working on a framework that can be used to analyze a digital asset to determine if it is a security. The duo point out, however, that the framework is not meant to be an exhaustive overview of the law, but just a tool to allow market participants to “assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.”
The framework is based on the “Howey Test,” a measure created by the U.S. Supreme Court to determine whether or not a financial transaction could be qualified as an investment contract and, as such, a security. Using the Howey Test, any transaction may be considered an investment contract if the following conditions are met:
• It is an investment of money
• There is an expectation of profits from the investment
• The investment of money is in a common enterprise
• Any profit comes from the efforts of a promoter or third party
Hinman and Szczepanik further caution in the report, “This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission. It does not constitute legal advice, for which you should consult with your own attorney. It does not modify or replace any existing applicable laws, regulations, or rules. Market participants are encouraged to review all the materials published on FinHub.”
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