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Are Cryptocurrencies Securities? What's The Howey Test?

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What Is A Security?

The definition is: "a fungible, negotiable financial instrument that holds some type of monetary value."

Securities come in many forms and can represent ownership in a corporation via its stock, a government-backed bond, share options, derivatives (like the kind that blew up the U.S. economy in 2008), treasury bills, debentures, and mutual funds.

Securities are ultimately used to raise funds and are typically well-regulated, and those selling them must ensure investors are aware of their risks.

So whether we like it or not, we can probably agree on the following:

+ Cryptocurrencies (always) have monetary value
+ They are fungible (they can be exchanged)
+ They are not (presently) regulated & do carry risk

Some crypto proponents argue that cryptocurrencies are not securities and are indistinguishable from an IPO (initial public offering) to generate funds for new projects or ventures. However, there is undoubtedly a lot of overlap in the definition.

Note: Bitcoin is the exception here as it is viewed as a commodity, given its limited supply and decentralization.

There is also a test that can be applied to test further whether cryptos are securities.

What is The Howey Test?

The Howey Test was proposed in the U.S. by the SEC to assess which offerings qualify as securities. According to the Howey Test, for a transaction or an asset to be regarded as a security, it must satisfy the following:

To qualify as a security, there must be an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."

Here are the four main criteria:

1) "Investment of money" You need fiat currency to invest in crypto. Pretty straightforward.

2) "In a common enterprise" This is less clear with all cryptocurrencies. However, a 'common enterprise' can extend to third-party expertise required for staking and crypto lending services. There is also an expectation of profit.

3) "Reasonable expectation of profits" If the collective expectation is that profit will be forthcoming, then crypto passes the test. However, some cryptos are used as stores of value, like stablecoins which are more like currencies.

4) "Derived from the Effort of Others" No third party is ensuring investor profits with cryptocurrencies - so it fails this security test.

It's easy to make a case that 1, 2 & 3 apply to cryptocurrencies and many other tokens.

Even if cryptos didn't meet any of the Howey criteria, they should still face some scrutiny and some regulation to ensure people are protected.

So, Are Cryptocurrencies/Assets Unregulated Securities?

According to Michael J. Saylor (@saylor) and many others: Yes. 100%.

According to Harvard Law School: NO. You can read their argument here.

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