Is “The Howey Test” outdated? Modernizing regulations for the digital age
The rate and reach of cryptocurrency adoption in recent years signals the dire need for modern regulations that simultaneously safeguards investors and enables innovation to flourish. As it stands, most crypto tokens fall within a regulatory gray area as they don’t fit within the confines of the traditional financial system — so why should they fall prey to inapplicable, outdated rules?
Presently, the SEC applies “The Howey Test,” a legal analysis based on a 1946 U.S. Supreme Court ruling, to differentiate between securities and non-securities. The SEC asserts that securities are an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
However, there is a glaring void of regulatory clarity on who determines this classification and how it applies to today’s constructs. The majority of digital assets resemble commodities and some were specifically designed to avoid securities laws.
Furthermore, in contrast to the citrus grove investors involved in SEC v. Howey, who had no intention of buying or eating the fruit they were backing, crypto enthusiasts are often looking well beyond the return on investment (ROI). Today’s crypto buyers see a future in which consumers use tokens to transact on the blockchain and for entry into decentralized apps, among other use cases.
I’d like to propose an alternative process to characterize crypto coins and tokens below.
There is a sliding scale when it comes to digital assets, ranging from fully decentralized to fully centralized. Where assets fall on this spectrum plays a huge role in whether both industry leaders and government officials see them as either a security or non-security. If a holder of a particular crypto
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