Can cryptocurrencies be recognised as securities: SEC spokeswoman Hester Pearce
Securities and Exchange Commission (SEC) member Hester Pearce insists that the criteria the regulator uses in defining securities assets has its flaws. At issue is the so-called Howe test, a precedent in the form of a landmark US Supreme Court case from 1946. In that case, the criteria emerged for a transaction to qualify as an “investment contract” and hence fall under the federal securities law.
The Howey test has long been the subject of controversy in the cryptocurrency community. The criteria, which is nearly 80 years old, is somehow considered by the US Securities and Exchange Commission to be appropriate to apply to Bitcoin and other cryptocurrencies. Cryptocurrencies would then have to be regulated under stricter laws, and the vast majority of blockchain companies could face fines and termination in the US. But can the Howey test even be applied to crypto, and what are its shortcomings that Pearce stated? We tell you more about what’s going on.
Can cryptocurrencies be considered securities?
Pearce was recently a guest on another podcast airing called gm from news outlet Decrypt. Here’s how she explained the importance of the Howey test in the context of the crypto industry.
In the cryptocurrency industry, a lot of attention has been paid to the Howey test because many of the crypto projects have been promoted as tokens along with promises of a future product.
According to the case file, such a combination is sufficient for an object to be recognised as a security. At the same time, there is a strict regulatory framework for the latter, within which cryptocurrencies would be very difficult - if not impossible - to exist. That is why representatives of the blockchain community consider this precedent too outdated to be used in relation to digital assets.
SEC member Hester Pearce
The court case that gave rise to the Howie test concerned the sale of units to a company that owned a citrus field in Florida. Through their purchase, investors could receive a portion of the profits from the sale of produce from the field, with the amount depending on the citrus farming effort. According to the court case, the criterion for a security was “a contract, transaction or scheme whereby a person invests their money in a common enterprise and expects to profit solely from the efforts of the arranger or a third party.”
In August this year, US Securities and Exchange Commission chairman Gary Gensler said that “many tokens can be unregistered securities” because “people who buy these tokens expect to make a profit”. But Pearce has slightly different thoughts on the matter. Here’s her rejoinder.
Just because I sold you a citrus grove as part of an investment contract does not make it a security. The goods and the promises I made to you about how I would look after the grove and bring you a profit were an offer of securities.
Accordingly, Pearce clearly disagrees with treating decentralised assets as securities, which sounds quite modern.
SEC chairman Gary Gensler
The question of whether crypto itself qualifies as a security in the Howey test is not addressed, Pearce noted. She continues.
“You might say, ‘well, look, many of these initial token sales look like securities offerings’. But then the question is, is the token itself a security? That’s much harder to answer, and I think there’s no consensus on it.
According to Pearce, more guidance on the prospect of a token moving from being a security to a commodity would clear up misunderstandings between the cryptocurrency community and regulators. In any case, regarding crypto, Howey’s test needs refinement, as it is a fundamentally new asset type in the market. Most importantly, many projects are decentralised, which means it will be very difficult to single out specific players that supposedly promise future investment returns.
Ripple XRP
Recall that one of the most relevant cases in this context remains the December 2020 court case between the US Securities and Exchange Commission and Ripple, which is the issuer of the cryptocurrency XRP. Actually, SEC officials classify the coin issuance as an “unregistered offering of $1.3 billion in securities”. The court case is still ongoing, with Ripple’s representatives having a good chance of winning, experts say.
We believe that sooner or later, US authorities will move away from the practice of using the Howe test to classify cryptocurrencies. Ideally, decentralised assets deserve a separate regulatory framework that promotes the development of the digital asset niche, rather than stopping it. It remains to be hoped that this will happen soon enough.
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