What The Howey Test Misses About Crypto Assets
A recent report from the former chairman of the Commodity Futures Trading Commission highlighted the shortcomings of the current regulatory framework with respect to cryptocurrencies and ICOs, calling upon Congress to address the issue. A critical factor in building a more coherent framework for digital tokens is to clarify which ones should be regulated as securities.
The SEC’s current stance is to rely on existing federal securities law, based on a 1946 SCOTUS case that established the “Howey test” for whether or not a financial instrument qualifies as a security. However, the Howey test was not conceived to adequately capture the nature of many digital tokens as dynamic network assets, failing to recognize the economic purpose and decentralized architecture of many blockchain hosting tokens. Indeed, some prongs of the test, such as the decentralization and the full functionality requirements, are seemingly contradictory when it comes to how cryptocurrencies operate, making them nearly impossible to be exempted from security registration.
For the U.S. to keep up with regulatory approaches in the UK and European Union and avoid stifling innovation in the crypto space, the U.S. needs a modern regulatory framework that allows decentralized blockchain ecosystems to flourish.