Is “The Howey Test” outdated? Modernizing regulations for the digital age
This idea keeps resurfacing: that the Howey Test, based on a 1946 ruling, is not precise enough for crypto tokens.
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.
The author is Arie Trouw, the co-founder of XYO and founder of XY Labs.
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 token does not have the expectation of profit based on the efforts of a centralized team, then that crypto should not be considered a security.
What then happens when an allegedly "decentralised" structure becomes centralised? This happens. Even a sliding scale needs some cut-off points - one cannot be a "partial security".
For example, the SEC’s former Director of Corporate Finance, William Hinman, stated in a 2018 speech that based on his understanding of the Ethereum network’s decentralized structure, Ethereum offerings and its associated sales would not be considered securities transactions. The debate about whether Ethereum can be labeled a security has reemerged following the network’s switch to a proof-of-stake (PoS) model, which greatly changed how the blockchain functions. However, I’d argue that shifting to PoS should not affect the assumption that Ethereum is effectively and directly decentralized, given the extensive holding of Ethereum.
OK, now I have to disagree. Read this: 64% of staked ETH controlled by 5 entities — Nansen. In which dictionary does this qualify as "decentralised"? POS needs more complex and subtle governance protocols, otherwise they are all prey to centralising take-overs.
You can read Trouw's longer article here: Decentralized Crypto Assets are NOT Securities.
I still disagree, because in Trouw's world any already established security that has no majority shareholder could then also claim to be "decentralised". Stockmarkets have rules about the percentage of a stock that is publicly traded, as well as mechanisms to switch between public and private companies. What I see in crypto is many such "private companies" trading as if they were "public companies". I think rules regarding this issue may be simpler than the rather complex metric of "effective decentralisation".