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Howey test and crypto

One of the main questions financial regulators are trying to address is whether cryptocurrency can be called a security. To answer it, regulators are using the Howey test.

What is the Howey Test

The Howey Test is a test that helps determine whether an asset belongs to the class of securities. It was developed and first used in 1946. The reason for creating the test was the court's attempt to make sense of the WJ Howey Company case.

Brief history:

- The WJ Howey Company sold a number of citrus plant sites to investors.

- Investors negotiated with company representatives to lease the plots. In this way, the WJ Howey Company team was able to legally harvest crops on other people's land and make a profit for selling them.

The Supreme Court of the United States held that in the case of the WJ Howey Company, the plots of land with plants constituted an investment contract, hence they could be treated as a security. The judge reached this conclusion based on four points:

  1. It is about investing money.
  2. An investor invests money with the expectation of making a profit.
  3. It is about investing in a common enterprise.
  4. The profits the investor expects are related to the activities of others.

U.S. regulators have dubbed this approach the "Howey test" and have begun using it to determine the status of securities.
If an asset is recognized as a security under the Howey test, then it falls under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Cryptocurrency — security or not

With the advent of cryptocurrencies, regulators around the world have wondered whether they can be considered securities. To this end, in some cases, regulatory authorities began to apply the Howey test. At the same time, practice has shown that the outdated scheme is not so easy to fit into the specifics of cryptocurrencies.

As of this writing, there is no single, regulator-approved scheme for determining the status of digital assets in the market. Despite this, regulators periodically share their conclusions on the issues of determining the status of cryptocurrencies.

Let's look at a few cases to help understand the rhetoric of U.S. regulators in determining the status of digital assets.

1. Ripple's battle with the SEC

In late December 2020, the U.S. Securities and Exchange Commission (SEC) accused California startup Ripple of illegally issuing securities in the form of XRP tokens. As of this writing, the regulator has failed to win the case. The proceedings are still ongoing.

2. The SEC considers bitcoin a commodity

The SEC believes that bitcoin (BTC) is the only cryptocurrency that can be considered a commodity. According to the logic of the regulator, altcoins risk getting into the category of «securities».
There is a theory that the SEC sees signs of securities in cryptocurrencies that work on the Proof-of-Stake (PoS) algorithm. The point is that such coins allow you to make money from steaking. Amid the move of Ethereum's second most capitalized coin to PoS, members of the cryptocommunity have started talking about possible regulatory pressure on the project.
3. Stablecoins in doubt

In February 2023, it became known that the SEC would classify Binance USD (BUSD) stabelcoin as a security. The logic behind that is: "stable coins" can be steamed, which means you can make money on them. Therefore, steablecoins can be called securities.

The case called into question the legality of the entire "stablecoin" market. The opinions of the experts interviewed by the editorial board of BeInCrypto on how logical such an inference of the SEC is differed.


The status of cryptocurrencies is still in question. Applying tools such as the Howey test to digital assets does not stand up to criticism. New, fully reflective solutions are needed to determine the status of cryptocurrencies.

In 2023, the SEC took on the task of regulating the digital asset market with a double-edged sword. The Commission's main goal is to make the crypto industry fully transparent. It is possible that in 2023 the market will get the final answer to the question about the status of cryptocurrencies.