Howey Test and How it Determines Whether Crypto is Asset Class or Security

July 1, 2020      Vandana Malik

Over the past few years, cryptocurrencies have become quite popular among people across the world. It has been seen that there has been huge crypto adoption in various parts of the world and a lot of people have grown their interest in this particular sector. Now people want to know more and more about this digital currency in order to invest in them. One of the most common questions that come in the mind of everyone is whether cryptocurrency belongs to the asset class or is it a security? To make such things clear, there is Howey Test which clearly determines whether any crypto belongs to an asset class or is it security.

Howey Test and its importance

It has been seen that the U.S. Supreme Court and the Securities and Exchange Commission (SEC) have always had quite a strict stance when it comes to the digital currency, especially cryptocurrency. The commission always makes sure that the digital currency which acts as investment contracts are securities or not. In order to determine whether the transactions which posed as investment contracts are securities or not, the Howey Test has been introduced by the U.S. Supreme Court.

Back in 1946, there was a case in the Supreme Court which involved Howey Company which was based in Florida in the lawsuit. The company was planning to sell the land to acquire funds to expand their business. The SEC found out that the company did not register the transactions of this sale and hence this sale was blocked by the commission. As per the Supreme Court, this transaction falls under the investment contract category and despite this fact, the firm failed to register it and hence it has violated the law. Since then, the Howey Test came into existence.

Now with the rapid increase in crypto adoption, people have started considering cryptocurrencies as securities and in this Howey Test plays quite an important role. As there is a huge risk associated with the cryptocurrencies, it is believed that people should have some kind of assurance while getting engaged in any such digital assets.

Use of Howey Test in crypto space

There has been an everlasting debate regarding whether cryptocurrencies belong to asset class or securities. As mentioned above, to make this thing clear, the Howey Test is there. As per the U.S. Supreme Court, cryptocurrency falls under the category of securities hence Howey Test needs to be applied to them. It gets quite difficult when it comes to determine or define cryptocurrencies and as per the US SEC being classified as a security, a lot of implications get applied to the cryptocurrencies. However, the major concern that is there among the people of the crypto community is that cryptocurrency might get into the hands of the U.S. SEC and it might have turned into a centralised currency. If such a thing will happen then the sole aim of cryptocurrency will be destroyed as they were meant to be completely decentralized and autonomous. Now as Howey Test classifies cryptocurrency as security, it is going completely against the aim of its creators.

Cryptocurrencies which are assets

There are a lot of cryptocurrencies which are there in circulation currently and some of the prominent ones which belong to asset class are –

  • Bitcoin – Bitcoin is the largest and oldest cryptocurrency out there but not many people know that Bitcoin actually falls under the asset class. This has been clarified by the SEC back in 2019 that Bitcoin is not security as it is classified as an asset. The reason why it has not been considered as an asset is that it is unable to satisfy the requirements that are there in the Howey Test and hence failed to pass this test.
  • EthereumEthereum, ETH which is the second-largest cryptocurrency after Bitcoin also classifies itself as an asset and not security. However, the SEC has earlier classified ETH as security but under the current circumstances and the laws it falls under asset class. The reason being that it is not counted as security is that it is not any kind of investment contract. Hence, it is not security.

Whether Altcoins are securities or not

An altcoin is another kind of cryptocurrency that came into existence after the launch of Bitcoin. It has been that some of the prominent cryptocurrencies are not securities and fall under the asset class. However, there are many of them which are classified in the category of securities. It has been seen that the coins which are offered during Initial Coin Offerings (ICOs) simply fall into the category of securities. Due to this, such cryptocurrencies which are popularly known as altcoins might get under the regulation of US SEC and hence they won’t remain decentralized anymore. All the securities laws will be applied to them as soon as they come under SECs regulation. As per the SEC, it is safe for all the crypto users who expects returns for their investment that the SEC will regulate that crypto as then it will become security.

Conclusion

Despite the fact that cryptocurrency is associated with a huge risk, people are moving more towards them and majorly due to its decentralized factor. Hence, it will not be in the favour of cryptocurrencies and its users if it will be counted as security and not assets because then it will fall under the regulation of the SEC which means it will not remain decentralized.

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Vandana Malik
Vandana Malik

Vandana has received Master of Arts degree in English from GEU Dehradun. She is currently working as a content writer with Agio Support Solutions and earlier worked as a sub-news editor at Business News and Information Services Private Limited. She is an enthusiastic content writer and aims to bring a compelling yet informative content to the audience. Meanwhile, enhancing her own knowledge in the cryptocurrency and blockchain industry.