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Is “The Howey Test” outdated? Modernizing regulations for the digital age

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The rate and reach of cryptocurrency adoption in recent years signals the dire need for modern regulation that simultaneously safeguards investors and enables innovation to flourish.

The rate and reach of cryptocurrency adoption in recent years signals the dire need for modern regulations that simultaneously safeguards investors and enables innovation to flourish. As it stands, most crypto tokens fall within a regulatory gray area as they don’t fit within the confines of the traditional financial system — so why should they fall prey to inapplicable, outdated rules?

Presently, the SEC applies “The Howey Test,” a legal analysis based on a 1946 U.S. Supreme Court ruling, to differentiate between securities and non-securities. 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.

Furthermore, in contrast to the citrus grove investors involved in SEC v. Howey, who had no intention of buying or eating the fruit they were backing, crypto enthusiasts are often looking well beyond the return on investment (ROI). Today’s crypto buyers see a future in which consumers use tokens to transact on the blockchain and for entry into decentralized apps, among other use cases.

I’d like to propose an alternative process to characterize crypto coins and tokens below.

Fully decentralized vs. fully centralized

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.

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 (ETH) is effectively and directly decentralized, given the extensive holding of Ethereum.

Most blockchain startups initiate their projects with a native coin or create a native coin derived from their original ERC-20 offering. Native coins fall under the category of centralized currency because they have their own designation, and acquiring significant decentralization is hard to achieve.

Since the Howey Test is not a “3 out of 4 is not bad” test, if any of the four aspects are not met, then the asset in question is not a security. Given Hinman’s statement, any asset that can show that it is decentralized is clearly not a security.

You can read more about decentralization determination here.

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Additional categories

While an asset may not meet the requirements to be deemed a decentralized currency, it is not automatically deemed a security. The asset may contrarily fall into a number of other buckets such as centralized currency, contract or organization.

As more and more individuals lose faith in the U.S. Federal Reserve, some are placing trust in centralized stablecoins, like USDT or USDC, that keep reserves of cash off-chain to ensure that their coins are always valued at $1. Those holding these stablecoins are simply looking to protect the value of their money and not expecting significant profits. But because stablecoins like USDT and USDC are backed by securities, the SEC believes that they should be regulated.

Decentralized autonomous organizations (DAOs) are governed by smart contract algorithms without a centralized authority. Oftentimes, DAOs issue tokens so that users can participate in the decision-making of the organization. While many believe that these decentralized collectives don’t qualify as securities, lawmakers have issued stark warnings that crypto companies can’t hide behind DAOs to avoid regulation.

The solution: Transparent regulatory framework

The landmark case against Ripple underscores how different agencies within the U.S. government aren’t even in agreement on this issue, as FinCEN declared it was not a securitywhile the SEC argued that it was. All various modes of tokens and crypto coins should be analyzed by the SEC according to which unique category they’d fall under, as this dilemma isn’t black or white.

In the interim, there is a lot at stake for the future of crypto either way this case falls. If Ripple can prove that the SEC has taken an unclear, arbitrary approach to regulating crypto, then an important precedent is set that places the power back in the blockchain. If the SEC reigns supreme, then the governmental agency has legal say in the procession and development of regimenting decentralized finance.

Ultimately, digital assets are notoriously difficult to place into buckets, and until we have new guidelines for the crypto securities market, there will continue to be disagreement and confusion, which could, in tandem, stifle the industry.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

Arie Trouw is the co-founder of XYO and founder of XY Labs.


This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.

Learn more about Cointelegraph Innovation Circle and see if you qualify to join

Source

  • 07.09.23 16:24 CherryTeam

    Cherry Team atlyginimų skaičiavimo programa yra labai naudingas įrankis įmonėms, kai reikia efektyviai valdyti ir skaičiuoti darbuotojų atlyginimus. Ši programinė įranga, turinti išsamias funkcijas ir patogią naudotojo sąsają, suteikia daug privalumų, kurie padeda supaprastinti darbo užmokesčio skaičiavimo procesus ir pagerinti finansų valdymą. Štai keletas pagrindinių priežasčių, kodėl Cherry Team atlyginimų skaičiavimo programa yra naudinga įmonėms: Automatizuoti ir tikslūs skaičiavimai: Atlyginimų skaičiavimai rankiniu būdu gali būti klaidingi ir reikalauti daug laiko. Programinė įranga Cherry Team automatizuoja visą atlyginimų skaičiavimo procesą, todėl nebereikia atlikti skaičiavimų rankiniu būdu ir sumažėja klaidų rizika. Tiksliai apskaičiuodama atlyginimus, įskaitant tokius veiksnius, kaip pagrindinis atlyginimas, viršvalandžiai, premijos, išskaitos ir mokesčiai, programa užtikrina tikslius ir be klaidų darbo užmokesčio skaičiavimo rezultatus. Sutaupoma laiko ir išlaidų: Darbo užmokesčio valdymas gali būti daug darbo jėgos reikalaujanti užduotis, reikalaujanti daug laiko ir išteklių. Programa Cherry Team supaprastina ir pagreitina darbo užmokesčio skaičiavimo procesą, nes automatizuoja skaičiavimus, generuoja darbo užmokesčio žiniaraščius ir tvarko išskaičiuojamus mokesčius. Šis automatizavimas padeda įmonėms sutaupyti daug laiko ir pastangų, todėl žmogiškųjų išteklių ir finansų komandos gali sutelkti dėmesį į strategiškai svarbesnę veiklą. Be to, racionalizuodamos darbo užmokesčio operacijas, įmonės gali sumažinti administracines išlaidas, susijusias su rankiniu darbo užmokesčio tvarkymu. Mokesčių ir darbo teisės aktų laikymasis: Įmonėms labai svarbu laikytis mokesčių ir darbo teisės aktų, kad išvengtų baudų ir teisinių problemų. Programinė įranga Cherry Team seka besikeičiančius mokesčių įstatymus ir darbo reglamentus, užtikrindama tikslius skaičiavimus ir teisinių reikalavimų laikymąsi. Programa gali dirbti su sudėtingais mokesčių scenarijais, pavyzdžiui, keliomis mokesčių grupėmis ir įvairių rūšių atskaitymais, todėl užtikrina atitiktį reikalavimams ir kartu sumažina klaidų riziką. Ataskaitų rengimas ir analizė: Programa Cherry Team siūlo patikimas ataskaitų teikimo ir analizės galimybes, suteikiančias įmonėms vertingų įžvalgų apie darbo užmokesčio duomenis. Ji gali generuoti ataskaitas apie įvairius aspektus, pavyzdžiui, darbo užmokesčio paskirstymą, išskaičiuojamus mokesčius ir darbo sąnaudas. Šios ataskaitos leidžia įmonėms analizuoti darbo užmokesčio tendencijas, nustatyti tobulintinas sritis ir priimti pagrįstus finansinius sprendimus. Pasinaudodamos duomenimis pagrįstomis įžvalgomis, įmonės gali optimizuoti savo darbo užmokesčio strategijas ir veiksmingai kontroliuoti išlaidas. Integracija su kitomis sistemomis: Cherry Team programinė įranga dažnai sklandžiai integruojama su kitomis personalo ir apskaitos sistemomis. Tokia integracija leidžia automatiškai perkelti atitinkamus duomenis, pavyzdžiui, informaciją apie darbuotojus ir finansinius įrašus, todėl nebereikia dubliuoti duomenų. Supaprastintas duomenų srautas tarp sistemų padidina bendrą efektyvumą ir sumažina duomenų klaidų ar neatitikimų riziką. Cherry Team atlyginimų apskaičiavimo programa įmonėms teikia didelę naudą - automatiniai ir tikslūs skaičiavimai, laiko ir sąnaudų taupymas, atitiktis mokesčių ir darbo teisės aktų reikalavimams, ataskaitų teikimo ir analizės galimybės bei integracija su kitomis sistemomis. Naudodamos šią programinę įrangą įmonės gali supaprastinti darbo užmokesčio skaičiavimo procesus, užtikrinti tikslumą ir atitiktį reikalavimams, padidinti darbuotojų pasitenkinimą ir gauti vertingų įžvalgų apie savo finansinius duomenis. Programa Cherry Team pasirodo esanti nepakeičiamas įrankis įmonėms, siekiančioms efektyviai ir veiksmingai valdyti darbo užmokestį. https://cherryteam.lt/lt/

  • 08.10.23 01:30 davec8080

    The "Shibarium for this confirmed rug pull is a BEP-20 project not related at all to Shibarium, SHIB, BONE or LEASH. The Plot Thickens. Someone posted the actual transactions!!!! https://bscscan.com/tx/0xa846ea0367c89c3f0bbfcc221cceea4c90d8f56ead2eb479d4cee41c75e02c97 It seems the article is true!!!! And it's also FUD. Let me explain. Check this link: https://bscscan.com/token/0x5a752c9fe3520522ea88f37a41c3ddd97c022c2f So there really is a "Shibarium" token. And somebody did a rug pull with it. CONFIRMED. But the "Shibarium" token for this confirmed rug pull is a BEP-20 project not related at all to Shibarium, SHIB, BONE or LEASH.

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