US SEC Staff Opinion Qualify Certain Crypto Assets As Securities

The US Securities and Exchange Commission (SEC) has released a framework that will determine whether digital assets can be regarded as security or not. 

In making public this decision, the commission’s Director of Division of Corporation Finance, Bill Hinman, and the Senior Advisor for Digital Assets and Innovation, Valerie Szczepanik, explained on Wednesday that the purpose of this framework is to help those involved with particular digital assets to assess its proper status with regard to the federal securities law.

 They further emphasized that the framework is not a rule, regulation or even a statement from the commission. Rather, it is simply a representation of staff views that have neither been approved or disapproved by the commission. 

The underlying threshold upon which digital assets are being analyzed is by considering the Howey test. This is a general test that is usually used to determine whether any asset, including digital assets qualifies as an “investment contract”, and whether offers and sales of such digital assets are securities transactions. 

The main aim of carrying out the Howey test is to determine whether buyers of a particular digital asset expect some form of profit or reward based on the efforts of others. This includes the wide range of digital assets that can be purchased on OTC platform through an easy process. 

Such purchases are not limited to institutional investors alone, as retail trading starts from as low as $5. Certain circumstances determine whether a digital asset at the time of its sale satisfies the conditions of the Howey test. 

They include: The Investment Money According to the framework, the digital asset in consideration must satisfy the sales and offer condition. In other words, the digital asset has to be purchased or acquired in exchange for value either by using fiat, another digital assets or other types of consideration. Common Enterprise Based on a general court analysis, “Common Enterprise” means a distinct element of an investment contract. Hence, to pass the Howey test, there must exist a common enterprise for the digital asset. 

Reasonable Expectation of Profits Derived From The Efforts of Others This is the most scrutinized circumstance in determining the status of a digital asset under the Howey test.

 A number of factors come into consideration whose summary is to determine whenever a buyer expects profits based on the efforts and activities of others.

 This factor mainly revolves around the activities of an active participant (AP) in the project and how it affects the expectations of the purchaser of the particular digital asset. Active participants in this case includes the managerial class, a sponsor, a promoter or any other third party whose efforts affect the success of the enterprise. 

A complete breakdown of the elements involved in determining the expectation of a buyer based on the actions of APs can be found in the framework.

 This announcement by SEC representatives has gone further to clear the doubts that exist over certain areas of the cryptocurrency industry.

 For instance, it has clearly distinguished cryptocurrencies like Bitcoin and Ethereum as non-securities. More importantly, this framework will serve as a guide to technologists and developers going forward to have a proper perspective before embarking on projects around the ecosystem.

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