‘Crypto mom’ calls SEC’s Howey test on crypto

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SEC Commissioner Hester Peirce aka Crypto mom has called out the Securities and Exchange Commission (SEC) for using the Howey test.

A Howey test is an assessment to determine if an investment contract exists. An asset is classified as a security if the money you invest in a joint venture with an expected profit from the efforts of others.

Does Crypto Pass the Howey Test?

If an asset qualifies as a security, it is subject to registration requirements under the United States Securities Act of 1933 and the Securities Exchange Act of 1934.

To be considered a security, an asset must tick four boxes; an investment of money, a joint venture, a reasonable expectation of profit and from the efforts of others.

In 2018, then-Commission Chairman Jay Clayton told CNBC that a digital asset is not a security. He explained that they replaced sovereign currencies like the dollar or the yen, which are not securities.

Bitcoin does not pass the test. It has no joint venture, sponsor or third party effort.

Initial coin offerings (ICOs), however, are something else entirely.

Clay shared this digital asset, you receive money invested in a business and provide a return, is a commission regulated security.

According to the SEC, ICOs tick the first three boxes; however, it is debatable whether you expected profits from the ICO and whether the efforts came from others. If the digital asset ticks all four boxes, it must comply with the commission’s regulations.

The bottom line is that there is no single regulation for all digital assets.

In 2021, SEC Chairman Gary Gensler noted that there are many digital assets that qualify as securities but are not registered. Investors were buying these coins in anticipation of profits, and entrepreneurs and technologists nurtured these coins.

Crypto Mom and the SEC’s Use of the Howey Test

In a podcast with Decrypt, Commissioner Hester Peirce reiterated that the test does not fully address the status of decentralized digital assets.

There was a lot of hype about the Howey test in the crypto world because these things were being sold as tokens plus a promise that was going to build a network, Peirce said in the podcast.

Commissioner Hester Peirce

The Crypto mom argued that investment contracts not only focus on assets, but also on promises. While ICOs looked like security offerings, it was unclear whether the token or digital asset was a security.

Crypto Mom offered the analogy of an orange grove. Suppose I sold you the orange grove under an investment contract that did not make orange security. The security, in this case, is the orange grove, the promises they give you to take care of the grove, and the profits from the investment.

The Orange Grove ICO is treated as a forever security; it’s confusing because you can’t tell when it stops being a security.

The SEC’s reliance on the test was therefore flawed.

The solution was for the commission to clarify how a digital asset could go from a security to a commodity. This way it would be easier to apply Howeys test.

Crypto Mom complained that since joining the commission in 2018, more progress was needed on digital asset regulation despite much industry conversation. The issue has frustrated users, developers, and even the commission.

Nicknamed Mom Crypto, Peirce told Protocol earlier in May that it was funny and that she was not an advocate for the industry.

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