The 1940s legal test that could pave the way for crypto regulation

The 1940s legal test that could pave the way for crypto regulation

Binance USD (BUSD) is a stablecoin issued by New York-based Paxos Trust Company and is backed 1:1 by the US dollar. However, recent regulatory scrutiny by the US Securities and Exchange Commission (SEC) has raised questions about whether BUSD should be considered a security.

There are arguments for and against this, which I’ll dive into in this article. Most interestingly, the Howey Test and legislation from the 1940s could have a key role to play in this most modern of financial disputes.

Security or not security

To begin, it is important to understand what a security is. According to the SEC, a security is any investment contract, note, stock, or instrument that represents an ownership interest in a company, partnership, or investment pool, or that is offered as a means of raising capital.

In the case of BUSD, the SEC issued a notice to Paxos stating that the stablecoin should have been registered as a security.

The regulator argued that BUSD meets the definition of a security because it is offered as a means of raising capital, has the potential for profit or loss, and derives its value from the success of a third party, namely Binance.

However, Paxos has disputed this classification. The company has even threatened litigation.

There are several arguments for why BUSD is not a security. First, BUSD is a stablecoin, which means that its value is pegged to the US dollar.

This pegging makes it less likely to experience the volatility associated with other cryptocurrencies. As a result, BUSD may not meet the definition of an investment contract because it does not have the potential for significant price fluctuations.

Second, BUSD is not an investment in a company or partnership, but it’s a digital asset that represents a claim on a reserve of US dollars held by Paxos. This means that BUSD does not represent an ownership interest in any entity and is not used to raise capital.

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Third, BUSD is used primarily as a means of payment and is not marketed as an investment. Unlike securities, which are marketed to investors expecting a profit, BUSD is promoted as a stablecoin used for transactions.

On the other side of the coin (pun intended), there are arguments for security classification.

To start, BUSD is backed by Paxos, which is a regulated financial institution. This means that investors may view the stablecoin as a safe investment, similar to a money market fund or certificate of deposit.

Next, the fact that BUSD derives its value from the success of Binance may be enough to classify it as a security. Investors may be purchasing the asset with the expectation of profit.

Lastly, the fact that BUSD is used primarily as a means of payment does not necessarily stop it from being a security. The SEC has previously classified cryptocurrencies like Bitcoin and Ethereum as commodities, despite their use as a means of payment.

The Howey Test for cryptocurrencies

The Howey Test is a legal standard used to determine whether a financial instrument is a security. There is debate over whether the almost 100-year-old test can be applied to digital assets, so some experts have proposed a modern-day version tailored to cryptocurrencies.

This version would include looking at several factors.

The first – as with the original test – is whether there is an investment of money. However, if a digital asset issuer has not sold any assets to build its project, it is unlikely to be considered a security.

The second factor is whether there is an expectation of profits from the investment. If a digital asset is utility-based and is used for purposes other than investment, such as voting, it is unlikely to be considered a security.

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The third factor is whether the investment of money is in a common enterprise. If the project is decentralized and not controlled and operated by a centralized entity, it is unlikely to be considered a security.

The fourth is whether any profit comes from the efforts of a promoter or third party. If the profit primarily comes from the community, which has nothing to do with the issuance of the digital asset, it is unlikely to be considered a security.

Improving the Howey Test

One approach to adapting the Howey Test to fit cryptocurrencies better is to examine the underlying tech of the digital asset being scrutinized. This would involve evaluating whether the cryptocurrency is sufficiently decentralized and functional to qualify as a utility token rather than a security.

If a token is used mainly to access a blockchain network or platform, and its value is tied to its use rather than speculation, it may not fit as a security.

The SEC has also brought cases against companies that issue cryptocurrencies but do not meet the requirements of the Howey Test. This suggests to me that the SEC is trying to apply the standard to cryptocurrencies even though it may not be completely apt.

While there are some potential ways to improve the test’s application, the ongoing debate highlights the need for greater clarity and guidance from regulators regarding the treatment of cryptocurrencies.

Seeking clarity

While the Howey Test can serve as a starting point for regulation, it is essential to adapt and refine the rules to better reflect the realities of the cryptocurrency market.

A more nuanced and flexible approach is required to ensure innovation while protecting investors from fraud, and more fleshed out regulatory guidance can establish clarity in the market. To do this, authorities should work collaboratively with industry players.

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To end where we started, it’s important to note that BUSD should not be classified as a security. Its main purpose is to serve as a payment method rather than an investment tool, and it’s not structured to produce returns for investors in the same manner as conventional securities.

BUSD’s value – with its link to the US dollar’s value – is meant to remain steady instead of being influenced by the speculative pressures that frequently hit other cryptocurrencies. So, let’s keep it this way.



Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

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