Modern-Day Version of Howey Test For Cryptocurrencies- How Does It Look Like?

Modern-Day Version of Howey Test For Cryptocurrencies- How Does It Look Like?

Howey test, which the Securities and Exchange Commission uses to decide whether a digital asset should be classed as a security, has certain limitations, according to SEC Commissioner Hester Peirce. I can relate to this statement very much. I felt the same way too, especially when they used the same framework for cryptocurrencies. I will walk you through my thoughts on what should the modern-day version look like.

What is Howey Test?

The Howey test is used by the U.S. Securities and Exchange Commission (SEC) to determine whether a particular financial product or transaction qualifies as an “investment contract.” If a product or transaction is deemed to be an investment contract, it is subject to certain regulatory requirements under federal securities laws.

The test is named after the 1946 Supreme Court case SEC v. W.J. Howey Co., in which the Court established a four-part test to determine whether a transaction qualifies as an investment contract:

1.         It involves an investment of money

2.         There is an expectation of profits from the investment

3.         The investment of money is in a common enterprise

4.         Any profit comes from the efforts of a promoter or third party

If all four of these criteria are met, the transaction is considered an investment contract and is subject to regulation as a security.

What is a Security?

Before we look further, let’s look at what is a security. A security is a financial instrument representing an ownership position in a publicly traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.

There are several types of securities, including:

1.         Stocks: Stocks represent ownership in a company and entitle the holder to a share of the company’s profits.

2.         Bonds: Bonds are a type of debt security that involves borrowing money from an investor for a set period of time at a fixed interest rate.

3.         Options: Options are a type of derivative security that gives the holder the right, but not the obligation, to buy or sell a specific asset at a predetermined price within a specific time frame.

4.         Mutual funds: Mutual funds are investment vehicles that pool money from multiple investors and use that money to buy a diversified portfolio of stocks, bonds, or other securities.

5.         Exchange-traded funds (ETFs): ETFs are investment funds that are traded on stock exchanges, much like stocks. They typically track an index, such as the S&P 500, or a specific sector or theme.

6.         Derivatives: Derivatives are financial instruments that are derived from other assets, such as stocks, bonds, commodities, or currencies. They are used to hedge risk or speculate on the price movements of the underlying asset. Examples of derivatives include futures, options, and swaps.

Howey Test Applied to Cryptocurrencies

The Howey test is a well-established legal test used for decades to determine whether a financial product or transaction qualifies as an investment contract and is subject to regulation as a security. While the test was originally developed in the context of traditional securities, it has also been applied to cryptocurrency and initial coin offerings (ICOs).

The four-part test established by the Howey case has generally been applied to cryptocurrency in the same way as it has been used to traditional securities. However, there may be some nuances or specific considerations that apply specifically to cryptocurrency when applying the Howey test.

For example, the first prong of the test, which requires an investment of money, may be satisfied by the purchase of a cryptocurrency using fiat currency (such as U.S. dollars) or by the exchange of one cryptocurrency for another.

The second prong, which requires an expectation of profits, may be satisfied by the potential appreciation of the cryptocurrency’s value or by the ability to earn returns through the use of the cryptocurrency in a particular platform or network.

The third prong, which requires the investment of money to be in a common enterprise, may be satisfied by the pooling of resources or the use of a shared infrastructure or platform.

The fourth prong, which requires any profits to come from the efforts of a promoter or third party, may be satisfied by the involvement of a central authority or the use of a decentralized autonomous organization (DAO) to manage the cryptocurrency or ICO.

Modern-Day Version of Howey Test for Cryptocurrencies

The above pointers may sound familiar to you. You are a project owner and have spoken to a lawyer before; this is the same advice they gave you. My question now is, since the state of play in cryptocurrencies are changing rapidly, should there be an adapted version for the modern day?

The modern-day version might look something like this:

1.         Is there an investment of money?

If the crypto digital asset issuer has not sold any assets issued to build its project. It is most likely not considered a security.

2.         Is there an expectation of profits from the investment?

If the crypto asset is utility-based, for example, it is used for voting purposes. It is most likely not considered a security.

3.         Is the investment of money in a common enterprise?

If the project is decentralized, it is not controlled and operated by a centralized entity. It is most likely not considered a security.

4.         Are 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 crypto asset. It is most likely not considered a security.

Reminding all again, when all four criteria are met, the investment is considered a security and is subject to regulatory requirements of the Securities Act of 1933. The application of the Howey test to cryptocurrency may involve considering the specific characteristics and features of the particular cryptocurrency or ICO in question, as well as the broader market and regulatory context in which it operates.

Take some time to do a self-evaluation based on the above thoughts shared. If you have time, you can ask yourself these questions about the tokens you invested. This is a good exercise for self-reference. I am not a lawyer, and none of the written content is formal advice.

“If you are a retail crypto investor- Do your crypto research. Learning about the regulation side of things can help you with your investment decision, avoiding unnecessary issues down the road.

If you are a project and you claim to be decentralized. Please stay decentralized. This will also avoid getting into any regulatory problems.” – Anndy Lian

 

 

Source: https://www.benzinga.com/22/12/30205466/modern-day-version-of-howey-test-for-cryptocurrencies-how-does-it-look-like

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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BWB2022 Day 3 First Mover Stage 앤디 리안Anndy Lian

BWB2022 Day 3  First Mover Stage 앤디 리안Anndy Lian

BWB 2022, hosted by Busan Metropolitan City was held at BEXCO for 3 days from Oct. 27th (Thu.) to the 29th (Sat).

With the theme of “Blockchain, City and Life”, as an extension of last year’s NFT Busan 2021, BWB 2022 featured conferences for the advancement of the blockchain industry and provide a space to obtain insight as well as to share information.

Anndy Lian, Book Author of NFT: From Zero to Hero presented his views on Trends Shaping the Future of NFT.

In his speech, he reminded all to go back to basics.

1. The 5 P’s of Marketing – Product, Price, Promotion, Place and People – are key marketing elements used to position a business strategically. Most of us, whilst still understanding what makes an NFT valuable, have forgotten that these are also the key elements for an NFT project to succeed. The industry is filled with people who are focusing on short-term hypes and price pumps. This is more obvious when the market is bullish; all kinds of projects get a price push upward no matter what you launch and draw.

He went on by saying that the regulation of NFT is a must, and we need to understand its importance.

2. As we can see, the market for NFTs is still growing, and it will take some time until an appropriate regulatory framework for NFTs is put in place. Having said that, governments worldwide have already begun developing NFT norms and standards, proving that they are seriously interested in these digital assets.

Additionally, you should be aware that the phenomenal success of NFTs will undoubtedly result in fraudulent activities. For this reason, it is becoming more and more crucial to conduct your research before purchasing or investing in NFT collections or projects.

3. Lastly, he also hoped that the general public and enthusiasts of NFT should understand what the market is like. Do not just be fooled by fake statistics. He cited NFT wash trading as an example.

Wash trading makes it difficult for non-fungible token enthusiasts to gauge genuine market interest in NFT collections. It also inflates and skews the amount of trading in marketplaces, misleading analysts about what’s going on on trading platforms.

Anndy Lian is an all-rounded business strategist in Asia. He has provided advisory across a variety of industries for local, international, public listed companies and governments. He is an early blockchain adopter and experienced serial entrepreneur, book author, investor, board member and keynote speaker.

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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Cryptocurrency losses top $275bn in a single day as instability spreads

Cryptocurrency losses top $275bn in a single day as instability spreads

TOKYO — More than $275 billion has been wiped off the value of the global crypto market in the space of 24 hours, after the collapse of a cryptocurrency that was supposed to be pegged to the U.S. dollar sparked mayhem.

As of Thursday afternoon in Asia, the total market capitalization of global cryptocurrency was $1.14 trillion, down more than 19% on the same time Wednesday, according to CoinMarketCap. Dozens of digital coins lost a quarter or more of their value, and even bitcoin, the largest and oldest cryptocurrency, was down 14%.

A crisis of confidence among crypto investors has been spreading since the weekend, when TerraUSD became unmoored from the U.S. dollar, which it was supposed to be shadowing. TerraUSD, also known as UST, was one of the most popular “stablecoins,” which are meant to have the same value as a real-world currency and have become a backbone of some crypto trading.

UST’s supposed peg to the dollar was based on a complicated algorithmic interaction with other cryptocurrencies, which turned out not to work.

The price of UST fell as low as 23 U.S. cents on Wednesday, and while it recovered to a level around 60 cents on Thursday, that is far below the $1 peg it is meant to maintain. Do Kwon, the Stanford University-educated developer behind UST, tweeted: “I understand the last 72 hours have been extremely tough on all of you. Know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this.”

“The snowball effect on the whole market is big,” said Anndy Lian, chairman of the Netherlands-registered crypto trading platform BigONE Exchange. “UST deviates too much from the $1 mark, resulting in more panic in the market. Investors who are already fleeing risky assets amid fears over rising inflation and possibly a recession start to panic sell as bitcoin falls below their expectation.”

Ethereum, the second-largest cryptocurrency after bitcoin, was down more than 20% in 24 hours to Thursday afternoon, while other well-established and popular coins lost even more value. XRP and Polkadot were both down around 30%. Dogecoin, a joke cryptocurrency hyped last year by Tesla CEO Elon Musk, was down by a third, according to CoinDesk.

The collapse of UST has already caught the eye of regulators, many of whom have issued stern warnings about the potential risks to financial stability posed by stablecoins.

In a hearing before the Senate Banking Committee on Tuesday, U.S. Treasury Secretary Janet Yellen said it proved there should be federal regulations. “This simply illustrates that this is a rapidly growing product and there are rapidly growing risks,” she said.

Most popular stablecoins, like Tether and USD Coin, claim to support their peg to conventional currencies such as the U.S. dollar by holding the same amount of fiat currency. Tether traded as low as 96 cents, versus its claimed $1 value, at one point on Thursday.

UST is known as an “algorithmic” stablecoin, using a complex mix of code and a sister token called Luna to stabilize prices. It relied on a mechanism that incentivized investors to maintain the peg, automatically adjusting the supply to maintain value.

Despite its riskier nature, UST gained popularity for a decentralized finance application called Anchor Protocol, which paid out interest in the form of cryptocurrency to users who lent out their UST.

The price began to fall below $1 late last week, after an interest rate hike by the U.S. Federal Reserve and a sharp drop in the crypto market. Amid the turmoil, the sister token Luna also sold off. This resulted in the algorithm becoming unable to work properly, breaking UST’s linkage to the dollar.

Additional reporting by Wataru Suzuki in Tokyo and Dylan Loh in Singapore.

 

Original Source: https://asia.nikkei.com/Spotlight/Cryptocurrencies/Cryptocurrency-losses-top-275bn-in-a-single-day-as-instability-spreads

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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