March 29th, 2024

Decentralized Transactions Challenge Howey Test’s Application to NFTs

The key question is whether NFTs meet the Howey test criteria for classification as securities under federal laws.
In the NFT industry, adopting best practices includes transparency, fraud prevention, respecting intellectual property, and ethical conduct.

Non-fungible tokens (NFTs) are unique digital assets that can represent anything from art and music to virtual land and gaming items. They have exploded in popularity and value in recent years, attracting the attention of celebrities, investors, and regulators alike. The legal status of NFTs remains unclear and controversial, especially in the United States, where the Securities and Exchange Commission (SEC) has the authority to regulate securities and protect investors from fraud and manipulation.

One of the key questions that arises is whether NFTs are securities under the federal securities laws, and specifically, whether they meet the criteria of the Howey test, the legal framework established by the Supreme Court in 1946 to determine whether an instrument is an investment contract and thus a security. Howey test has four elements, I will argue that NFTs are not securities. On top of that, I will also address some of the counterarguments and challenges that NFTs may face in the future, and suggest some possible solutions and recommendations for the industry and the regulators.

NFTs are not investments of money, but rather purchases of digital goods

The first element of the Howey test is whether there is an investment of money or something of value in exchange for the instrument. This element is usually easy to satisfy, as most financial transactions involve some form of payment. However, in the case of NFTs, the payment is not an investment, but rather a purchase of a digital good.

They are not shares, bonds, or derivatives that represent a claim or a right to a future cash flow or a share of profits. Rather, they are digital tokens that prove ownership and authenticity of a unique digital asset. In my point of view, they are similar to other digital goods, such as e-books or music downloads, that consumers buy for personal use and enjoyment, not for investment purposes.

NFTs are not common enterprises, but rather individualized and decentralized transactions

The second element of the Howey test assesses the presence of a common enterprise, where investors’ fortunes are tied to the success of an issuer or third party. However, in the case of NFTs, no such common enterprise exists. Transactions are decentralized and individualized, with various artists and creators minting NFTs across different blockchain networks like Ethereum or Solana. NFT buyers rely on blockchain‘s public ledger to verify authenticity, rather than trusting a specific issuer or promoter.

NFTs do not generate profits, but rather subjective value and utility

The third element of the Howey test concerns whether there’s a reasonable expectation of profits. Unlike traditional investments, NFTs don’t generate income or appreciate based on others’ efforts. Instead, their value comes from subjective qualities like rarity, originality, and cultural significance, rather than anticipated financial returns. NFT buyers don’t expect profits but rather value the assets for their intrinsic qualities and utility.

NFTs are not dependent on the efforts of others, but rather on the creativity and innovation of the creators and the community

The fourth element of the Howey test examines whether profits stem from the efforts of others. Unlike traditional securities, NFT profits aren’t reliant on issuer or third-party services. NFT value is driven by the creativity and innovation of artists and developers, not centralized platforms. Buyers assess and appreciate digital assets based on personal judgment, rather than external influences.

Counterarguments and challenges

Despite the arguments in favor of NFTs, potential challenges from regulators and courts may arise in the future. One such challenge is the classification of certain NFTs as securities under regulatory tests like the Howey or Reves tests. Depending on their characteristics, some NFTs could represent real-world assets or rights, potentially falling under the definition of securities, especially if they promise future cash flows or resemble investment instruments.

Moreover, even if NFTs don’t meet all elements of the Howey test, they might still be deemed securities through a flexible analysis. For instance, if they are marketed as investments or show characteristics of speculative opportunities, they could create expectations of profit, thus falling under securities regulations. Additionally, if buyers pool funds or share risks and rewards, or if the NFTs’ value depends on underlying asset performance, regulators might consider them securities.

Furthermore, beyond securities laws, NFTs could be subject to various other regulations based on their nature and function. Anti-money laundering and sanctions regulations might apply if NFTs facilitate illicit transactions. Tax regulations could come into play if NFT transactions generate taxable income or capital gains. Consumer protection laws might be relevant if NFTs involve deceptive practices or breach contracts. Intellectual property regulations could be triggered if NFTs infringe upon original creators’ rights.

My take: Possible solutions and recommendations

Given the uncertainty and complexity of the legal landscape surrounding NFTs, it is important for the industry and the regulators to work together to find possible solutions and recommendations that can balance the interests and needs of all the stakeholders. Here are some suggestions from me that may help to achieve this goal:

Industry stakeholders should adhere to best practices and standards to improve transparency, accountability, and compliance in the NFT market. This includes clear disclosure of terms and conditions for NFT transactions, implementing measures to prevent fraud and illegal activities, and respecting intellectual property rights. Additionally, they should engage in responsible and ethical behavior, avoiding harm to the environment, society, or public interest.

Regulators should adopt a flexible approach to regulate the diverse NFT market. Avoiding overly restrictive frameworks is crucial to foster innovation and growth. Recognizing nuances among NFT types and consulting with industry and community for feedback is essential. Continuous monitoring and evaluation of market evolution are necessary to update policies accordingly.

Conclusion

NFTs are a new and exciting phenomenon that has revolutionized the digital economy and culture. They offer unprecedented opportunities and challenges for the creators, consumers, and regulators of the digital assets.

The legal status and implications of NFTs are still unclear and uncertain, and may vary depending on the facts and circumstances of each case. Therefore, it is important to understand and address the potential legal issues and risks that may arise from the creation, distribution, and consumption of NFTs, and to seek appropriate solutions and recommendations that can foster a healthy and sustainable NFT market.

Source: https://www.financemagnates.com/cryptocurrency/decentralized-transactions-challenge-howey-tests-application-to-nfts/

Anndy Lian

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”.

www.anndy.com

j j j

October 6th, 2023

Put ChatGPT, Bing Chat, and Bard to the Test: A Comparative Analysis

In today’s rapidly changing world of artificial intelligence, language models have become essential tools with a wide range of applications. They play pivotal roles in everything from virtual assistants and chatbots to content generation and translation services. As these models push the boundaries of what’s possible, it’s imperative that we scrutinize their capabilities, acknowledge their limitations, and evaluate their real-world performance. In this opinion piece, we’ll subject three prominent language models—ChatGPT, Bing Chat, and Bard—to a rigorous examination, delving into their strengths and weaknesses while pondering the profound impact they have on our digital interactions.

Understanding the Players

Before delving into the comparison, let’s briefly introduce the contenders:

ChatGPT: Developed by OpenAI, ChatGPT is a highly advanced language model known for its natural language understanding and generation capabilities. It has been used in various applications, from chatbots to content creation.

Bing Chat: Microsoft’s answer to conversational AI, Bing Chat is a product of continuous research and development. It’s designed to facilitate natural and context-aware conversations, making it an attractive choice for customer support and virtual assistance.

Bard: While perhaps less well-known than the other two, Bard is a language model developed by Google. It’s designed for a wide range of language tasks, including translation, summarization, and chatbot interactions.

Testing Criteria

To fairly evaluate these language models, we’ll assess them based on several key criteria:

Natural Language Understanding (NLU): How well do these models comprehend and respond to user inputs?

Conversation Flow and Context Management: Can these models maintain coherent and contextually relevant conversations, even with complex inputs?

Content Generation: How adept are these models at generating coherent and informative responses, especially in content creation scenarios?

Ethical Considerations: What steps have been taken to mitigate biases and ethical concerns in these models?

Accessibility and Integration: How easily can these models be integrated into various applications and platforms?

Natural Language Understanding (NLU)

ChatGPT, Bing Chat, and Bard have all made significant strides in natural language understanding. They can process a wide range of user inputs, from casual conversation to technical queries. OpenAI’s ChatGPT, for instance, has been fine-tuned to understand and respond to various languages, dialects, and domains.

Microsoft’s Bing Chat also excels in NLU, boasting an impressive ability to recognize user intent and context. It leverages Microsoft’s vast knowledge base to provide informative responses, making it a compelling choice for customer service applications.

Bard, though less known in this arena, still demonstrates a commendable understanding of natural language. It’s especially effective in multilingual settings, owing to Google’s extensive translation capabilities.

Conversation Flow and Context Management

A crucial aspect of conversational AI is the ability to maintain coherent and contextually relevant dialogues. ChatGPT, Bing Chat, and Bard approach this challenge differently.

ChatGPT often relies on generating context from the conversation history. While it generally performs well, it may occasionally produce responses that seem out of place or disconnected from previous messages, especially in longer conversations.

Bing Chat, with its focus on context-aware conversations, tends to excel in this area. It can seamlessly manage complex dialogues and provide informative responses even when users provide incomplete information.

Bard, too, handles context reasonably well. Google’s model can maintain coherence in multilingual conversations and adapt its responses to evolving user queries.

Content Generation

Content generation is a critical application for language models, especially for tasks like writing articles, product descriptions, or creative pieces. In this regard, ChatGPT stands out as a strong performer. It can generate coherent and contextually relevant text, making it a valuable tool for content creators.

Bing Chat, while primarily designed for conversations, can still generate informative responses for content-related queries. However, it may not be as proficient in long-form content generation as ChatGPT.

Bard, developed by Google, is also adept at content generation. Its strength lies in summarization and translation tasks, but it can produce well-structured paragraphs and essays with the right prompts.

Ethical Considerations

Ethical concerns surrounding AI models are paramount in today’s discussions. OpenAI has made efforts to address biases in ChatGPT, implementing guidelines to reduce harmful and biased outputs. While it’s not perfect, these measures demonstrate a commitment to responsible AI development.

Microsoft, too, emphasizes ethical considerations in the development of Bing Chat. The company actively seeks to avoid biased and inappropriate responses and provides tools for users to report any issues they encounter.

Google, with Bard, has also acknowledged the importance of ethical AI. Google’s AI Principles guide the development of all their AI systems, with a commitment to avoiding biases and promoting transparency and accountability.

However, it’s crucial to note that none of these models are entirely free from biases or ethical challenges, and continuous vigilance and improvement are necessary to address these concerns.

Accessibility and Integration

The ease of integrating these language models into various applications and platforms is another vital aspect of their usability. ChatGPT is available through APIs, making it accessible for developers to incorporate into their projects. OpenAI offers both free and paid tiers, allowing a range of users to benefit from its capabilities.

Microsoft offers Bing Chat through Azure, providing a scalable and robust solution for businesses. It integrates seamlessly with Microsoft’s other products, which can be a significant advantage for enterprises.

Google’s Bard is accessible through Google Cloud AI, making it a viable choice for businesses already using Google’s ecosystem. It offers flexibility in terms of deployment and integration.

Conclusion

In the dynamic world of conversational AI, let’s take a closer look at ChatGPT, Bing Chat, and Bard, each bringing its own set of strengths to the table. ChatGPT really shines with its exceptional grasp of natural language and its ability to generate content that’s second to none. It’s the top pick for content creators and developers who crave a versatile language model.

Now, Bing Chat steps up to the plate with its knack for managing context and reading user intentions like a pro. It’s the go-to choice for applications that require impeccable customer support and virtual assistance, and the fact that it seamlessly blends into Microsoft’s ecosystem is a huge plus for businesses.

And let’s not forget Bard. While it might not be as famous as the other two, it packs a punch with its multilingual skills and its knack for content creation. In scenarios where translation and summarization are vital, Bard could carve out its own special niche.

But here’s the scoop: deciding among these language models isn’t just about their features. It’s also about the specific needs of your project, ethical considerations, and how easily they fit into your existing setup. As AI charges forward, it’s our responsibility as developers, businesses, and users to keep up with these models’ capabilities and quirks. Armed with this knowledge, we can make smart choices and steer AI development in an ethical direction. With ongoing improvements and an eye on fairness, these models can continue to jazz up our digital interactions and make the online world more welcoming and accessible to all.

Source: https://wishu.io/put-chatgpt-bing-chat-and-bard-to-the-test-a-comparative-analysis/

Anndy Lian

www.anndy.com

j j j

April 24th, 2023

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.

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.

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.

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.

Source: https://www.techinasia.com/1940s-legal-test-crypto-regulation