What kind of digital currency is securities? |SEC Digital Asset Securities Framework Analysis

Whether a certain digital asset is a security is directly related to whether it is regulated by the SEC. It is well known that in addition to BTC and ETH, other digital assets are currently considered by the SEC as securities, and there is currently no digital currency issuance (ICO) registered or waived in the SEC. In this case, a clear official standard is especially necessary.

The chain lawyer team had previously published a special article on the SEC. In the article we emphasized that the Howey test is the main method for judging whether a certain digital asset constitutes an investment contract on US securities law. .

However, because the test method is more abstract, there are more uncertainties in the actual application. To solve this problem, the US Securities and Exchange Commission (SEC) issued a reference analysis framework for judging whether digital assets are investment agreements, and further explained the specific application of the Howe test.


Whether a certain digital asset is a security is directly related to whether it is regulated by the SEC. It is well known that in addition to BTC and ETH, other digital assets are currently considered by the SEC as securities, and there is currently no digital currency issuance (ICO) registered or waived in the SEC. In this case, a clear official standard is especially necessary. From this analysis framework, we have become more and more clear that BTC and ETH do not meet the current SEC definition of securities (investment contracts).

Regarding the Howe test, we have mentioned it many times in previous articles. It originated from the judicial precedent of the US Supreme Court in the Howe case and other related cases. Such a case clarifies that “if an investor has reasonable expectations of profiting from the efforts of others when investing funds in a joint investment company, then The investment constitutes the rules of the investment agreement on US securities law. The SEC chairman did not say that Ethereum is not a securities, but we have interpreted these contents.

In general, the Howe test has four main points, but for the sake of understanding, we refine it here into three important points:

(1) Capital investment;

(2) Joint investment enterprises;

(3) Reasonable expectation of profiting from the efforts of others.

The term "co-investment enterprise" as referred to in the second point above refers to the fact that the investor's property income is confused with the property of the promoter or third party and depends on the company that operates and succeeds.

All along, according to the standards of Haowei test, the first two points are relatively easy to judge, but the third point is not so easy to pinch.

The SEC believes that "joint investment companies" are common when judging whether digital assets are investment agreements.

In general, the key to judging whether a certain digital asset is in compliance with the Howe test is to see "whether the investor has a reasonable expectation of profiting from the efforts of others."

When the project's sponsors, underwriters, or other third parties and third-party affiliates (these entities are collectively referred to as actual participants or "active participants") invest sufficient and substantial effort in the entity in which the investor invests When these efforts have an impact on the success or failure of the project, if the investor has reasonable expectations for profit from such efforts, the digital assets involved in the project meet the third point of the above-mentioned Howard test.

The SEC's analytical framework further clarifies the third point of the Howe test, which states that digital assets should be considered in the following ways to meet the third point – a reasonable expectation of profiting from the efforts of others.

(1) How to judge whether to rely on the efforts of others

When judging whether there is any effort to rely on others, the following "two issues" should be considered.

1. Whether the purchaser of digital assets has expectations for the efforts of relying on actual participants;

2. Whether the efforts of the actual participants have a substantial and indispensable impact on the success or failure of the project rather than an insignificant impact.

In addition to the above two points, the more the following conditions are satisfied, the more the facts that depend on others' efforts exist.

1. The actual participant is responsible for the development, improvement, operation or promotion of the digital asset network.

2. There are many tasks that must be or are expected to be undertaken by actual participants, and these tasks cannot be undertaken by loose community users.

3. Actual participants create a digital asset trading market or determine the price of a digital asset.


(1) The actual participants control the generation and distribution of digital assets;

(2) Or the actual participants control the total amount of digital assets in the market through repurchase, combustion, etc. to achieve the purpose of controlling the price of digital assets. (The project parties that currently include many digital assets, including platform coins, are controlling the price of digital assets in this form.)

4. Actual participants play a leading or central role in the ongoing development of digital asset networks.

5. The actual participants have a continuous and substantial impact on the decision or judgment of the characteristics of the digital assets, the digital asset network or the rights and interests of the digital assets.


(1) Decide whether and how to compensate those who provide services to digital asset networks or organizations.

(2) Decide who and under what conditions can obtain additional digital assets.

6. Buyers of digital assets reasonably expect actual participants to work to promote their own interests and enhance the value of digital assets or digital asset distribution networks.

In judging whether a certain "digital asset previously sold as a securities" still has "the fact of relying on others' efforts " in subsequent sales, the following facts need to be considered:

1. Whether the efforts of actual participants or actual participant successors still have a significant impact on the value of digital asset investments;

2. Whether the digital asset network operates in a way that the purchaser does not have a reasonable expectation of the actual participants' efforts to invest in the business;

3. Whether the actual participants have no influence on the success of the investment entity.

(2) How to judge the reasonable expectation of profit

The more the following characteristics are consistent, the more the "reasonable expectation of profit" exists:

1. Digital assets give their holders the right to share the income, profits, or benefits of capital gains from digital assets.

2. Digital assets can be traded in the secondary market or platform at present or in the future.

3. The purchaser of digital assets reasonably expects that the actual participant's efforts will bring about the capital appreciation of digital assets, and the purchaser will profit.

4. Digital assets are widely available to potential buyers. (This condition means that the number of shares issued and the number of transactions are determined for investment purposes rather than for normal use purposes, that is, their issuance and trading volume may be much larger or much smaller than the amount required for actual use)

5. There is no clear correlation between the transaction price of the digital asset and the true value of the corresponding goods or services.

6. There is no clear correlation between the trading of digital assets and the number of basic goods or services purchased or consumed by the average consumer.

7. The actual participants raised more funds than they actually needed to build a network or digital asset.

8. Actual participants are able to make a profit when holding assets of the same class as digital assets issued to the public.

9. Actual participants continue to raise funds in the course of operations or revenues to enhance the value of digital assets or networks.

10. When digital assets are sold directly or indirectly, the following conditions exist:

a) The actual competence or experience of the actual participants can increase the value of the digital asset or its network.

b) Digital assets are declared to be an investment at the time of sale, or the holder of a digital asset will be referred to as an investor.

c) The intended use of the proceeds from the sale of digital assets is the development of digital assets or their networks.

d) Digital assets or their networks have unimplemented functions, or actual participants will implement this functionality in the future.

e) Commit or imply that a new business or operating system will be established instead of using existing ones.

f) The tradability of digital assets in the future is the main selling point.

g) Emphasize the future earnings outlook of digital asset networks or the value-added prospects of digital assets in sales or promotional materials.

h) Declare the availability of a digital asset exchange, or the actual participant expressly or implicitly establishes or otherwise supports the digital asset exchange.

In addition to the above, when judging whether "a certain digital asset previously sold as a securities" still has "reasonable expectation of profit " in subsequent sales, the following facts need to be considered:

1. The purchaser of digital assets no longer reasonably expects the continued development of actual participants to be a key factor in determining the value of digital assets;

2. The value of digital assets has formed a direct and stable relationship with the value of the goods or services that they can redeem;

3. The trading volume of digital assets is consistent with the actual demand for the goods or services it represents;

4. The holder of the digital asset can use it for a predetermined function, such as obtaining goods or services;

5. Whether the benefits derived from the appreciation of digital assets are limited to the intended use;

6. Whether any actual participants have access to important and non-public or other important information about digital assets.

(3) Others

The Federal Court upholds the principle of "economic substance is more important than form" when considering the existence of the "reasonable expectation of profiting from the efforts of others."

Therefore, in weighing this fact, the federal courts will consider whether investors buy digital assets for use and consumption (rather than investment).

Although the following facts about the use or consumption of digital assets have no decisive influence on the Howell test, the more items a certain digital asset meets, the more it indicates that it does not meet the Howe test.

1. Distributed ledger or digital assets have been developed and are in operation;

2. The holder of the digital asset can immediately use it on the network according to the predetermined function, especially the system encourages the holder to do so;

3. The generation of digital assets is designed to meet the needs of users, rather than to meet the value added of digital currency or its network. For example, digital assets can only be used in their networks, and in general they only trade in the amount that the user actually needs;

4. The prospects for appreciation of digital assets are limited. For example, the design principle of digital assets stipulates that its value will not change over time, and rational investors will not invest in the way they hold the digital assets for a long time;

5. For digital assets known as virtual currency, they can be immediately used for payment in various situations or as a substitute for legal currency. in particular:

a) such digital assets do not need to be converted into legal or other digital assets for payment;

b) Such digital assets are actually used as value storage tools or means of payment.

6. For digital assets supported by goods, services or rights, they can redeem the content that supports them on a network or platform that has already been developed;

7. The value added of digital assets is secondary to its use as intended;

8. The sale of digital assets is based on its function rather than the prospect of appreciation;

9. Potential purchasers can use digital assets by default;

10. The restrictions on digital asset transactions are intended to meet their intended use, rather than to promote the development of their speculative markets;

11. If the actual participant in the digital asset creates a secondary market, then that market is only used for digital asset transactions for users within the platform.

The SEC emphasizes that the above factors may not be comprehensive enough to determine whether a digital asset is an investment agreement, and that any single element has no decisive influence on this judgment. This analysis framework is only for reference by people involved in the issuance and trading of digital assets.

As SEC Chairman Jay Clayton mentioned in his reply to the White House representative: You also asked me if I agree with some statements about the digital token in Director Haiman’s speech in June 18th. I agree with his analysis of whether “digital assets are issued and traded in the form of securities that are not static or fully compliant with the definition of legal documents. A certain digital asset is issued in securities at the time of initial issue or transaction because it is in line with investment. The contract (according to the US securities law, the investment contract is a kind of securities), but its connotation may change in subsequent transactions, and no longer meet the definition of investment contract.

In the final analysis, the SEC's principle for the identification of the attributes of digital currency securities is "economic substance is more important than form."

In the horizontal latitude, for the identification of whether digital assets belong to securities, specific analysis of specific issues is required. It is necessary to take into account the existing standards of the securities law and the judging criteria formed by the jurisprudence, and also take into account the specific circumstances of digital assets.

At vertical latitude, certain digital assets may no longer meet the definition of securities as time progresses. We believe that, strictly speaking, if a certain digital asset is a security at the time of issue, then the issuer must also bear the corresponding legal responsibility according to the law, even if the issuer gives the project and the token to the community at a later time. Digital assets no longer meet the definition of securities.

The above mentioned "some kind of digital assets that were previously sold as securities" first reminded me of BTC and ETH. As of now, the SEC has never explicitly mentioned in the official that the two are not securities, but whether it is a press release, an open letter or an official explanation, it is "notifying" that the BTC and ETH are not securities. In connection with the above content of this article, it is not difficult for us to conclude that BTC and ETH are currently not in compliance with the SEC's definition of securities.

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