It’s Wednesday, August 7th and it’s Markets Daily, hosted by myself, Jen Sani. On this show, we navigate the currents that shape the cryptocurrency markets, providing insights into the broader financial landscape. Whether you’re actively trading or just fascinated by the volatility of the cryptocurrency markets. This show is your compass to understand what happened to where we are and where we’re going. Hello, everyone is happy when and where we stay. Now, we’ve talked a lot about crypto and the election. It’s a very hot topic here in the industry. Many people who have come on this show have said that this needs to be a bipartisan issue if we’re going to see movement on legislation here in the United States. Now, Coinbase Chief Legal Officer Paul Gray Wall joins the conversation. He said in an interview at the Asia Blockchain Summit. My main concern is that crypto is becoming politicized and a partisan issue in a way that, at the very least, slows down and perhaps worse, threatens its continued growth and development. It must be understood that the Howie Test was developed in the context of an orange grove estate in Florida in the 1940s and 1950s. He stated that blindly applying the Howie and McKay Test to blockchains and cryptocurrencies does not make practical sense. This is a sentiment that has long been expressed by many in the crypto industry and yet SEC Chairman Gary Gensler maintains his position that no new rules are needed for crypto. Today, we are going to talk about the Howie Test, what it is, how it works, why it remains a controversial issue, and whether it is relevant to investors like you. The Howie test is a legal standard used in the United States to determine whether a transaction qualifies as an investment contract and would therefore be considered a security under federal law. It dates back to 1946. It comes from a 1946 Supreme Court case. SEC v. W.J. Howie Co. involving a Florida citrus grove. The court’s decision established a four-part test, which goes like this: an investment of money in a common enterprise with the expectation of profits derived solely from the efforts of others. If all of these elements are met, the transaction is considered a security, meaning it falls under the SEC’s regulatory jurisdiction. How does this apply to cryptocurrencies? Well, applying how we test to the world of crypto is where things get interesting, controversial, and a little murky. Many projects have been examined under this test. The SEC has argued that many tokens and coins essentially offer securities without proper registration. Based on these Howie criteria, let’s break down how each part of the Howie test might apply to a cryptocurrency or token that offers an investment of money to participate in many coins or tokens. Participants invest their money in exchange for a new cryptocurrency or token common venture. This is often met in the crypto space because the success of the investment is usually tied to the success of the project as a whole, expectations of profits, investors generally expect to profit from their investment through appreciation in the value of the tokens and the efforts of others. This is where it gets a little heated if the success of the project relies heavily on the efforts of a centralized group or company, it leans towards security. So why is the Howie test so controversial when it comes to crypto to begin with. This industry is incredibly diverse. Tokens serve many functions beyond just investing, they can be used to access governance of services or as a medium of exchange within a specific ecosystem. This multifunctionality makes it difficult to apply a single test like Howie. Additionally, the decentralized nature of many blockchain projects complicates matters further. For example, Bitcoin is generally considered decentralized enough that its tokens are not considered securities. But what about newer projects that are starting out with a centralized development team? At what point, if ever, do they stop being considered securities? This ambiguity has led to a lot of uncertainty and frustration in the industry. If you follow the cryptocurrency news, I’m sure you’ve noticed that cryptocurrency projects are arguing that the way we test is a mid-20th century tool. It’s ill-equipped to handle the nuances of modern decentralized technologies. And they’re calling for clearer guidelines and perhaps even new legislation that better fits the unique characteristics of digital assets. On the other hand, regulators maintain that the Howie Test is flexible enough to apply to various scenarios and is essential to protect investors from fraudulent schemes. They argue that many token offerings and IC Os are in essence modern securities offerings and should be regulated as such to ensure transparency and accountability. Now, why is this relevant to our crypto markets today? Well, classifying a crypto asset as a security has significant implications if it is considered a security or a cryptocurrency must comply with a multitude of regulatory requirements, including SEC registration, disclosure obligations, and investor protection measures. This can impose substantial costs and operational hurdles on crypto projects for investors. Understanding what a token or token is classified as a security is essential. This affects how you legally buy, sell, and trade these assets. It also influences the overall market perception and value of token projects that fail to comply with securities laws can be subject to legal action resulting in fines, investor refunds, or even the closure of the projects. This regulatory risk can create volatility and uncertainty in cryptocurrency markets, affecting investor confidence and market stability. As we’ve discussed on this show, the global nature of cryptocurrency markets means that US regulatory decisions can have far-reaching effects. Other countries may take a cue from the SEC’s actions to adopt a more standardized approach to cryptocurrency regulation around the world. This can either foster innovation by providing clearer guidelines or stifle it with strict controls. For now, the Howie Test plays a crucial role in the cryptocurrency regulatory landscape. Coinbase Paul Graal said at the summit that precedent, even Supreme Court precedent, has always been recognized as applying in particular contexts and having to adapt to new technologies and issues that emerge in markets and the economy in general. He added that it is important to respect precedent and use the wisdom gained over decades of applying it in all sorts of other contexts without being beholden to it in a way that makes no practical sense. Okay, that’s it for today’s show. Thank you so much for listening and joining me on this journey to better understand the cryptocurrency markets. If you enjoyed today’s show, please subscribe to the Coin Desk podcast network which is available wherever you find the podcast, give us a five-star rating. If you prefer to watch on video, please subscribe to our YouTube channel and hit the like button. Your support means a lot. We wish you a fantastic day and we will see you again tomorrow.
