The Howey test used to gauge whether an asset qualifies as a security does not fully account for the nature of digital assets. In an interview with Decrypt, SEC Commissioner Hester Peirce said.
The official noted that many startups raised funding on the promise to build a network. This created grounds for recognizing issued tokens as ‘investment contracts’ under the Howey test.
One of the latter’s conditions is ‘expectation of profits from investments’. This was stated by the SEC Chair Gary Gensler, who sees ‘unregistered securities’ in crypto assets.
“What I sold you—a grove of orange trees—as part of an investment contract does not turn it into a security. The orange grove plus promises about how I plan to care for it and bring you profits is a securities offering,” Peirce explained.
The commissioner is convinced that the Howey test by itself does not yield a definitive answer to whether a cryptocurrency constitutes an investment contract, detached from the offering process in which such features can be observed.
Peirce warned against the policy’s course, recalling the landmark speech by William Hinman, who headed the SEC’s Division of Corporate Finance in 2018. In it he described Bitcoin and Ethereum as ‘sufficiently decentralised’, which did not permit calling them securities.
“We said that the orange grove is treated as an investment contract forever. I don’t know when the situation will change, but it would make sense. We should bring clarity,” Peirce lamented.
The way out, the commissioner sees, is to clarify the conditions for moving tokens from ‘securities’ to ‘exchange-traded commodity’ status. In that case there would be less criticism about applying the Howey test, she argues.
The current uncertainty disheartens Peirce. She says there has been ‘no real positive’ in cryptocurrency regulation since 2018.
In October 2021 Peirce called for the Commission to engage with industry participants to create a ‘sensible framework’ for oversight. Later she criticised Gensler for his stance on cryptocurrencies.
As reported, in February 2022 Peirce saw a threat to DeFi platforms in amendments to the Securities Act.
In December, Representative Tom Emmer accused the head of the SEC of failing to regulate the crypto industry.
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