Coin Center Releases Guidance Framework for Cryptocurrency Securities Regulation

Coin Center, a non-profit digital currency research and advocacy center based in the United States, recently released a regulatory guidance framework for treating digital currencies as securities.

This report, written by Peter Van Valkenburgh, director of research at Coin Center, proposes an investment contract framework based on the Howey test and the basic policy objectives of securities regulation.

Van Valkenburgh described Coin Center’s work as identifying several “key variables” around digital currencies that represent risks to investors or users through the communities that run and maintain the software involved.

This article examines these variables and explains their depth, and further maps them to the “four elements” of the Howey test to determine whether a digital currency resembles a security and therefore needs to be regulated.

The main point of this article is that larger, more decentralized digital currencies like Bitcoin, anchored by digital currencies like sidechains, and distributed computing platforms like Ethereum, do not easily meet the definition of securities and do not represent the possibility of some risk to consumers that needs to be addressed through securities regulation.

Van Valkenburgh added,

“We have found that some small-scale, more suspicious, or specially designed digital currencies may indeed meet the definition of securities.”

The purpose of this report is to help securities regulators identify "scams disguised as innovation."

Coin Center was funded by Barry Silbert, founder of Digital Currency Group, which recently acquired Coindesk.

Report Overview

Full of notes and references, this report provides an overview of digital currencies and related technologies, and a detailed discussion of their functions, advantages and disadvantages, as well as relevant regulatory guidance for each.

The report also covers variables that could impact risk for users and investors, including software and community variables including transparency, decentralization, and developer interest.

Howey Test

The 1946 case of SEC v. WJ Howey Co. established the standard for determining "investment contracts". The defendant, Howey Co., is a Florida company that grows about 500 acres of oranges each year and sells half of them to investors from all over the country. Howey Co. signed a "land sales contract" and a "service contract" with investors. The Federal Supreme Court believes that to determine whether a security exists, it is not necessary to find a formal stock certificate, but only the existence of formal benefits of tangible assets, such as actual ownership of an orange grove. At the same time, it is believed that the form should be abandoned and the substance should be emphasized, and the focus of judgment should be placed on economic reality (Economic Reality Test).

The court proposed a test method consisting of four elements, namely the so-called "Howey Test": "An investment contract in securities law is a contract, transaction, or plan in which a person (1) invests money; (2) invests in a common enterprise; (3) invests in a common enterprise solely due to the efforts of the promoter or a third party; or (4) expects to make a profit." Applying this standard to this case, the Supreme Court supported the SEC's claim that the three constituted an "investment contract" as defined under the Securities Act and were therefore "securities" that should be registered and issued in accordance with relevant regulations.

After this case, investment contracts were regarded as a panacea for determining the definition of "securities", and the plaintiffs used the name of "investment contracts" to resolve disputes over whether they were subject to securities laws. According to judicial practice, the following were identified as "investment contracts": whiskey storage receipts, gold and silver investment plans, and club memberships.

Original: http://www.coindesk.com/coin-center-bitcoin-securities-report/
By Daniel Palmer
Translator: Prince Gong