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A Test Of Howey

October 26, 2022
min. read

… A taste of honey…

Tasting much sweeter than wine!

(The Beatles)


The Howey Test is a test developed by the U.S. Supreme Court to determine whether a financial transaction means investing in a security. The test is considered positive if four conditions are met simultaneously:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To be derived from the efforts of others

If the test produces a positive result, then the financial transaction falls under the law "On Securities" of 1933 and the law "On the exchange of securities" of 1934. This means that only qualified investors can legally buy these securities.

In order to become a qualified investor in the United States, you must have an annual income of $200,000 over the past two years ($300,000 if you are married) or a net worth of at least $1 million. Belonging to this affluent class gives you the privilege to invest in hedge funds, venture funds, private investment proposals and other private enterprises.

In addition to taking care of investors, the Howie test directly indicates who and how should regulate the asset in case of a positive test result. An absence of registration if an asset is recognized as a security will entail fines and delisting of cryptocurrencies on platforms. In the case of Grayscale trusts, they are excluded from the product line, as was the case with XRP.

The question of whether cryptocurrencies and tokens using PoS technology should be required to pass the Howie test is heard increasingly more often in the public space. For instance, in a September speech in the US Senate, the head of the SEC Gary Gensler said that staking is very similar to lending, which means there is an expectation of profit based on the efforts of others. This means that all PoS assets should be classified as securities.

At the same time, responding to the application of Cipher Technologies Bitcoin Fund, the financial regulator stated that Bitcoin (PoW technology) "is not a security according to SEC staff." “Among other things, we do not believe that current purchasers of Bitcoin are relying on the essential managerial and entrepreneurial efforts of others to produce a profit,” - stated the department’s response.

Interestingly, in this regard, the recent Ether update of The Merge towards PoS made it much more vulnerable in terms of the Fed's intentions to tightly regulate DeFi. However, the SEC is acting rather cautiously, trying not to kill the formed market, but also blocking the way to new clearly influential projects, e.g. Facebook's own Libra/Diem cryptocurrency or Pavel Durov's TON.

It is also interesting that the main driving force pushing PoS tokens under the SEC regulation wing is currently not the SEC itself, but massive investor class actions that accuse large companies like Binance, Tron, Block.One (the EOS issuer), BitMEX, KuCoin of attempting to sell them securities under the guise of tokens. The gap between legislation and reality allows lawyers to make a lot of money on such precedent-setting proceedings, and the SEC is forced to respond to so-called “corporate blackmail.” The larger the class action suit (i.e., the more victims), the greater the amount of the settlement agreement that completes 99% of class action suits.

However, lawsuits from single investors are also not uncommon. Thus, an investor from California Mark Young accused the key participants of the Solana ecosystem of illegally profiting from the native SOL token. According to the lawsuit, the coin is an unregistered security.

As money is lost from investing at highs, unsuccessful investors try to take revenge on projects using any available methods.

However, PoS tokens have a chance to avoid being classified as securities due to clause 4 of the Howey test, which states that profit is obtained through the efforts of others. Despite their belonging to DeFi, using PoS technology and staking for profit, the influence of BTCMT token holders' community is very strong in projects like Minto. Each owner has the opportunity to participate in decision-making on project development, voting for various ideas in proportion to his share. This means that he profits not so much through the efforts of others, but by participating in project operations himself.

Thus, some time ago, an issue on managing Bitcoin mining profitability was submitted to the community for voting. It was proposed to turn mining power off during peak load times on the electric grid, when electricity is the most expensive. Having approved the project, the community began to earn more, which was announced in Minto's monthly report.

The next decision was made by the Minto community in early October 2022, approving the migration of the BTCMT token from the HECO Chain to BNB.

Cryptocurrency industry regulation will be improved and tightened one way or another, however, the future of PoS projects is far from a foregone conclusion, and projects such as Minto, which demonstrate reliability even in adverse market times, have a high chance of remaining a token and not becoming a security after taking the Howie test.

Join Minto, become a part of the project community and make decisions on its development!

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