Platform currency may usher in a regulatory storm. On December 22, the U.S. Securities and Exchange Commission (SEC) stated in a lawsuit against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison filed on Wednesday that from the time of issuance, FTX’s trading token FTT has served as The sale of investment contracts is a kind of "securities", which may have a wide-ranging impact on the industry.

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FTT Recognized as a Security, or 'Forced' to Recognize for Mitigating Penalties

In the latest investigation, two core members of FTX and Alameda admitted that FTT is a security.

The lawsuit filed by the SEC claims that FTX will use proceeds from the token sale to fund FTX’s development, marketing, business operations, and growth, while emphasizing that FTT is an “investment” with the potential to be profitable. “Demand for FTT tokens is likely to increase if demand for transactions on the FTX platform increases, so any price increase in FTT will benefit FTT holders equally and in direct proportion to the FTT assets they hold. Substantial allocations to FTX's tokens incentivize the FTX management team to take steps to attract more users to the trading platform, thereby increasing the demand for FTT tokens and increasing their trading prices. The FTT purchase and burn plan is similar to a stock repurchase, with funds from FTX Repurchase and burn FTT with revenue from the FTT, thereby increasing its value.” At the same time, the FTT material made it clear that the efforts of the FTX core management team will drive the development and ultimate success of FTX.

To understand why FTT is considered a security, it is necessary to understand the definition of the Howey test. The Howey Test originated in 1946 in Florida by a business called the "Howey" Company. At the time, the Howey Company sold large tracts of citrus groves to raise funds to buyers in Florida, who leased the land back to the Howey Company. Howey tends to the citrus orchard land, and those buyers share the proceeds with Howey without tending the land themselves.

But the SEC sued Howey, arguing that the deal constituted an investment agreement that falls within the scope of securities as defined by the U.S. Securities Act, and the court ultimately ruled that Howey was required to comply with the U.S. Securities Act. As a result, the Howey test became the current legal standard used in the United States to determine whether something is a security, and is still used today.

The Howey test requires the investment contract to meet the following four conditions simultaneously: (1) use money to invest; (2) invest in a common enterprise; (3) expect to make profits for itself; effort;

Of course, the SEC and the Federal Supreme Court also pointed out that the Howey test is a flexible rather than a static standard. For encrypted assets, once they are identified as "securities", they must comply with the relevant regulations of the SEC and fulfill compliance obligations. Encrypted assets include not only virtual currencies, but also stablecoins, NFTs, etc. For example, Yuga Labs, the parent company of Bored Ape Yacht Club, the leading NFT project recently, was investigated by the SEC for whether NFT and ApeCoin violated federal securities laws.

Not only that, but the SEC's jurisdiction is not limited to the United States. For example, in May 2020, Telegram, which was registered in the UK and operated in Dubai, was suspended by the SEC for selling tokens to some US investors and failing to disclose key information to the public, even though Telegram claimed that "it can only invest in non-US investors." to issue tokens”. In the recent FTX thunderstorm case, the company’s headquarters has been relocated to the Bahamas, but its founder SBF and executives are still accused by US regulators, and former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang also Has pleaded guilty to criminal charges.

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An Encrypted Howey Test Is Coming Soon

Once FTT is identified as a security by the SEC, other trading platform tokens will have to face regulatory investigation or prosecution. Judging from past cases, "breaking money and eliminating disasters" is usually a last resort.

For a long time, the Howey test has been the SEC's accountability blade, but it has not been recognized by encryption projects/companies. For example, Kin, the ERC-20 token originally issued based on Ethereum, has been arguing with the SEC for a year and a half over whether assets should be defined as securities or cryptocurrencies, and even launched a "defense encryption" to sue The SEC, however, chose to settle and was fined $5 million. In addition, XRP Capital founder Michael Arrington once responded to the SEC's lawsuit against Ripple, saying that the Howey test is outdated and ridiculous.

Although many people believe that the new technology of cryptocurrency is in conflict with the regulation of the old system, SEC Chairman Gary Gensler has repeatedly stated that most of the current encryption market is securities because they have the characteristics of securities defined by the Supreme Court in the 1940s , so the issuance and sale of these security-type encrypted tokens will be regulated by securities laws. “Some in the crypto industry have called for clearer guidance, but over the past 5 years, the SEC has been very vocal”. At the same time, Jay Clayton, the previous chairman of the SEC, also mentioned that without prejudging any token, most encrypted tokens belong to the investment contract under the Howey test.

In the past few years, the SEC has filed dozens of complaints against crypto asset companies/projects for failure to register. However, recent cryptocurrency-friendly SEC Commissioner "Crypto Mom" ​​Hester Peirce pointed out in the latest podcast that the so-called Howey test used by the US SEC to determine whether digital assets should be classified as securities still has some limitations.

Hester Peirce states that the Howey test identifies an "investment contract" as "a contract, transaction, or scheme whereby a person invests his funds in a common It does not address the question of whether a crypto asset itself is a security, because an investment contract is centered not only on the asset, but also on the promises attached to the asset, and these two components should be kept separate from each other.

After Coinbase was accused by the SEC of unregistered securities, its founder Brian Armstron recently published "Suggestions and Predictions for the Regulation of the Encrypted Industry in 2023", pointing out that perhaps the most complicated point that needs to be clarified around cryptocurrencies is how to define them as commodities. Or securities. The CFTC and SEC have been wrangling this issue in the US for years without providing any clear information to the market. At this point, Congress clearly needs to step in and pass legislation. This can be done with an updated version of the Howey test for cryptographic tokens that may fall under the definition of an investment contract.

Brian Armstron explained that the modern Howey test for cryptocurrencies needs to include the following: (1) if the issuer of the crypto asset does not sell the asset in exchange for funds in order to build the project, then it is not a security; (2) for the crypto asset to be a security, It has to be controlled and operated by a centralized organization like a corporation. If a project has become sufficiently decentralized, it is not a security; (3) if the primary purpose of a crypto asset is some other form of utility (voting, governance, incentivized behavior by the community, etc.), then it is not very may be considered securities. (4) If profits are expected to come primarily from participants unrelated to the asset issuance, then the project is sufficiently decentralized to not be considered a security. It is important to note that all four of the above points must be met in order for an asset to be considered a security. Meeting some of these points is not enough. For example, people invest in gold or a Picasso painting with the expectation of profit, but these are not securities because the expectation of profit does not come from ordinary businesses (or the efforts of others).

In short, if the platform currency is confirmed as a security, it is bound to have a great impact on various encrypted exchanges. But as Brian Armstron argues, the role of financial regulators should be limited to centralized players in cryptocurrencies, and their decentralized counterparts should be allowed to innovate. Regulators should give cryptocurrencies plenty of room to innovate.