What is Howey Test? | CryptoWallet.com

What is Howey Test?

A Howey Test is a means for the US Federal government to ascertain whether or not an asset can be distinguished as security. 

The purpose of a Howey Test is to inform the US government about the nature of certain assets. If the asset passes the Howey Test it can then be considered to be a security. This categorisation of assets carries its own legal frameworks, regulatory standards and requires certain declarations. This can sometimes include but is not limited to, assets disclosure and asset registration. 

When certain transactions are conducted the Howey Test is implemented. This means the asset transaction is assessed on whether or not it qualifies as an ‘investment contract.’ This allows for the financial regulatory bodies to establish if the asset is a security. A security can be loosely defined as a financial instrument that has a monetary value and in the case of a Howey Test, whether or not there is a reasonable expectation of profits from the labours of others. If this reasonable expectation can be established, then the asset is a security.

The financial body that regulates securities and implements the Howey Test is the Securities and Exchange Commission or SEC for short. The SEC is considered to be one of the most important and powerful financial regulatory bodies employed by the US government and much like most financial regulatory bodies, has increasingly turned its attention towards the cryptocurrency community. 

The Howey Test: Regulating the Blockchain Tokens

Cryptocurrency has long eluded centralised financial regulatory bodies, in part because of the new evolving nature of the technology and largely due to the very nature of its design. However, this has not stopped governing bodies or specific actors within the community from attempting to employ a more central form of authority or adherence to more commonplace regulatory standards. In 2017 there was a noted increase in external pressure to apply to Howey Test to crypto-assets and has been met with mixed results. 

It was established by the now-former head of SEC, Jay Clayton, that Bitcoin did not meet the classification of a security and therefore is not respondent to the associated legal and declarative frameworks. However, Initial Coin Offerings (ICOs) and their associated tokens do meet the standards of the SEC’s Howey Test. This is in part because an ICO can be reasonably considered to result in profit derived from the efforts of others and therefore is classified as a security by the SEC.