Coinbase CEO on What a ‘Modern Day Howey Test for Cryptocurrency’ Might Look Like

Earlier this week, Brian Armstrong, Co-Founder and CEO of crypto exchange Coinbase, shared his thoughts on crypto regulation in the U.S.

In a blog post published on 19 December 2022, Armstrong said that, in the wake of the collapse of crypto exchange FTX, the U.S. and other major jurisdictions needed to take the aforementioned steps to “restore trust”:

• “Create regulatory clarity for centralized actors“
• “Enforce a level playing field“
• “Let innovation happen in decentralized crypto“

With regard to the issue of regulatory clarity, Armstrong stated:

“Perhaps the most complex point that needs clarity is around which crypto assets are commodities and which are securities. The CFTC and SEC have been debating this issue in the U.S. for several years now, but unfortunately they haven’t provided any clarity to the market. At this point, it seems clear that Congress needs to step in and pass legislation. This can be done with an updated version of the Howey test that applies to crypto tokens that may fall under the definition of an investment contract.“

Here’s the Coinbase CEO’s proposal for a modern version of the Howey test that could help determine whether a particular cryptoasset is a commodity or a security:

“Was there an investment of money? If the crypto asset issuer hasn’t sold the asset for money for the purpose of building a project, it’s not a security.

“Is the investment in a common enterprise? For a crypto asset to be a security, it must be controlled and operated by a centralized organization like a company. If a project has become sufficiently decentralized, it’s not a security.

“Is there an expectation of profit? If the primary purpose of the crypto asset is some other form of utility (voting, governance, incentivizing actions of a community, etc) then it is very unlikely to be considered a security.

“Are the profits to be derived primarily from the efforts of others? If the expectation of profit primarily comes from participants who are unaffiliated with the issuance of the asset, then the project is sufficiently decentralized and would not be considered a security.“

He then pointed out that “all four of these prongs need to be satisfied for the asset to be considered a security” and “if you just have a few of them, it’s not enough.”

On 7 December 2022, U.S. Senator Cynthia Lummis (R-WY) said during an interview that Ethereum ($ETH) might get called a security by the U.S. Securities and Exchange Commission (“SEC”).

According to a press release issued on 7 June 2022, “U.S. Senators Kirsten Gillibrand (D-NY), member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), member of the Senate Banking Committee, introduced the Responsible Financial Innovation Act, landmark bipartisan legislation that will create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.”

During an interview on CoinDesk TV, Lummis — who plans to reintroduce her bipartisan bill next year — said that “it’s starting to look more like bitcoin is the only thing that would qualify as a commodity,” and that Ethereum might be “a security because of the way [it] moved from proof-of-work to proof-of-stake,” with the “inability to [unstake tokens] right now” making it “susceptible to being [considered] a security.”

On 6 December 2022, while being interviewed by entrepreneur Patrick Bet-David (“PBD”) for episode 212 of the PBD Podcast, Michael Saylor, Co-Founder and Executive Chairman at business intelligence software company MicroStrategy Inc. (Nasdaq: MSTR), was asked what he thinks about Ripple (or rather XRP).

Saylor, who seems confused by the difference between Ripple, which is a FinTech firm specializing in cross-border payment solutions, and XRP, which is a digital asset that is the native token of the XRP Ledger (XRPL), replied:

“Ripple is an unregistered security… There’s a company. The company owns a bunch of it. They sell it to the general public, but they never took the company public. There’s no disclosures, right? So the SEC’s position is ‘you’re selling an unregistered security’. It’s a crypto token, right?

“Just like Ethereum is an unregistered security. It’s controlled by a few people in the Ethereum Foundation and Consensys… Just like FTT. Just like Solana. They’re all unregistered securities…”

PBD then asked Saylor if all altcoins are unregistered securities, why is the SEC going after $XRP and not $ETH.

Saylor answered:

“I think the best thing for the world would be with if the SEC pretty much shut down all of it. It’s all unethical, right? I mean the Bitcoin position would be Bitcoin is an ethical commodity. All of these other altcoins are unregistered securities. They’re all just equity tokens issued by a company in order to get around going public and they’re committing securities fraud, Ethereum included, of course. Especially Ethereum.

“You know, Ethereum’s got 20 billion dollars of $ETH token locked up in the staking contract right now and there’s a couple of people that may or may not give it back to you ever. Now, isn’t that the definition of an investment contract? If a bank took 20 billion dollars of your assets, froze the the window, and said, ‘you can’t have your money back ever, it may be in the year 2024, we’re not sure, we’re just going to keep it, we may actually give you interest on it, we may take it all, we may slash it.

“That’s the definition of a security, right? It’s an investment of money in a common enterprise, relying upon the efforts of others and expectation of profit. The whole point is if you want to crypto asset to be a commodity, you can’t rely upon four, engineers, a company, a CEO. If a person can make a decision, It’s not a commodity.“