Congress can do better than the Howey test for crypto regulation
Cryptocurrencies are generally not subject to federal regulation unless they are deemed to be “securities,” in which case the Securities Act of 1933 requires them to abide by disclosure requirements and antifraud regulation by the Securities and Exchange Commission (SEC) if they are offered to the public. The test the SEC uses to determine whether a cryptocurrency is a security was laid out by the Supreme Court in Securities and Exchange Commission v W. J. Howey Co. If the SEC asserts that a cryptocurrency is a security, an alleged issuer seeking to challenge that contention must litigate. The criteria contained in the so-called Howey test are irrelevant to any rational public policy reason to regulate cryptocurrency. Yet, cryptocurrency companies are forced to spend millions in legal fees to seek to demonstrate that their products do not meet these criteria. Howey, of course, did not deal with cryptocurrency or any other form of modern technology. Rather it dealt with a 1940’s era scheme to market units of a citrus grove in Florida coupled with a contract for cultivating and marketing the grove’s fruit and paying the profits to investors.