Regulating cryptocurrencies under the federal securities laws

Abstract

This chapter relates how the SEC characterized the creation and distribution of cryptocurrencies as being equivalent to an initial public offering (IPO) of stocks. The SEC has claimed jurisdiction over cryptocurrency offerings, which it calls “initial coin offerings” (ICOs), through the application of a 1946 Supreme Court decision that is popularly referred to as the Howey decision. That case established a multi-pronged test for identifying a form of SEC regulated “security” called an “investment contract.” This chapter shows how the application of the Howey test to cryptocurrencies is, at best, flawed and how its fails to address the unique market structure of cryptocurrencies. This chapter further shows why cryptocurrencies do not fall within other categories of SEC regulated securities such as “stocks” and “notes.” Finally, it examines the doubtful proprietary of the SEC’s effort to regulate the cryptocurrency market through enforcement actions, rather than through clarifying legislative authority.