A Regulatory Classification of Digital Assets: Toward an Operational Howey Test for Cryptocurrencies, ICOs, and Other Digital Assets

51 Pages Posted: 17 Oct 2018 Last revised: 23 Jul 2019

See all articles by M. Todd Henderson

M. Todd Henderson

University of Chicago - Law School

Max Raskin

New York University School of Law

Date Written: October 10, 2018

Abstract

Digital assets are hot right now. Whether cryptocurrencies, like bitcoin, or initial coin offerings and tokens, this new asset class has captured the imagination of American investors. While it remains to be seen if this phenomenon has staying power, there is no doubt that these assets and their promoters have attracted the attention of the Securities and Exchange Commission. But neither Congress nor the SEC has formally elucidated which digital assets are securities and which are not.

This Article seeks to provide clarity in determining which digital assets are securities. It proposes two tests that operationalize the Supreme Court’s test in SEC v. W. J. Howey Co. The first test is the Bahamas Test, which asks whether a digital asset is sufficiently decentralized such that it is not a security. The second test is the Substantial Steps Test which is used to determine whether an investment is made with an expectation of profit. This Article takes a rules-based approach to provide clarity and begin a conversation about crafting more predictable jurisprudence and regulation in this area.

Keywords: cryptocurrency, initial coin offering, securities regulation, Howey, digital asset

Suggested Citation

Henderson, M. Todd and Raskin, Max, A Regulatory Classification of Digital Assets: Toward an Operational Howey Test for Cryptocurrencies, ICOs, and Other Digital Assets (October 10, 2018). 2019 Columbia Business Law Review 444; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 858; U of Chicago, Public Law Working Paper No. 683. Available at SSRN: https://ssrn.com/abstract=3265295 or http://dx.doi.org/10.2139/ssrn.3265295

M. Todd Henderson (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)

Max Raskin

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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