When does a Crypto become a Security? (Part 1)
The recent case that the US SEC has filed against Binance and Coinbase has again brought up the issue of a cryptocurrency being considered a security under US law.
The recent case that the US SEC has filed against Binance and Coinbase has again brought up the issue of a cryptocurrency being considered a security under US law.
According to the US Supreme Court's Howey case and subsequent case law, an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
This applies to any crypto also regardless of whether it has any of the characteristics of typical securities.
The Howey test applies to the cryptocurrency itself as well as the manner in which it is offered, sold, or resold.
Here are 20 questions that I use to determine if a cryptocurrency is likely to be considered to be a security under US law.
Q1. Have a significant number of holders purchased tokens from the founding team?
Q2. Did the team carry out a substantial pre-mine?
Q3. Did the team sell pre-mined tokens to fund its operations?
Q4. Was fund-raising the primary purpose of the token sale?
Q5. Were there restrictions on who could purchase tokens during the initial sale of tokens?
Q6. Was there an airdrop where tokens were provided in exchange for personal information and / or promotions by the public?
Q7. Do token holders receive any direct benefits simply for holding the tokens?
Q8. Is there a publicly identifiable team that manages or develops the project?
Q9. Do token-holders get any voting or governance rights?
Q10. Is there a requirement for miners / validators to hold a specific number of tokens?
Q11. Is a publicly identifiable team involved in burning, buybacks, or other methods to improve the market price of the tokens?
Q12. Does the token have clear utility in the working of the project?
Q13. Were any brokers, influencers, or exchanges paid commissions or fees by the project team for enabling sales of the token?
Q14. Did the team make any promises for having the token listed on a centralized exchange?
Q15. Was the project fully operational at the time of the initial sale of tokens?
Q16. Does the team own or control any trademark, copyright, patent, or other intellectual property rights in the project?
Q17. Is the consent of the team needed for implementing any changes to the project?
Q18. Are only the team members substantially involved in the development of the project?
Q19. Is the project managed by the team instead of by a decentralized organization?
Q20. Can the team earn direct revenues (commission, fees, etc.) from the project?
In part 2, I will cover the issue from the point of the Indian Law.
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