With the SEC ruling today that “Ethereum and Bitcoin are not securities”, the question naturally arises, “How do I know if a currency can be classified as a security or not?”

In an interview with Peter Van Valkenburgh, Coin Center research director, he was asked about the SECs latest ruling and how transactions involving Ether aren’t subject to federal securities rules.

Valkenburgh started off by stating the bare requirements for determining whether a blockchain token can be classified as a security or not. He added that all standard evaluations are done in conjunction with a flexible court standard that has been derived from something known as the Howie Test.

When viewed from the context of blockchain tokens, the Howey test expresses itself via its core tenets that include:

  • Is the token an investment of money?
  • Is the currency going to be used within the context of a common enterprise?
  • Does the investment rely on third-parties for an expectation of profit?

The third element encompasses both the third and fourth prongs of the traditional Howey Test.

However, Valkenburgh did admit that the test has its limitations and professional bankers and lawyers will not be happy with such an evaluation since it leaves a lot of room for legal flexibility and interpretation.

Final Take

As with any new technology, things are bound to be murky at the earliest stages of adoption. However, people like Valkenburgh are confident that once certain legal definitions regarding currencies such as Ethereum, Bitcoin, and Ripple are set in stone, it will become much easier for enthusiasts to adopt these assets into their everyday lives.

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