Nowadays most governments are yet to react to the emergence of cryptocurrencies with regulations. Currently, people starting a cryptocurrency-related business have to deal with some significant risks because the status of different possible actions with cryptocurrencies is not clear, and even if it seems to be clear, it can change any moment. All the attempts from authorities and lawmakers to clarify the terms on which cryptocurrencies are going to exist can only be met with high interest and gratitude. Like the regulations or not, you should always know exactly what you are going to deal with.

The New Framework

The US Securities and Exchange Commission (or SEC) released a framework aimed to assist people in distinguishing if any digital asset is an investment contract (security) or not. The document (together with an official statement) was published on April 3 under that name of “Framework for ‘Investment Contract’ Analysis of Digital Assets”.

One of the general contributors to the creation of this framework is Senior Advisor for Digital Assets and Innovation Valerie Szczepanik equally known as Crypto Czar. It’s important to realize that officially the U.S. Commission has nothing to do with the document, the framework is yet to be approved, neither was it disapproved.

According to the authors of this guidance, it cannot be the only source of useful information on the legal questions associated with securities, and it’s better to use this framework together with the official rules that can be found on the SEC’s Strategic Hub for Innovation and Financial Technology. Allegedly the framework is rather a helping hand in the analysis in the situation when token issuers or operators of ICOs need to make sure that their actions are not breaking the law because of fitting in the definition of an investment contract.

The thing is that according to the Howey Test that exists for 71 years, the contract qualified as an investment contract if participants invest in a common enterprise hoping for part of the profit made by the enterprise. The framework provides a scrupulous explanation of the principles of the Howey test in its use towards digital assets. Authors warn that in many cases ICOs are associated with ‘common enterprises’, and the operators and issuers should be aware of the consequences.

Over 6 pages are devoted to a really tough issue — “a reasonable expectation of profits derived from the efforts of others”. The authors note that in most cases people don’t know how to treat a digital asset while dealing with the Howey test. One of the most significant parts of the framework is focused on the analysis of the economic nature of the transaction as a phenomenon and the processes driven by coin offering, the plan of distribution, and further perspectives.

“Framework for ‘Investment Contract’ Analysis of Digital Assets” is guidance containing the useful legal information that was long-time awaited by lawmakers and blockchain businessmen because no one wants to deal with troubles with the law but at the same time, cryptocurrencies still exist in the grey area. It makes people nervous.