What Is the “Howey Test” and How Is It Applied to Cryptocurrencies?
The Howey Test is a US Supreme Court standard used to determine if a transaction qualifies as an "investment contract" and is thus subject to securities laws. It requires an investment of money, in a common enterprise, with an expectation of profit, derived solely from the efforts of others.
Regulators use this test to classify certain tokens, especially those from Initial Coin Offerings (ICOs), as securities.
Glossar
US Supreme Court
Jurisdiction ⎊ The US Supreme Court’s relevance to cryptocurrency, options trading, and financial derivatives stems from its ultimate authority over interpreting constitutional law and federal statutes impacting these markets, particularly concerning regulatory overreach and investor protection.
Initial Coin Offerings
Capitalization ⎊ This initial fundraising mechanism serves to bootstrap the network by distributing the native asset to early investors in exchange for capital, often fiat or established cryptocurrencies.
Howey Test
Test ⎊ The Howey Test is the seminal legal methodology, derived from a 1946 Supreme Court case, used to ascertain if a transaction involves an "investment contract," thereby classifying the underlying asset as a security.