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  • Writer's pictureDanny J. C.

Regulating Virtual Currencies

In the states, the U.S. Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have taken the lead to regulate digital currencies at the federal level in regards to trading of and investing in digital currency derivatives. The ultimate goal is to educate and protect investors. Firms and projects aiming to pursue a Security Token Offerings (STO) to tokenize their equity or other assets for sale, will need an STO Advisory to strategies and help identify regulatory requirements.


The CFTC has extended supervisory authority over the trading of digital currency derivatives and has supported self-certification of new digital currency derivatives contracts. CFTC defined virtual currencies as “commodities”: In 2015, the CFTC issued an Order that found "virtual currencies" to be commodities under the Commodity Exchange Act (CEA),2 which subjects the trading of related derivatives to CFTC jurisdiction and requires a trading platform to register as a Swap Execution Facility or Designated Contract Market.


The SEC's actions related to virtual currencies have focused on anti-fraud and securities registration issues. On July 25, 2017, the SEC issued a report on ICOs and "token sales" used to raise capital for investments in projects and stated the conditions for when tokens offered in these ICOs were securities and therefore subject to the federal securities laws. The SEC noted that not all tokens are securities and applied its three-part Howey Test to define an investment contract.

The Howey Test

The Howey Test was born in 1946 when a case involving the SEC had to be settled in the Supreme Court. The lawsuit involved the Howey Company based in Florida – a citrus farm that operated on a large piece of land in the southern portion of the state, which in a bid to raise more funds for additional development, decided to lease out half of the farm to visitors. The company targeted tourist that were staying at a hotel that was owned by Howey Co. and sold land plus service contracts for producing, harvesting and marketing citrus fruits in Lake County, Florida. The SEC sought to understand if the land purchase plus the service contract had created an investment contract. According to the Securities Act of 1933 and the Securities Exchange Act of 1934, any transaction that qualifies as an “investment contract” can be considered as security, and this means they are subject to specific requirements with disclosure and registration. The court would eventually agree that the agreement was an investment contract and come up with the Howey Test to determine whether things that don’t look like securities can, in fact, be seen as securities.

The test comprises of the components:

  1. There is an investment of money

  2. The investment comes with the expectation of profit

  3. The expectation of the profit is based on the efforts of others

  4. The investment is in a common enterprise

In regards to the Howey Company, the court determined that since the purchasers of the Howey land had no “knowledge, skill, and equipment to care and cultivate the citrus trees,” they acted as speculators. They bought the property based on the assumption that it would generate a profit for them as a result of the efforts of other people. The court would also determine that the transactions involved in the case were indeed investment contracts since the company was offering something more than simple interests in land, they were providing an opportunity to contribute money, and in return, they would get a share of profits of a large citrus fruit enterprise.

Eventually, the company was found in violation of the law for failing to register the transactions with the SEC.

The Howey Fact vs ICO Fundraising

Using the test, the SEC seeks to understand if cryptocurrency investors (ICO and STO) are participating in a speculative enterprise.

  • Howey Co. every year planted about 500 acres annually and kept half of the groves to itself and offered the other half to the public < > ICO issuers dedicate only a portion of the total allocation for sale to the public. The remaining tokens are given to the founding team of the ICO, advisors and bounty programs

  • The Howey leaseback aim was to help the company finance additional development < > The aim of ICOs is to raise capital to develop a platform or protocol often from scratch

  • The Howey Co. land sale contract offered a uniform purchase price per acre or fraction of the land < > During an ICOs tokens are sold at fixed prices

  • Of the 500 acres available for sale every year, the average investor held only 1.33 acres. There was also the sale of smaller fractions of land. All in all, the scheme was more like a crowd sale < > ICO public sales are also structured as crowd sales with the average investor purchasing a fraction of the total token offering

  • The purchasers were people of different backgrounds that lacked the knowledge, skill, and equipment that was necessary to care and cultivate the citrus trees < > Many of the people that buy tokens don’t have the technical, economic business and financial background that is necessary to understand the token economics that they are subscribing to

  • There was speculation with profits in 1943-1944 expected to be 20% and even greater the following year < > Some ICOs also make speculations about their tokens with investors made to believe they will appreciate in value

Are All Cryptocurrencies Securities?

Security tokens offer their holders’ ownership rights in a company. According to the Howey Test, this makes clear security since there is an investment of money and a profit is expected. Also, the gain is based on the labor of others (if the project is to succeed).

Utility tokens usually represent a unit of account within a network. The more the system grows so does the utility of the token. As the network grows in size so does the transaction volumes, and this increases demand for the tokens. So, are utility tokens also securities?

✓An investment of money. ✓Expectation of profit. And even though a utility token may not represent shares in a company, they usually ✓grow in value. This will lead to ✓profit in the future for token holders. That profit is also based on the ✓labor of others. Hence, utility tokens likely are securities as well.

Who can help your firm understand and strategize?

Moonwhale Ventures is a global 100% Blockchain Advisory company covering multi-industries. Moonwhale offers advised projects on their Security Token Offerings (STO) Investment and Issuance Platform to institutional investors. We are focused on STO and SMEs/MNCs primarily, which is projected to capture a USD10tn market by 2020 through 'tokenization of assets' for growth-financing.

The End-to-End Security Token Offering Investment and Issuing Platform that will cater to investors looking to invest in STO projects, and to companies looking to raise capital through STO´s to finance business expansion or new ventures. Investors will be presented with vetted projects incl. due- diligence reports and will be able to manage their investments through our platform. Companies will be offered strategic advice on STO process & structure, as well as token issuance incl. lifecycle management and secondary market on-boarding for our projects.

Moonwhales' current client MoneyFi by Odyssey Finance Group (US) will purse a STO to fuel its growth and expansion in the global remittance market, supported by its existing infrastructure of BTC/Fiat Hybrid ATM's and their Banking system in South and North America, Africa and Europe:

#IWSFinTech consults on and develops disruptive technologies such as FinTech or Blockchain (project management/product). IWS FinTech focuses on next-generation technologies that will impact lives in the next decade.

Partner with the world’s leading corporates to support start-ups / SMEs through co-development and co-creation. At the same time, our corporate partners are able to inject new technologies and innovations into their existing businesses.

IWS develops proprietary software products; and consults your company or start-up on development through

1) Guidance on corporate structure, equity planning, business model, product-market fit, marketing, branding, finance, legal, pitch deck, valuation, capital raise planning, media training,

2) Mentoring through our network of successful entrepreneurs, industry, finance, and investor relations experts, and

3) Resources such as facilities support, market expansion & landing, business partners, government & academia resources, investor relations, media relations, accounting & legal services, etc.

Source: Investopedia, KPMG, IWSFinTech


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