• 14 October, 2024
News

Crypto Community Debates Howey Test’s Fifth Prong Amidst Legal Battles

Crypto Community Debates Howey Test’s Fifth Prong Amidst Legal Battles

In recent crypto-related lawsuits, legal experts and observers highlight an intriguing aspect of the Howey Test. The fifth prong of this test, introduced by Bill Hinman, former director of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance, is emerging as a focal point in the ongoing debates surrounding regulating digital assets.

The controversy surrounding the fifth prong centers on its application by the SEC, seemingly leading to Bitcoin and Ethereum being treated differently from other cryptocurrencies. Renowned blockchain entrepreneur and legal expert Steven Nerayoff argued in X (formerly known as Twitter) that this selective approach raises questions about the validity of this “agency created law.”

The Howey Test, a legal framework used to determine whether a particular investment qualifies as a security, has five key prongs. The fifth prong, proposed by Hinman, focuses on the expectation of profits from the efforts of others. While Bitcoin and Ethereum have been exempt from this classification, other digital assets have been less fortunate.

The discussions surrounding the fifth prong have ignited a debate over the perceived inconsistencies in the SEC’s regulatory approach. Some suggest that the agency’s decisions, particularly in the case of Ethereum, may be based on something other than a solid legal foundation.

John E. Deaton, a distinguished attorney and prominent champion of crypto rights, has also voiced inquiries. In a recent tweet, he questioned whether individuals in positions of influence, like William Hinman, Marc Berger, and Jay Clayton, may have hidden agendas. He highlighted encounters between pivotal figures in the crypto sphere, particularly Hinman’s engagements with Ethereum co-founder Joseph Lubin and his affiliations with a16z crypto.

https://twitter.com/JohnEDeaton1/status/1702884664388489421

While some dismiss these concerns as baseless, the ongoing legal battles and public scrutiny indicate that the crypto community demands more clarity and transparency in applying the Howey Test’s fifth prong. As these legal disputes unfold, the crypto industry awaits potential legal precedents that could redefine the regulatory landscape and bring greater consistency to treating digital assets under securities laws.

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