Coin Center Updates Its Securities Framework for Cryptocurrencies

Blockchain advocacy group Coin Center continues to believes some cryptocurrencies look like securities by law, and should be regulated as such.

Peter Van Valkenburgh, the organization's director of research, published a new report Friday arguing that certain cryptocurrencies follow the oft-cited Howey Test and act as investment contracts. As such, he wrote, they should be treated as securities.

The report updates a 2016 version, which laid out a possible framework for regulators in determining whether any given cryptocurrency should be a security according to the Howey Test.

The framework examines three variables that Van Valkenburgh believes are important for determining whether a cryptocurrency is a security: "distribution, decentralization and functionality." Specifically, he says, how a token is initially distributed, how decentralized its underlying network is and what powers or rights token holders have should determine whether it is a security.

He wrote:

"We find that larger, more decentralized cryptocurrencies — e.g. bitcoin — pegged cryptocurrencies — i .e. sidechains — as well as distributed computing platforms — e.g. ethereum —do not easily fit the definition of a security and also do not present the sort of consumer risk best addressed through securities regulation. We do find, however, that some smaller, questionably marketed or designed cryptocurrencies may indeed fit that definition."

The new version more closely examines initial coin offerings (ICOs) than the original, perhaps reflecting the fundraising method's spike in popularity last year. ICOs raised $46 million in 2016, less than one-tenth of the more than $5 billion raised in 2017. It also provides more in-depth explanations of alt-coins and how they may fit into the framework.

Van Valkenburgh also notes the rise in airdrops and ERC-20 tokens, writing that "several networks, most prominently ethereum, are designed to empower their users to create further bespoke tokens 'on top of' the parent network. The minting and transmission of these new tokens and their use is policed and described by the consensus mechanism and blockchain of the underlying network."

Like the previous version, Van Valkenburgh then outlines possible risks to investors, providing suggestions on how to protect them without hurting innovation.

House framework image via Shutterstock