Digital Asset Regulation: Cryptocurrency Smart Contracts and Securities Law

The Securities and Exchange Commission has a long history of regulating interstate transactions. However, the meteoric rise of digital exchanges has presented the governmental organization with significant regulatory challenges. The SEC currently lacks an effective protocol for regulating commerce on digital exchanges. Notably, legislation classifying cryptocurrency as a security does not exist. This research project will first conduct a literature review of the current Supreme Court jurisprudence. Beginning with the review of SEC v. Howey (1946). This case is a seminal piece of precedent and is still used to determine the classification of assets. This landmark case involved the sale of orange grove units and a dispute about whether or not the sale constituted an “investment contract.” Upon examining the facts of the case, the Supreme Court determined that the sale of orange grove units did constitute an investment contract. The Court created a test to determine whether or not an asset is sold as an investment contract. First, there must be a payment of currency from one party to another. Second, the exchange must occur in a common enterprise. Finally, there must be an expectation of future profits for an investment contract to exist. This note will examine the factors of the Howey test, created by the Supreme Court, and apply the test to cryptocurrencies. Furthermore, this presentation will review recent judicial precedents about the XRP ledger. The New York Senate is currently considering legislation that will aid in limiting securities fraud. This legislation is effective because it defines different types of cryptocurrency fraud, including rug pulls. Thus, this presentation formally recommends adopting the New York statute’s definition of rug pull, securities token, and developer.