The recent lawsuit filed by the US Securities and Exchange Commission (SEC) against Binance, its CEO Changpeng Zhao and Binance US has caused a stir in the crypto community.. From the organization behind the development of Cardano express that ADA is not a security. Given these statements and the rise within the Cardano community, in this article we will show what the role of the SEC has been and if the Court has the power to define whether it is a “security” in these cases.
The SEC explicitly labeled 12 tokens, including ADA, SOL, MATIC, and MANA, as securities. However they insist, from the Cardano community, clarify that it is important to note that the SEC classification does not have the last word. The determination of whether a token is a security is a matter that must be decide a judge in the judicial system, not a regulatory agency.
Although the SEC affirms that it is a security, it is relevant to note that so far there is no lawsuit directed specifically at the ADA itself, and no legal proceedings have been carried out in court to determine its status.
From the crypto community they argue that ADA has characteristics more similar to a commodity than to a security. ADA serves as a utility token within the Cardano ecosystemgranting holders access to the network functionalities and participating in the governance of the platform.
Input Output Global (IOG), the firm behind Cardano, has responded on the SEC’s assertions saying that: “Under no circumstances is ADA a security under US securities laws. It never has been”, the statement continues, saying that: “This latest SEC filing demonstrates that We still have a long way to go in this sense”.
From the community they assure that the main purpose is not to generate profits for the holders, but to facilitate transactions and secure the chain of blocks. These features align ADA more closely with commodities, which is nothing more than a raw material that is used for another product, such as more familiar commodities, such as gold or oil, that have inherent value and utility.
To better exemplify this position, it is pertinent to explain that, Gold by itself only has intrinsic value as a valuable mineral, but it also has underlying value as a raw material to be a conductor of energies., For example. The same happens with oil and many others “commodities or merchandise”.
Role of the SEC
SEC Chairman, Gary Gensler, has raised concerns about the regulatory approach towards cryptocurrencies. His comments and actions have generated controversy, with many in the cryptocurrency industry feeling that his stance is too aggressive.
By labeling ADA and other tokens as securities without legal resolution, Gensler’s approach raises questions about the limits of the SEC’s authority.assure members of the Cardano community.
The determination of whether a token is a security must be based on a careful examination of its characteristics and purpose, rather than a broad generalization covering everything other than bitcoin.
With Gensler’s approach potentially hindering innovation and driving companies away, The US risks being left behind in this innovative new field that has the potential to reshape finance and many other industries.
Regulators must strike a balance between protecting investors and enabling technological advancement, creating an environment in which innovation can thrive without stifling it with excessive regulations.
The global landscape of cryptocurrency and blockchain innovation is rapidly evolving. Countries like Switzerland, Singapore, and the United Arab Emirates have adopted cryptocurrency-friendly regulations.fostering an environment that attracts entrepreneurs, companies and investments in the crypto space.
The role of the Supreme Court
As previously mentioned, The SEC has the ability to interpret the rules on the “values or securities”, but it is the Supreme Court of Justice that determines, through a court rulingwhich element, stock, bond or instrument is considered a value.
In a simple and orderly way, Next, specific cases will be named that make up the doctrine used by the Supreme Court to determine if there is indeed a “security” or not in certain cases that the SEC has tried, such as the case of Ripple or that of Tron, Binance, Coinbase, Bittrex among others.
The Supreme Court, in the case SEC v. W.J. Howey Co., 328 US 293 (1946)established the definition of the investment contract as follows: any transaction in which “a person invests money in a joint venture and expects to make a profit solely through the efforts of others”.
From this definition, four fundamental elements can be highlighted: 1) Investment in money, 2) Joint venture, 3) Expectation of earnings, 4) Effort of others. These elements constitute what is known in the values doctrine of the United States as the “Howey’s test”. This test is applied when you want to determine if a transaction is considered a “investment contract” and is therefore classified as a “worth”.
The first thing to take into account is the temporality of the sentence, for 1946 the “money“was the form of investment, since there were no electronic transfers, bonds or other forms of investment automatic. Therefore, the first element is currently referred to any type of investment with the intention of obtaining profits from that investment.
The second element, having mixed opinions regarding the joint venture, it can be divided into two main categories: horizontal and vertical. The joint venture is considered horizontal when there are multiple investors who share common interests in a business project.
On the other hand, it is considered vertical when there is a single investor whose interest is aligned with the investment manager. An illustrative example of a horizontal common undertaking is found in the case Curran v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216, 224 (6th Cir. 1980), aff’d and other grounds, 456 US 353 (1982)where it was established that “There can be no horizontal joint venture unless there is some relationship linking the success of the venture to the fortunes of each investor.“.
As for the vertical joint venture, the courts have not reached a unanimous consensus on whether it is sufficient to satisfy the Howey test requirement. Some courts have even made a distinction between two types of vertical joint ventures. However, a broader definition of a vertical joint undertaking -see Michigan v. Art Capital Corp., 612 F. Supp. 1421, 1427 – SDNY (1985)- establishes that a common enterprise exists when the fortune of the investor (or investors) is linked to the effectiveness of the promoter’s efforts.
In reference to the expectation of earnings, the Supreme Court in the case of Goodman v. Epstein, 582 F.2d 388 (7th Cir. 1978)established two different forms of profit that fit the Howey’s test: 1) the capital appreciation as a consequence of the development of the initial investment and 2) the profit sharing derived from the use of investor funds.
In said judgment, the Supreme Court delineated these two types of profit that are evaluated under the criteria of the Howey test. First, capital appreciation is recognized as a gain generated by the increase in the value of the initial investment.
This can be due to various factors, such as market growth, business development or improvement in asset value. In summary, A gain is considered when the original investment increases in value over time..
On the other hand, the Court also pointed out that the participation in profits resulting from the use of investor funds constitutes another form of profit. This implies that investors benefit from the earnings generated through the use of their funds in a certain project or company.
If investors contribute capital and that investment is used to generate profits, they are entitled to receive a portion of the profits based on their participation in the investment.
These two forms of profit, established in the case of Goodman v. Epstein, are critical in determining whether an investment meets the requirements of the Howey testwhich is used to assess whether certain transactions qualify as securities under United States securities law.
To finish with the fourth element, the Supreme Court, in the Howey case, established that profits must come exclusively from the efforts of others. However, lower courts have recognized that the efforts made by investors in the joint venture can contribute to generating profits. However, it is crucial that the efforts of the managers are predominant, while the investors mainly adopt a passive role.
As set forth in the Howey case, generating returns on an investment requires investors to rely on the labor and efforts of others to obtain returns.
Despite this, lower courts have interpreted that, in certain cases, the efforts of investors can also contribute to the success and profits of a joint venture.
In this sense, although the active participation of investors in the development and operation of the company is admitted, it is crucial that the efforts of the administrators are predominant.
This implies that administrators must assume a central role in decision-making and the strategic direction of the company, while investors play a more passive role, trusting in the professional management of administrators..
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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