Around the block

Highlights:

What is a security and what is the Howey test?

Defining if a financial asset is a security is central to crypto regulation. In its most ambitious effort yet, the U.S. House unveiled its discussion draft bill (p. 2) in early June that included a “refreshed” definition of digital commodities and digital securities. The current law that determines if a financial asset is a security traces back to a 1946 Supreme Court case; the SEC vs. W.J. Howey Co.

Howey Co., the defendant, sold land with citrus groves to buyers lacking agricultural expertise, who then leased the land back to Howey to cultivate the citrus groves, sell the citrus and then share profits with the buyers. The Supreme Court found in favor of the SEC and defined 4 required elements of an investment contract that must be met to be deemed a security under SEC jurisdiction. The four elements are:

• An investment of money
• In a common enterprise
• With an expectation of profit
• Derived from the efforts of others

The House draft bill offers a contemporary refinement to the Howey test, distinguishing between commodities and securities, and clarifying their respective regulators.  This is at odds with the SEC who has cast a wider net to capture most digital assets. Markets remain hopeful this initiates a constructive dialogue that can lead to smart legislation.

Chart of the month – Bitcoin volatility in decline

High volatility has historically been a feature and one of the primary risks of investing in bitcoin. Elevated volatility has been the price of admission for speculators seeking profit, but a deterrent to risk-averse long-term investors. After an explosive 60% rally to begin 2023, bitcoin has remained in a tight range for the last 90 days.

• Current volatility levels are half 2020 and 2021 peak levels.
• Bitcoin volume has plummeted since March as shrinking liquidity in our financial system has discouraged many traders.
• Only three other occasions in Bitcoin’s limited history (2015, 2017 and 2020) have seen volatility levels as low as today and each was followed by an explosive rally.