Academic Papers

Le Morte De Howie en la Crypto:
How the SEC v. Ripple Case is showing that it is time for the United States to Move Away from the Howie Test in regard to Crypto.

In SEC v. W.J. Howie Co., 328 U.S. 293 (1946), the SEC of the United States won a legal victory which set the standard for what a security was in the United States for the last 77 years. The standard, at the time, was needed as the field of securities had reached the point that regulation was a necessity. The constitutionality of securities law is always questionable, but the Howie standard granted some semblance of regulation to a fairly “Wild West” field. However, as we move into the new digital era is Howie still a “gold standard” for securities regulation, or has it become “Fool’s gold” as the new field of DeFi develops.
The impetus for this brief essay is a statement from the CFTC chair, Ronstin Behnam. Recently Chair Behnam made the statement that the government has authority over “products U.S> customers are being exposed to, rather than the entity offering those products.” This statement, which Behnam based on the Howie Test, violates the roots of the Howie Test chain of caselaw, going back to the Gibbons v. Ogden case of 1824. In Gibbons, the court ruled that Congress has the power to regulate all commercial activity that substantially affects interstate commerce. The ruling in this case was expanded in National Labor Relations Board v. Jones & Laughlin Steel Corp (1937), which stated that indirect activity can also be regulated.
Behnam’s statement comes down to an issue of what Congress has the authority to regulate (as the West Virginia v. EPA case has shown, executive agencies cannot expand that power) goods, or if their power is limited to business activity. As we have seen in Lopez (1995), the courts are very clear that congressional power to regulate interstate commerce is not “unlimited” and that West Virginia v. EPA clarified that even the ability for congress to delegate its authority to regulatory agencies is extremely limited. The court, to date, has avoided the separation of powers issues arising out of delegation of authority to regulatory agencies, along with the separation of powers issues that they create. Returning to the point, it is the activity that congress has tenuous control over- the assertion that a regulatory agency has authority, without clear statement of the law, over a “good” is a statement backed by nothing

1. Edwards, Jim (2023). “CFTC Chair Says DeFi Crypto Exchanges will be Regulated even if they are ‘Just Code.” The Block at www.block.co.
2. Gibbons v. Ogden 22 U.S. 1 (1824).
3. Id.
4. National Labor Relations Board v. Jones & Laughlin Steel Corp. 301 U.S. 1 (1937).
5. West Virginia v. Environmental Protection Agency. 597 U.S. ______ (2022 WL 2347278; 2022 U.S. Lexus 3268).
6. United States v. Lopez. 514 U.S. 549 (1995); See Also West Virginia v. EPA, Supra.

more than conjuncture and speculation on the meaning of clearly defined words. To make it clearer, Behnam’s statement has no basis in the law.
The cryptocurrency market further exposes the problems with the Gibbons Case line and the authority represented by congress to regulate interstate commerce. The original assertion of the congress’s power to regulate interstate commerce comes from the commerce clause of the United States Constitution. Reading, “[The congress shall have the power…] to regulate commerce with foreign nations, and among the several states, and with the Indian Tribes.” The commerce clause is very clear in what it was designed to authorize. As the nation was developing, the States were not “one United States” rather several states formed together in a nation. Each state had large levels of authority over how to conduct its business. Trade between states, therefore, had become a problem under the Articles of Confederation as some states wanted to tariff trade with other states. This was problematic for the young nation, so the drafters of the Constitution created the Commerce Clause. The “identity crisis” of the United States after the Civil War, led to the statement “The United States” rather than the proper terminology “These United States.” As such, the Congress of the United States began usurping state’s rights powers very quickly during the reformation. Many of these usurpations have been struck down by the courts; however, major problems, such as the direct election of senators, have been codified in amendments which have severely undermined the balance of power in between state and federal government- which can be attributed as a factor to many of the problems we see in our nation today.
Under the current case line, Congress has the authority to regulate activities between states for activities that are directly or indirectly related to interstate commerce; however, we need to question whether cryptocurrency falls under that terminology. Firstly, does Congress have the ability to regulate contracts between individuals if the individual is using a digital portal to “access” the point? This question is very difficult to place under the commerce clause as “the cloud” has moved beyond specific servers in the world. This draws a very clear question of, “Does the data cross state lines for transfer.” Data, as you may be aware, becomes transferred through the wires and waves of the world as a signal based on alternating current. This means that the “data” never moves more than a fraction of a millimeter when it is being transmitted. Even so, it is more akin to telecom, rather than “business activity.” Herein lines the problem for the federal government, well the first problem, if the data of cryptocurrency functions like a telecom signal, is transmitted via telecom signal, and is received like a telecom signal- then it is functioning more like speech than like business activity. The government knows that if cryptocurrency (and currency in general under Citizens United) is treated as speech, then it is protected under the First Amendment, which brings it out from under the Commerce Clause.

7. Art 1 §8 c.3.
8. Id.
9. Library of Congress (2021). “Identifying Defects in the Constitution.” At https://www.loc.gov/collections/continental-congress-and-constitutional-convention-from-1774-to-1789/articles-and-essays/to-form-a-more-perfect-union/identifying-defects-in-the-constitution/.
10. Id.
11. Lopez, Supra.
12. Citizens United v. Federal Elections Commission, 558 U.S. 310 (2010). The court held 5–4 that the free speech clause of the First Amendment prohibits the government from restricting independent expenditures for political campaigns by corporations, including nonprofit corporations, labor unions, and other associations. The decision overturned the Bipartisan Campaign Reform Act of 2002's restrictions on corporate and union spending for independent expenditures for political campaigns. The decision has been controversial, with critics arguing that it has led to an increase in the influence of money in politics. This case established that spending of money is a form of speech, whose restriction could not be limited under the First Amendment.

The second major problem comes from the Commerce Clause itself. The text states, “to regulate commerce with foreign nations, and among the several states, and with the Indian Tribes” but it does not state individuals. While it can be argued that individuals moving products across state lines is a “related activity,” in the process of cryptocurrency- nothing is moving. Our portals (exchanges, wallets, etc.) give us access to digitally go to the location of the cryptocurrency on the blockchain. The currency remains on the blockchain, therefore it does not move. The human being trading the currency does not move. Therefore, what is crossing state lines that the government is regulating? All items remain in their location- therefore, the movement needed in the commerce clause is not present at all.
But the rabbit hold goes even further. In their argument that they should be allowed to regulate cryptocurrency under the Commerce Clause and the Howie test, the SEC and CTFC are stating that cryptocurrency is either a security or a commodity. The commodity argument needs to be dispelled entirely, and the security argument only applies in a minority of cases. The elimination of these two misconceptions can allow cryptocurrency to be regulated as it should be, through traditional contract law with normal AML/anti-terrorism/anti-fraud protections.
As for the claim that cryptocurrency is a commodity, it is not. According to Corporate Finance Institute, “[Commodities] are the raw materials needed by large manufacturing companies in running their businesses.” This is the general trade definition used globally. Under U.S. Law, however, there are two conflicting definitions of commodity. Under 22 CFR § 228.01, commodities are defined as, “any material, article, supply, good, or equipment.” Under the same section, commodity-related services are “delivery services” defined as “any service customarily performed in a commercial export or import transaction which is necessary to affect a physical transfer of commodities to the cooperating/recipient country.” or “incidental services” defined as “installation, erection, maintenance, or upgrading of USAID-financed equipment, or the training of personnel in the maintenance, operation and use of such equipment, or similar services provided for the authorized disposition of such commodities.” Cryptocurrency is not a good based supply, nor an article, nor a piece of equipment, thus cryptocurrencies do not fall under the commodities definition. Looking at the commodities-related services, they do not affect the “physical transfer of commodities” as there is no physical presence, nor do they assist in the “installation, erection, maintenance, or upgrading of services for the distribution of commodities.” Hence, the CFTC (the commodities authority) should have no involvement with cryptocurrencies unless they intend to use them for business purposes.
The second definition, 7 U.S. Code § 1a §§ 9 states:
“The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice,

13. Art 1 §8 c.3.
14. Staff (2022). “What are Commodities?” Corporate Finance Institute at https://corporatefinanceinstitute.com/resources/commodities/commodities/.
15. 22 CFR § 228.01.
16. Thus no authority to regulate.

and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.”
Because crypto is not an item listed in the definition, it does not fall in this category. Further, the concept that “any index, measure, value, or data related to such receipts…” is excluded, speficially, from the definition, increases the argument that data transfers and indexing of those data transfers do not fall under the scope of 7 U.S. Code §1, which would move cryptocurrency beyond the Security Act of 1934.
The argument for securities, however, is more complex. One of the key problems presented is that cryptocurrencies are not all of the same type. The key types are governance tokens/coins, exchange tokens/coins, Stablecoins, NFTs, SFTs, and meme coins. To properly walk each of these through the Howie Test, is the only way to categorize these macro categories. The Howie Test functions as the following with each macro category:
1. An Investment of Money- Investment is putting money into a certain asset with the expectation of revenue. One of the clear problems here is most people use crypto to invest in crypto (which has amazing tax implications to protect people from tax debt.) Therefore, only in cases where the majority of transactions are for fiat currency can ANY crypto be considered an investment under this definition. The breakdown by macro category is:
a. Governance Coins/Tokens- Governance tokens are purchased with the intent of having some say in the control of an organization, the question of whether the is intent of generating revenue, therefore is derivative of the purpose of the organization. (outcome-some pass/some fail).
b. Exchange Coins/Tokens- Exchange coins and tokens are used to exchange for goods, which is a method used by individuals to “gain benefit) (outcome- pass).
c. Stablecoins- Stablecoins are designed to hold value against a fiat currency or basket of goods, which is a stabilizing investment (outcome-pass).
d. NFTs- NFTs are a trade good, to argue that they are an investment would make all trade good investments such as artwork, trading cards, etc. investments not products. (Outcome-Fail).
e. SFTs- Semi-Fungible tokens are used for a variety of means and how they are used dictates whether they are an investment or not (outcome- some pass, some fail).
f. Memecoins- Memecoins are a speculation vehicle, more like a casino token than an investment. The expectation of loss is higher than the expectation of revenue, therefore they are not really investments (outcome-fail).
2. In a Common Enterprise- Common enterprise is one of the most important terms in the Howie test. Enterprise under 29 CFR §794.106 means “the related activities preformed (either through unified operation or common control) by any person or persons for a common business purpose.” This sets the stage for what is a “common enterprise” what is not.

17. 7 U.S. Code § 1a §§ 9.
18. Wex Law Cornell.
19. Assuming that the majority of transactions are for Fiat.

a. Governance Coins/Tokens- Governance tokens have the common level of control needed to be a common enterprise (outcome-pass).
b. Exchange Coins/Tokens- Exchange coins that are not governance tokens do not have any control, therefore they fail that element of 29CFR §794.106 (Outcome-fail).
c. Stablecoins- Stablecoins are a pure currency, therefore they do not vest control over the controlling body (outcome-fail).
d. NFTs- NFTs convey complete rights and control over the subject matter; however, this is not a common enterprise as they are not working with anyone else (outcome-fail).
e. SFTs- SFT’s need to be judged on a case by case basis (outcome- some pass, some fail).
f. Memecoins- memecoins give an illusion of community control; however, do not convey actually voting rights within the code of the coin/token (outcome-fail)
3. With the Expectation of Profits- The expectation of profit is that the value of the asset will rise in relation to the amount invested.
a. Governance Coins/Tokens- As governance tokens are treated largely as digital shares, the investors expect that they will grow in value (Outcome-pass).
b. Exchange Coins/Tokens- Exchange tokens are expected to increase in value the more they are used (Outcome-pass).
c. Stablecoins- Stablecoins are not to increase in value, but hold their value (Outcome-Fail).
d. NFTs- NFTs are expected to increase in value (Outcome-Pass).
e. SFTs- SFTs expectations depend on the nature of the SFT (Outcome- Some Pass, Some Fail).
f. Memecoins- People always expect memecoins to grow in value (Outcome-Pass).
4. To be Derived from the Efforts of Others- The work of others means that the work is done by another person, contractor, or sub-contractor- not through mechanical means.
a. Governance Coins/Tokens- The management of the company is done through the common enterprise. (Outcome-Pass).
b. Exchange Coins/Tokens- The work is done by the smart contract (Outcome-fail).
c. Stablecoins- The work is done by the smart contract (Outcome-fail).
d. NFTs- The Work is already done at the point it is sold, therefore it is based on the market. (Outcome-pass).
e. SFTs- The work is done by the smart contract (Outcome-fail).
f. Memecoins- The work is done by the smart contract (Outcome-fail).
As you can see the arguments for each macro-category by the government are:
1. Governance Coins/Tokens- Many governance tokens pass the Howie test and should be considered securities and therefore fall under the purview of the SEC; however, each token should be looked at on a case-by-case basis.
2. Exchange Coins/Tokens- Exchange coins fail test 2 and test 4 of the Howie test; therefore, should not be considered securities.
3. Stablecoins- Stablecoins failed test 2, 3 & 4 of the Howie Test, therefore are not securities.
4. NFTs- NFTs fail test 1 and 2, while there is an argument that people are working with the authors/artist/composers to make a common enterprise, it is difficult to state they are anything

20. Law Insider (2023). “Work Definition” at https://www.lawinsider.com/dictionary/work-by-others.

other than a trade good like a collectors card. As the government has refused to see these as securities, any claim on NFTs is dubious.
5. SFTs- SFTs need to be looked at on a case by case basis, no blanket statement can be made.
6. Memecoins- Memecoins fail test 1, 2 and 4, thus should not be considered securities.
If the community would work with the government for these expectations to be accepted, the system could become more streamlined.
In conclusion, Howie has its place in the world, just not in the digital world. For the vast majority of cryptocurrencies, the binding law is already in place- contract law. Making things more complex for people who should not be investing in something that they do not understand defeats the purpose of protecting investors. If the CFTC and the SEC concentrated their efforts on educating people how to find good cryptocurrency companies and how to avoid the bad ones, then millions of people could enjoy an opportunity to find new wealth. The current process is simply legal king-making and attacking of the system for political gain. There is a bright future in the digital frontier, we just need the opportunity to explore it.

Thank you for reading!