Mark Cuban, an American entrepreneur, expressed that determining what constitutes security within the existing regulatory framework of the U.S. Securities and Exchange Commission (SEC) is extremely challenging.

In a recent tweet, he referred to information found on the SEC’s website, specifically mentioning a document regarding the application of the Howey test to digital assets. Cuban suggested that the SEC’s communication regarding this matter has been inconsistent.

“None of the elements presented in this page are part of the registration process. Which makes it near impossible to know, with or without an army of securities lawyers, what is or is not a security in the crypto universe.”

SEC’s digital asset framework

The Securities and Exchange Commission (SEC) has released a 13-page document called “Framework for ‘Investment Contract’ Analysis of Digital Assets,” which guides cryptocurrency companies on determining whether their digital assets fall under federal securities law.

The SEC’s document outlines applying the Howey test to digital assets to determine if they qualify as investment contracts. It also discusses the possibility of re-evaluating assets that were previously classified as securities.

As per the SEC document, digital assets that have fully developed and operational distributed ledger networks, or those used as payment methods or for their intended purposes, are generally not considered investment contracts. However, it notes that there may be exceptions where an asset could still be classified as such if:

the digital asset is offered or sold to purchasers at a discount to the value of the goods or services; the digital asset is offered or sold to purchasers in quantities that exceed reasonable use; and/or there are limited or no restrictions on reselling those digital assets, particularly where an AP is continuing in its efforts to increase the value of the digital assets or has facilitated a secondary market.

The Commission included a precautionary statement stating that the mentioned factors should not be considered as the only criteria for determining if a digital asset qualifies as an investment contract or another type of security, and no individual factor holds complete decision-making power. The document also incorporates detailed footnotes that provide further clarification on its stance.

SEC enforcement proceedings

SEC Chair Gary Gensler has classified all digital assets, excluding Bitcoin (BTC), as securities and emphasized the failure of crypto companies to comply with regulations. During Gensler’s tenure, the SEC has categorized over 60 cryptocurrencies, such as SOL, MATIC, ADA, BNB, and others, as securities.

These actions taken by the SEC have sparked strong responses from various crypto stakeholders who disagree with this extensive categorization and urge for industry-specific regulations. Nonetheless, Gensler firmly believes that the current securities laws effectively regulate the digital assets industry.