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October 16, 2018

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EtherDelta and Crypto Exchange Regulation: Day Two

November 9, 2018


Yesterday, we shared the news with you that EtherDelta was charged with being an unregistered securities exchange, chiefly due to the SEC determining that some of its hosted Crypto assets were clearly securities. Now, a day later, Coindesk has already reported that more crackdowns on Crypto exchanges may be on the way, according to insider sources.


With this, logical questions to raise include: who are these sources and if this is true, what platform might be next to fall?


 As to the first question here, Coindesk’s primary source that has most directly influenced their report on the subject is Andrew Hinkes, a law professor at New York University. In today’s article, he is quoted as suggesting that facilitating the exchange of crypto assets is most likely being treated the same as facilitating the exchange of securities. Therefore, if we take this to be true, we can then say that unregulated Crypto exchanges are violating securities laws. Central to this possibility is the fact that regulators have been using the Howey Test since about 1946, to determine whether an investment product is or is not a security. In fact, if we take the 2017 DAO hack as our primary example here, we can also conclude that the Howey Test is now being applied to Cryptocurrencies as well.


In remembering what the Howey Test is, it may be easier to apply this logic to a decision like yesterday’s charges against EtherDelta. Because of how it has been applied over time, this test has been distilled into three main criteria for whether or not something constitutes a security. First, if it is clear that profits are promised from the undertaking, then it is a security. Second, if the investment is made in one clear business of some kind, it can be defined in the same way. Third, if it can be proven that something was an investment of traditional assets, then it is a security.


Moving forward, it would not be amiss for the average Blockchain investor to apply the Howey Test in determining whether or not a cryptocurrency is safe to invest in.



By: BGN Editorial Staff

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