Hester Peirce Outlines Problems With the SEC’s Howey Test

The Howey test used to assess compliance with securities status does not fully account for the nature of digital assets.

The functionary recalled that many startups raised funding on the promise of building a network. That made the case for recognizing the tokens being issued as "investment contracts" under the Howey test.

One of the conditions of the latter is the "expectation of return on investment." This was also stated by SEC CEO Gary Gensler, who sees crypto-assets as "unregistered securities."

According to Peirce, the existence of an investment contract depends not only on the asset, but also on the promises associated with it. The two components are unrelated, she stressed.

The commissioner is convinced that the Howey test alone does not provide a clear answer to the question of whether cryptocurrencies meet the status of an investment contract in isolation from the very process of their placement, in which such attributes can be found.

Pierce pointed out the fallacy of the course of using such a policy, recalling a landmark speech by William Hinman, who headed the SEC's corporate finance division in 2018. In it, he recognized bitcoin and Ethereum as "substantially decentralized," which prevented them from being called "securities."

The commissioner sees a way out of the situation by clarifying the terms of tokens' transition from "securities" to "exchange-traded commodity" status. In this case, there would be less criticism regarding the application of the Howe test, she is convinced.

The current uncertainty frustrates Peirce. There has been "no real positivity" in cryptocurrency regulation since 2018, she said.

In October 2021, Peirce said the Commission needed to work with industry participants to create a "reasonable structure" of oversight. She later criticized Gensler for his stance on cryptocurrencies.