Fusion Market Analysis - February 17, 2023

FUSION MARKET ANALYSIS

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The Howey Test is a US legal test to determine whether a transaction qualifies as an "investment contract" and thus a security under US federal securities laws. The test is named after the case SEC v. W.J. Howey Co. in 1946.

Under the Howey Test, an investment contract exists when there is:

1. An investment of money
2. In a common enterprise
3. With the expectation of profits
4. To be derived solely from the efforts of others

If all four elements are present, the transaction is considered an investment contract and therefore a security. The third and fourth elements are particularly important in the context of cryptocurrencies, as the expectation of profits and the role of third-party efforts can be central to the value and function of many cryptocurrencies.

For example, if a company raises money by selling cryptocurrency tokens to investors with the promise of profits based on the company's future efforts to develop a platform or network, the sale of those tokens may be considered an investment contract and thus a security under the Howey Test.?

On the other hand, if the same tokens were sold solely as a means of access to a functional network or platform, without any expectation of profits from the company's efforts, they may not be considered a security under the test.

In general, if a cryptocurrency is marketed as a way to invest money with the expectation of profits from the efforts of others, it is more likely to be considered a security.?

However, if a cryptocurrency is designed primarily as a medium of exchange, like Bitcoin, it is less likely to be considered a security.

Crypto Case Study: BUSD

Binance USD - BUSD - is a stablecoin that provides a more stable cryptocurrency alternative for traders and investors who are looking to avoid the volatility of the digital asset market.?

BUSD can be used for trading on Binance / Binance DEX, participate in Ethereum smart contracts, yield farming, collateralizing for loans, and paying for goods or services but it is primarily used as a means of exchange on the Binance exchange, possibly not categorizing it as a security.?

Some of the benefits of holding BUSD include its versatility, the fact that it is backed 1:1 with USD held in reserve, and its compatibility with both the Ethereum blockchain and Binance Chain.

BUSD is built on the Ethereum blockchain using the ERC-20 standard, which means it can be easily integrated with other blockchain-based applications and services.?

It was created in partnership between Binance and Paxos.

Paxos has recently received a Wells Notice from the SEC indicating a possible enforcement action for the charge that its BUSD stablecoin constitutes an unregistered security.?

Paxos claims that BUSD is not a security but they have stopped minting new BUSD tokens as directed by the New York Department of Financial Services.

The SEC has taken further steps by a new proposal recently to make it harder for asset managers to invest customers’ money in cryptocurrencies, in line with regulators' goals to rein in the sector after the collapse of the FTX trading platform.?

The proposal entails:

• Expanding the types of assets that investment advisers are required to hold using qualified custodians.
• New requirements for qualified custodians, and notes that certain features of cryptocurrencies could make them difficult to safeguard in compliance with the rules.
• Limit how asset managers can handle customers’ crypto assets but wouldn’t impose new requirements on individual investors who manage their own portfolios.
• Expand the qualified-custodian requirements to include virtually any assets that an adviser might hold in a client’s name, including all cryptocurrencies and even physical assets such as artwork.

Some believe the proposal will make advisers jump through more hoops to invest in crypto, while others worry that it could leave investors more vulnerable to theft or fraud.?

The SEC's move comes as regulators are cutting off access to some products and services central to the digital-currency business like BUSD and the Federal Reserve is warning banks against getting deeply involved in crypto.

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Disclaimer: Trading and investing is a risky activity. None of the information we provide is a recommendation to buy or sell a financial security, digital asset or cryptocurrency instrument. Cryptoquote and its subsidiaries shall not be liable for the outcome of any trading activity you decide to take part in and content is for information purposes only.