Hive Is Not A Security - It Doesn't Pass The Howey Test

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(Edited)

We spend a lot of time discussing regulation in regards to Hive. Many of us maintain that, when it comes to the base layer, Hive cannot be regulated. Without the central point of entry, the vulnerability is removed. Even with that, some contest this idea.

For that reason, we will look at the most public regulator regarding cryptocurrency, the Securities and Exchange Commission (SEC). What would Gensler find if he looked at Hive?

This means we have to embark upon the Howey Test, the age old rule of thumb if an asset is a security or not. Looking into this means we can conclude whether Hive is like Ethereum, Cardano, and a host of other coins that are out there.

Please bear in mind, this is only going to apply to the base layer. We cannot say the same thing about layer 2 solutions.

Is Hive a security? Lets dig in.

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Investment Contract

When it comes to US Securities law, the idea of an "Investment Contract" is vital. This is what the Securities and Exchange Commision uses to determine if something qualifies or not. If it does, then it is the same as stocks and bonds.

This is from the SEC website regarding digital assets.

The U.S. Supreme Court's Howey case and subsequent case law have found that an "investment contract" exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.

It was further broken down into the following characteristics:

  • an investment of money
  • a common enterprise
  • the expectation of profit
  • derived from the efforts of others

Looking at these, we see the first three are met. So according to Howey, Hive is on pace to be a security.

It is the last one where it gets tripped up.

Active Participant (AP)

This is a term that is crucial to this aspect of the discussion.

Here we see how the SEC views it:

When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an "Active Participant" or "AP") provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.

So the question is does an Active Participant exist on Hive? At the same time is this individual responsible for performing certain tasks that are necessary for one to realize the expectation of profit?

To get this answer, let us dive into the working of Hive.

Open To Anyone Running

Hive operates on a Delegated Proof-of-Stake system that assigns block production on a rotation basis. That means anyone who sets up a node, running the software, will produce blocks. This is not up for debate or dispute. Anyone can produce blocks simply by setting up a node.

Here is a list of the lower ranked witnesses. Notice the one's highlighted (they are live) and how they produced blocks. One of the nodes was only recently set up.

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The point here is the network is not dependent upon an Active Participant to keep things going. All nodes are run by unaffiliated users. The system is not dependent upon any project backer.

Hence, if any of the Top 20 witnesses closed down, regardless of who it is, the network would keep running. No single entity is essential for Hive to operate.

Software Development

The software is written. It is open source. Here again, anyone with the skills is able to update and add to it. Nobody can stop the community from participating.

Naturally, skill and ability factors into this. That said, those with the coding experience could produce the next version of the software.

Before getting to that, it is vital to understand the network is running. No software upgrades are necessary. Anything that is added is for enhancement, not necessarily for the operation of the network.

It might appear that there is only one set of software code. We often mention the "core developers". While this is not inaccurate, it can be a bit misleading. The reality is we have what is only one version of possible upgrades. Another group of developers could get together and write version 1.27.5 as it sees fit.

If that were to happen, then the block producers would decide which version to run. This would likely cause a great deal of conflict yet it is a possibility. What this means is we are not beholden to any one group or Active Participant for ongoing software development.

Anyone can step in and redo the code. The question ultimately comes down to will it be accepted by the community?

Access Coin

$HIVE is an access coin. This is the final piece offered up as evidence that it is not a security. The utility means that the purchase of the coin is not solely for speculation. In fact, that could be a secondary benefit.

The SEC points to the fact that courts have incorporated other considerations into the process. We will simply list them here:

  1. The distributed ledger network and digital asset are fully developed and operational.
  2. Holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use.
  3. The digital assets' creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network. For example, the digital asset can only be used on the network and generally can be held or transferred only in amounts that correspond to a purchaser's expected use.
  4. Prospects for appreciation in the value of the digital asset are limited. For example, the design of the digital asset provides that its value will remain constant or even degrade over time, and, therefore, a reasonable purchaser would not be expected to hold the digital asset for extended periods as an investment.
  5. With respect to a digital asset referred to as a virtual currency, it can immediately be used to make payments in a wide variety of contexts, or acts as a substitute for real (or fiat) currency.
  6. With respect to a digital asset that represents rights to a good or service, it currently can be redeemed within a developed network or platform to acquire or otherwise use those goods or services.
  7. Any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality.
  8. The digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential for the increase in market value of the digital asset.
  9. Potential purchasers have the ability to use the network and use (or have used) the digital asset for its intended functionality.
  10. Restrictions on the transferability of the digital asset are consistent with the asset's use and not facilitating a speculative market.
  11. If the AP facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform.

Digital assets with these types of use or consumption characteristics are less likely to be investment contracts.

Framework for “Investment Contract” Analysis of Digital Assets

Going through the list we see these conditions met: 1, 2, 3, 5, 6, 7, 9

We can actually add to this by promoting the access coin aspect, thus fulfilling #8. There is also the fact that #11 is met although not facilitated by an AP (since there is none). The Internal Exchange is a secondary market that exists and can only be accessed by users of the platform.

To engage with the network, on requires Resource Credits which are derived from Hive Power. This is created by staking $HIVE.

Therefore, we have a use characteristic that makes the acquisition of $HIVE vital to different projects along with individuals.

Whatever happens to the market price of the coin does not impact one's ability to engage with the blockchain. This is determined be an internal set of metrics that have nothing to do with the market price.

Consumption Asset

This is a consumption asset. People wonder why $HIVE never takes off and the reason is simple: it is not purely for speculation.

We see there is a reason to hold it. As the network expands, we realize the price will likely follow. If the network grows in overall value, the ability to engage in it, thus, becomes more expensive. Here we see supply and demand take over based upon access and not speculation.

In summary, this fails the Howey Test and absolutely destroys the other considerations that courts use.

We are not dealing with a security in this instance.


This is not legal advice. It is an article written for informational purposes only. I am not an attorney and proper counsel should be sought out before indulging in any transaction of this nature.


If you found this article informative, please give an upvote and rehive.

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23 comments
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What a fracking awesome way to start the new year.

I just got major education. Whoop whoop.

Thanks Task.

!BBH

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Yes going through the SEC's site, we see how the Howey Test breaks down along with the other aspects the courts are focusing upon.

Plus who is going to get served.

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Thanks for the post.. I appreciate the info :)

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It is constantly said by many that Hive is not a security, but it's nice to see it broken down in detail as to why that's the case. People just say it's "decentralized" and "there's no company behind it", and while those are true statements, few of us really know that they mean. This article solves that problem. Thank you!

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The no company means that compliance is impossible.

How are you going to fill out the paperwork with the different regulatory agencies if there is no company to put on it?

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Like I said, it makes sense. It's just nice to flesh out the rationale behind the statements. Which you have done. Sometimes it's hard for people that understand to figure out why people that don't understand have a hard time. It seems so easy. That's why an article like this is very important. It breaks down the why so us novices can finally grasp the concepts. :-)

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In terms of the first part, investment of money, it is possible to participate on the network without investing. I am sure there are some Hivers who have built their stake without putting in a dime. Participation does not require investment. However, I would concede that it does not preclude investment. This is in the realm of muddy waters.

I also agree on the last part, derived from the effort of others. Besides the witnesses, each Hiver is mining coins through their efforts and activities. Without upvotes, comments, and posts, there wouldn't be much for Witnesses to do. One has more to gain on Hive by active participation than by passive investment. Ultimately, it's not a clear cut separation between the "investor" and the "efforts of others". Again, muddy waters.

I think there is enough that distinguishes HIVE/HBD from a security. I will operate under the assumption that HIVE is not a security. The only risk we face is if a court is able to rightly or wrongly determine the opposite. But, this is not a present problem or possibility having operated under the radar for this long. And, of course, who would the court summon?

On the other hand, had HIVE not forked from STEEM, we would more likely have been labeled a security because of the ninja mine.

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With regard to the first part, whether one chooses to invest or not is not what the SEC is concerned about. Yes, you are right, we can get Hive without investing. However, it is looking at the entire picture.

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Funny I started writing about this yesterday and shelved it for now. I got caught up in what is the difference between a token and a coin instead lol. Yes Hive does not tick the 4 boxes and is not a security. The second layer tokens however I think would tick the boxes.

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Agreed unless the second layer was built to replicate Hive. Then you might have the foundation for something that might not be if structured properly.

But for the most part, as things are now, it does appear that way.

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Great analysis! I particularly appreciate the thorough examination of the Howey Test and how it applies to Hive. I completely agree that the decentralized nature of our platform, with no central point of entry and no Active Participants performing essential managerial efforts, is a key factor in determining that Hive would not be classified as a security by the SEC. It is important for the Hive community to consider these regulatory implications, and I believe this analysis provides a valuable contribution to the conversation. Well done!

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I think speculation being a secondary aspect to Hive is one of the best ways to put it. People are using Hive for different reasons, it has a number of utilities that can only be utilized through its access token. That's the main feature of Hive.

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It is a very valuable difference. The fact that Hive is needed to engage on the blockchain and gives one access is crucial.

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Regulatory structures built for the past and for central systems cannot cope with modern emergent technology and decentralized projects. Not only is HIVE not a security, but HIVE is outside the scope of old laws, and outside the practical power of regulators.

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Lol

This is not legal advice. It is an article written for informational purposes only. I am not an attorney and proper counsel should be sought out before indulging in any transaction of this nature.

This killed it for me.

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It's kind of funny how speculation plays a lot in terms of price. I think that is true and the speculation really happens with a lot of the crypto tokens because there are people who advertise/promote tokens and I see a lot of people talk about those tokens. In a way, it's always speculation.

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Thanks for this educational post and Hive is out of reach from government's regulation because of it's strong decentralized nature. This is what makes HIVE unique and better than others.

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Please bear in mind, this is only going to apply to the base layer. We cannot say the same thing about layer 2 solutions.

If only Hive passes the Howey Test, what will happen if the SEC sees the layer 2 coins as securities and then try to regulate them?

Hence, if any of the Top 20 witnesses closed down, regardless of who it is, the network would keep running. No single entity is essential for Hive to operate.

So does this mean that even if the top 20 witnesses will just suddenly disappear, a new set of 20 witnesses can just replace them?

Before getting to that, it is vital to understand the network is running. No software upgrades are necessary. Anything that is added is for enhancement, not necessarily for the operation of the network.

It seems very simple but the distinction between the basic operation of the blockchain and its continuous development is really very important, particularly for us who are not into coding.

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