By: Florian Uffer

A Background on Cryptocurrency

The relatively recent rise in cryptocurrency has significantly affected the financial world. As it becomes evident from the stock price, Bitcoin, the name generally associated to cryptocurrency, experienced a growth of about 2020% between January 2017 and mid-October 2017.[1] For 2017, the S&P 500’s average total return was 9.7%.[2] In light of such a return the growth that Bitcoin posted during that year is unfathomed. In order to realize such a growth in investment, however, an investor would have had to time it perfectly. Indeed, since that peak in mid-October, Bitcoin has plummeted and lost 82%.[3] This example elucidates the constant uproar around cryptocurrency, as its financial attributes are both cherished among bullish investors, while also disapproved of by risk-averse financial players.

The financial world was not the only one affected by the surge of cryptocurrency. The law has had trouble grasping this movement and is still struggling to effectively govern it: as a consequence, cryptocurrency still lacks a single regulatory body.[4] The main hurdle facing regulators consists of a difficulty in properly classifying the range of cryptocurrencies that exist.[5] This analysis, however, will only focus on cryptocurrencies used as a medium of exchange and provide a proposed answer as to whether the SEC has the ability to regulate them as securities. This analysis concludes that the SEC does not have the authority to regulate cryptocurrencies used as a medium exchange as investment contracts.

The Howey Test

The 1934 Securities Act’s definition of a “security” provides a catch-all provision – an “investment contract.”[6] The Supreme Court in S.E.C. v. W. J. Howey Co.stated that “an investment contract for purposes of the Securities Act means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”[7] Put differently, an investment contract exists if there is a contract, transaction, or scheme and the following elements are present: (1) a person invests money (2) in a common enterprise and (3) is led to expect profits (4) solely from the efforts of the promoter or a third party.

The Howey Test Applied to Cryptocurrency as a Medium of Exchange

There are two main ways to acquire Bitcoin: (i) buy it from one of the many exchanges, or (ii) acquire it as payment for the delivery of goods or services.[8] In the first instance, it seems clear that in order to purchase Bitcoin, one has to come forth with a sum of money. Consequently, a purchaser would be investing money in order to obtain it and it would thus seem that purchasing Bitcoin would meet the first requirement of the analysis. As to the second instance, the Supreme Court in International Brotherhood of Teamsters v. Danielnoted that “[i]n every decision of this Court recognizing the presence of a ‘security’ under the Securities Acts, the person found to have been an investor chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security.”[9] But, the Court continued, “[t]his is not to say that a person’s ‘investment,’ in order to meet the definition of an investment contract, must take the form of cash only, rather than of goods and services.”[10] Therefore, the first element of the Howey test is likely met.

            As to the second element, there are three ways of showing the existence of a common enterprise: horizontal commonality, broad vertical commonality, and narrow vertical commonality.[11] Circuits are unanimous in holding that horizontal commonality satisfies the second Howey factor, but are split as to whether either type of vertical commonality is sufficient.[12] When obtaining cryptocurrency, one does not pool his assets into an enterprise along with other investors; rather, one simply exchanges money or services for an alternative method of payment. A simple analogy can be drawn to exchanging U.S. Dollars for a foreign currency. Horizontal commonality is therefore lacking. Further, neither of the vertical commonalities are applicable to cryptocurrencies used as a medium of exchange. There is simply no promoter or third-party upon which the value of the “investment” in cryptocurrency depends. Instead, its value depends on government regulation, political and economic upheaval, and media and trader enthusiasm.[13]Consequently, cryptocurrency as a medium of exchange most likely does not meet the second factor.

The third factor of the Howey test is likely met. Although Bitcoin is used as a currency, its value drastically changes over time, even from day to day. Furthermore, the economic reality is that many people buy Bitcoin with the hopes that its value will rise and that they will be able to exchange it for more value. Therefore, it is reasonable to conclude that people investing in or buying Bitcoin have an expectation of profit.

Finally, the nature of cryptocurrency leaves the fourth factor of the Howey test hard to determine. Although just like stock, purchasers of Bitcoin are hoping that outside factors will cause its value to go up, there is no “effort” or “work” in the background which affects the value of Bitcoin. Rather, the value largely depends on government regulation, political and economic upheaval, and media and trader enthusiasm.[14] Whether these factors could be considered as “efforts of the promoter or of a third party” is difficult to determine. However, because the second Howey factor is not met, such an analysis is not required.


This analysis concludes that cryptocurrency used as a medium of exchange is not an “investment” contract under the Howey standard. Therefore, the SEC would not have the authority to govern it as such.


[1]Bitcoin USD (BTC–USD), Yahoo Finance(last visited Feb. 6, 2019),

[2]Michael Santoli, The S&P 500 has Already met its Average Return for a Full Year, but Don’t Expect it to Stay Here, CNBC (June 19, 2017, 9:19 AM),

[3]See supra note 1.

[4]See id.

[5]See Daniel Araya, The Challenges of Cryptocurrency Regulation,The Regulatory Interview(Oct. 9, 2018),

[6]See 15 U.S.C. § 78c(a)(10) (1934).

[7]See S.E.C. v. W. J. Howey Co., 328 U.S. 293, 294–296 (1946).

[8]See 5 Easy Steps to Get Bitcoins and Learning How to Use Them, Weusecoins (last visited Feb. 7, 2019),

[9]International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 559 (1979).

[10]Id. at 560 n. 12.

[11]“[H]orizontal commonality requires the pooling of assets from multiple investors so that all share in the profits and risks of the enterprise … Broad vertical commonality requires that the well-being of all investors be dependent upon the promoter’s expertise … [N]arrow vertical commonality requires that the investors’ fortunes be ‘interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties.” See S.E.C. v. SG Ltd., 265 F.3d 42, 49 (1st Cir. 2001).

[12]See generally SG Ltd, 265 F.3d at 49–50.

[13]Why is Bitcoin’s Price Going Up or Down?, Finder (last visited Feb 7, 2019),

[14]See supra note 13.