January 28, 2025

REGULATORY CLARITY, ECONOMIC FREEDOMS AND INNOVATION USING FINANCIAL TECHNOLOGY EMBRACED

On Jan 23, 2025, the US government by way of President Donald J. Trump’s Executive Order titled “Strengthening American Leadership in Digital Financial Technology” ushered in a new era lending legitimacy and market space to digital currencies. By opening up breathing room for digital currencies, the regime emphasizes protecting the rights of individuals and entities to access and engage with blockchain networks. This includes the entire gamut of related activities in the digital currency landscape: mining, validation, holding assets. No law or policy should curtail these inherent economic freedoms to engage in the economic landscape.

LIBERALIZING THE HOWEY TEST’S APPLICATION IN FAVOR OF POTENTIALLY WITHDRAWING REGULATOR’S CASES

Before we speak about key deadlines and clear targets in the coming months, it’s critical to note here that this may mean pending cases by the SEC are withdrawn after review. Why these cases are pending as of now is the grey area of whether security regulations even apply to crypto assets. Effectively liberalizing the landmark Howey test. Right now, the critical determinant of whether digital currency should be categorized as a security asset and therefore subject to the extensive regulatory scheme governing the US market, is the Howey test.

What then, you ask, IS the Howey test?

The Howey test determines whether an investment contract is considered a “security” and consequently, whether it is subject to security laws. Essentially, any “security” is subject to the Securities Act 1933 and the Securities Exchange Act of 1934’s stringent disclosure and registration requirements. The Howey test is derived from a 1946 US Supreme Court case, SEC v. W.J. Howey Co. , a dispute over the sale of land with citrus groves in Florida. This case resulted in a legislative framework to determine whether investment contracts should be classified as securities consisting of a 4-factor test. These are:

1. A monetary investment
2. Involvement in a common enterprise
3. Expect profits solely
4. Reliance on the efforts of others

Previously, on the question of the applicability of securities laws to digital currency, the U.S. Securities and Exchange Commission (SEC) initiated a lawsuit against Ripple Labs for allegedly offering unregistered securities in the form of XRP tokens. A whooping $4.4 billion judgment by the SEC against Terraform Labs has been obtained for fraud involving crypto asset securities on June 12, 2024, leading to Chapter 11 bankruptcy.

To circumvent these requirements, the market has devised legal work-arounds such as the Simple Agreement for Future Tokens (SAFT). The SAFT enables new cryptocurrency ventures to raise money within the current regulatory frameworks without being subject to the full gamut of securities laws. This writer has also applied the Howey test to enable multi-million-dollar ICO third-party investments by drafting a SAFT agreement for an environment-friendly plastics-to-fuel venture.

What exactly the implications are for any investor, entity, founder or otherwise, depends on a case-by-case analysis as we go on to discuss deadlines, goals and objectives of this significant Executive Order next week. In the weeks and months to come, crucial leaps and bounds will occur in this arena. A backlash remains to be seen as to where the chips may fall.

All in all, welcome breathing room is opening up for crypto assets and digitization of assets in this new ecosystem in the largest financial market in the world. How exactly this unfolds remains to be seen in due time. Founders of digital assets may be cautiously optimistic as Trump launches his own $Trump crypto currency three days before his Presidential inauguration oath assuming office.

Tech Tuesdays by That Global Tech Attorney Girl

From the Desk of Dr. Sarah Farid, Esq.

The writer is a licensed attorney with the State Bar of Texas, holding a BA in Economics from Rice University. She is the world’s only tech attorney qualified to practice law in 3 common law jurisdictions worldwide. As an industry leader with dedicated focus in cross-border data, AI, cybersecurity and crypto legal consultancy work, she runs a global tech practice, RNM Law, and may be contacted at sarah@rnmlaw.net.

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