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Will The SEC's Framework Beget Blue Sky Blues For Digital Assets?

Earlier this week, two senior officials at the Securities and Exchange Commission issued this statement elucidating a "framework for 'investment contract' analysis of digital assets".  The Framework applies the tripartite test fashioned by the United States Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).  The Framework pointedly rejects state law: "Whether a contract, scheme, or transaction is an investment contract is a matter of federal, not state, law . . .".  That may be true, but it doesn't mean that state law is irrelevant.  Indeed, state law will actually become more relevant when a digital asset is determined not to be a security under federal law.

As an initial matter, the Framework is not binding upon state securities regulators or the courts.  Indeed, the Framework explicitly acknowledges that it is not a rule, regulation, or statement of the SEC, and that the SEC has neither approved nor disapproved its content. 

While California courts have applied the Howey test, they are free to apply their own tests and analysis.  The most famous example is the "risk capital" test described in Silver Hills Country Club v. Sobieski, 55 Cal.2d 811 (1961)

Finally, states may decide to enact legislation explicitly regulating digital assets either under existing securities laws or under a new regulatory regime.

Are Digital Assets Any Less Real Than Currency?

The Framework distinguishes digital assets from "fiat currency".  Fiat is a Latin hortatory subjunctive form meaning "let there be".  Many educational institutions, including the University of California, have adopted the Latin phrase Fiat Lux ("let there be light") as their motto.   

Fiat currency is a term coined to refer to currency that has no intrinsic value (as opposed to gold or silver coins).  To the extent that digital assets are used a medium of payment, it would seem to have no less or more value than traditional paper money.  Both represent a store of value but lack intrinsic value.  

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