The Howey Test vs The Token Taxonomy Act: Regulatory Clarity or More Uncertainty?

Freeing Crypto from the Bondage of a 72-Year-Old Law?

That header above makes a great headline but executing the concept is proving to be easier said than done. The Token Taxonomy Act (TTA) is splitting opinions among leading blockchain legal experts. The big question is whether the newest version of the TTA can deliver the regulatory clarity it promises to protect consumers and investors and encourage cryptocurrency legitimacy and growth in the blockchain industry.

Centralized finance is entrenched in legal traditions established in the 1930s which blockchain technology is disrupting across the board, from securities definitions to smart contracts to the SEC itself. In an interview with CNBC, head of the Blockchain Association and crypto-lobbyist Kristen Smith summed up the ongoing difficulty we’re experiencing in the transition saying, “These decentralized networks don’t fit neatly within the existing regulatory structure”.

So why have current crypto regulatory efforts been described in the CNBC report as analogous to fitting “square pegs in round holes”? In this article, I will unravel some of these tangled legal issues to help blockchain startups and investors make the most prudent informed decisions concerning the state of crypto now and what we may be facing in the immediate future.

But before we look to the future a brief history lesson is in order.

What is the Howey Test?

The key question in the debate is whether or not the TTA can indeed provide “regulatory certainty for businesses, entrepreneurs, and regulators in the U.S.’s blockchain economy” as promised by its bipartisan sponsors when it was introduced in April of 2019. Or are we better off as blockchain participants sticking to the tried and true Howey Test for categorizing most coins and tokens as securities? 

As things stand now, the IRS has already classified trading crypto-assets as a taxable event and the SEC has declared that most do seem to pass the Howey Test, and are therefore subject to securities regulations.

This regulatory burden clashes with the anti-authoritarian nature of the crypto-world. 

Bitcoin was originally intended to bypass third-party regulation altogether, relying instead on the distributed ledger’s built-in, decentralized security characteristics for internal regulation. 

Blockonomi founder, Oliver Dale, tackled the ICO/Howey Test correlation in his informative article, clarifying just how cryptocurrencies became recognized as securities after the German DAO group’s token was hacked in 2016.

The Howey Test is the result of a 1946 Supreme Court test case in which Florida citrus groves sold to outside investors by the WJ Howey Company were then immediately leased back to Howey who would harvest and resell the produce. The court ruled that the deal constituted an investment contract and investment contracts qualify as securities. Any financial instrument classified as a “security” then falls under the purview of the SEC. The Howey Test provides 4 criteria for an instrument to qualify as a security. They are:

  1. Investment of money
  2. Expectation of profit
  3. Common enterprise
  4. Profit generated by a third party

It seems that in many cases, digital tokens qualify as securities using the Howey Test. Passing the Howey test means that tokens should be subject to the same securities regulations as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934, with all of their attending requirements for registrations, independently certified financial statements, management description disclosures, and regulations for secondary trading.

The TTA proposes to change all that, but as we’ll see, some industry watchers think we could be jumping from the frying pan and into the fire.

What is The Token Taxonomy Act of 2019?

Here’s the official summary for H.R.2144, the Token Taxonomy Act Version 2.0 straight from


To amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.

The bipartisan pitch sounds like the passage of TTA 2019 (version 2.0) is a no-brainer, one sure to induce instant “cryptophoria” in the blockchain community, but some leading blockchain legal minds disagree. 

The original version of the bill was presented to Congress late in 2018, so late that it “never really stood a chance of getting anywhere” according to Guillermo Jimenez’s report at Decrypt. Jimenez cites crypto-attorney Gabriel Shapiro to support his evaluation that TTA version 2.0 is actually worse than the original.

Shapiro stated, “I can’t imagine legislation that is worse for blockchain entrepreneurs, regulators or markets than this!” Shapiro was joined by Wall Street veteran Caitlin Long who tweeted that the “watered down definition” of digital tokens was so vague it removes any “taxonomy” from the bill. 

Worse, the bill claims federal preemption over state blockchain legislation, such as the legislative effort Long championed to make Wyoming “the blockchain state” and would wipe state token definitions off the books in up to 15 states where tokens have been or will soon be clearly defined.

Benefits of The Token Taxonomy Act

Most of the objections from certain crypto-focused lawyers have to do with “vague definitions” and “difficult to apply elements” in the bill. 

No doubt, the legislative transition will be a long evolutionary process, and TTA version 2.0 is just the first critical step. The TTA, for many, is a diamond in the rough worth polishing.

For the crypto-community, the primary objective of the bill definitely makes TTA worth pursuing. Excluding digital tokens from the definition of a “security” removes a major logjam and reinforces the original spirit of decentralized financing intended when Satoshi Nakamoto introduced Bitcoin in the revolutionary white paper in 2008.

Other major benefits for the digital token trade under a new TTA are the tax breaks cited in the bill summary. Active token traders can reap the rewards of tax exemption when exchanging one virtual currency for another, not to mention the tax break for tokens held in IRA accounts.

For the US economy, the ramifications of passing some version of  TTA 2019 go far beyond the lucrative tax incentives which the bill provides for individual crypto investors. 

If the regulatory confusion isn’t cleared up soon, harsh status-quo regulation under the Howey Test could drive the central hub of blockchain to other countries in Europe and Asia where the technology has been embraced.

The chief rival for the US is, as always, China, which leads the world in blockchain-based projects. 

According to the bill’s sponsor Congressman Warren Davidson, “Without [the Token Taxonomy Act], the U.S. is surrendering its innovative origins and ownership of the digital economy to Europe and Asia.”

Davidson cites the early days of the internet when Congress resisted the temptation to over-regulate while providing certainty as a model for achieving a similar win which will “unlock the blockchain industry” and secure the US position as a blockchain leader. His “light touch” regulatory philosophy harmonizes well with the original intent of blockchain innovation.

The Howey Test is not the answer but the TTA, in some form, might be.

Crypto Resources

This post is continually being updated.

I’ve been getting asked quite a bit about how to buy Bitcoin, Ethereum, Litecoin, and other ‘alt’ coins.

And after my short rant on Facebook about people trying to take advantage of friends and family by putting them through sales funnels and webinars on “How to Buy Bitcoin and Make a Shit-Ton of Money”, I decided to put together a short list of resources.

To be clear…

**This post is NOT about**:

  • Recommending that you invest any money into cryptocurrencies, ICOs, or token sales
  • Helping you get rich quick
  • Suggesting that you invest in an ICO or token sale
  • Recommending specific currencies or “coins” to buy into

Please, do your own homework. Investing time and money into something just because there’s a lot of loud noise surrounding the topic, does not mean that it is best for you.


Twitter. Follow reputable experts in this space. To name a few:

Crypto-news sites:

Reddit. Reddit communities are often excited about the topic that the subreddit focuses on (if you’re unfamiliar, a subreddit is identified by the text after the /r/ in the URL – for example, is a subreddit about Bitcoin). There can be great information found within these subreddits, but be careful of buying into the ‘hype’ posts about all-time highs (ATH), ‘just HODL (meaning, keep holding and don’t sell)’, buying, and/or selling. I caution to browse these subreddits for the most informative posts only, which are usually stickied at the top and highlighted green:

If, after doing your own research and coming to your own conclusion, that you’d like to get involved, here’s how to get started (finish reading the entire post first):

How to Buy BTC (Bitcoin), ETH (Ethereum), and LTC (Litecoin):

Coinbase – this is the easiest way to get started. Go to to sign up and begin your verification process. They will walk you through the steps of what is needed to verify your account, such as confirming your address, bank account, email address, and phone number. This may take a few days mainly due to bank verification.

Once you are verified on Coinbase and get your feet wet, you can move over to their trading platform, Coinbase Pro. It uses the same login as Coinbase but the fees are much lower. I recommend getting comfortable on Coinbase first.

How to Buy ‘alt’ Coins:

You’ll need to use another exchange such as Bitstamp, Binance, or Bittrex. There are others as well. I personally prefer Binance (referral link) or Bitstamp. Whichever you sign up for, follow their onboarding steps to get setup properly. Important: Binance will be closing trading to US residents as of Septmember 2019. They will be launching a separate platform for US based users soon.

Note that these exchanges require you to trade using BTC (sometimes ETH & LTC are available to trade), so you’ll want to be set up on Coinbase/Pro first.

From there, you can use your Coinbase account to transfer BTC to your wallet on the other exchange. Once the BTC transfer is verified and deposited to your wallet, you can use that BTC to purchase alt coins.


Look out for scams and phishing sites. This can be avoided by entering the direct URL of the site you wish to visit. For example, if you want to login to your Coinbase account, it’s best that you type in in your browser. Doing a search for Coinbase on a search engine may display ad links that may not be representative of the actual site you trust. At first glance, the site may look legit, but it’s actually an attempt to steal your information.

Always enable 2FA (two-factor authentication). Use an app such as Google Authenticator (Android) (Apple) or Authy to generate unique codes for you each time you log in, buy, or sell. Although added security measures may seem cumbersome, they are certainly worth-while.

Consider getting a hardware wallet. Often referred to as “cold storage”, hardware wallets such as the Trezor or Ledger Nano are secure ways for storing your coins offline.

It should go without saying, but don’t ever share passwords or security codes from an authenticator app with anyone, not even support teams from exchanges, and use strong & unique passwords for your accounts.

If there is anything else that you’d like me to cover or add to, please comment below.