Crypto Mining Statement: The Flame in Plato’s Cave

[1]The Acting Chairman’s office has directed the staff to issue yet another non-binding interpretation bringing the running tally to at least 10 such actions in 9 weeks.[2] Rather than engaging in an open and transparent process that benefits from the input of market participants, these supposedly “clarifying” statements deliver neither progress nor clarity.

Today’s statement suffers from a few problems. First, the logic is flawed. The statement assumes a hypothetical situation as true (relying on its ability to read the minds of crypto miners). Specifically, it declares with certitude that miners choose to mine “merely” to receive rewards in the form of crypto assets, not to profit from the managerial efforts of others. Accordingly, the statement finds, crypto mining does not fall under the definition of a security. If you start with an assumption that mining is not undertaken with the expectation of profits based on the efforts of others, you will necessarily conclude that it does not involve such an expectation and is therefore not a security.

Next, potentially in recognition of the limitations of its flawed logic, the statement cabins itself. It purports to address only “PoW [Proof of Work] generally” and not “all of PoW’s variations or any specific PoW protocol.”[3] So, this non-binding statement generally applies to mining. Except when it doesn’t.

Finally, buried in the footnotes, the statement reveals its true limitation: one actually would have to conduct a Howey analysis to know if a specific mining arrangement constitutes an investment contract. In fact, the footnote accurately notes that to make a “definitive determination” under Howey, one would need to analyze the economic realities and real-world arrangements, including “the way in which pool members may be compensated, how miners or other persons may participate in mining pools, or the activities conducted by pool operators,” and other “facts relating to the specific Mining Activity.”[4]

In short, the statement leaves us exactly where we started: with a facts and circumstances application of Howey. For the sake of investors, other market participants, and the markets themselves, I hope that readers do not mistake it for something more than it is.[5] The meme coin statement issued by the staff similarly cautioned (again, buried in a footnote) that its discussion was limited to what it called “typical” meme coin offers and that a determination as to any specific coin would require a facts and circumstances analysis under Howey.[6] Predictably, these cautionary footnotes were largely ignored and the statement was widely reported as a wholesale exemption for meme coins.[7] I hope that the statement on crypto mining is more accurately understood for what it is and is not. Beware of any headlines that herald a wholesale exemption for mining. And mine the fine print.