Statement on Certain Proof-of-Work Mining Activities
Division of Corporation Finance
Introduction
As part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets,[1] the Division of Corporation Finance is providing its views[2] on certain activities on proof-of-work networks known as “mining.” Specifically, this statement addresses the mining of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network, and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network. We refer in this statement to these crypto assets as “Covered Crypto Assets”[3] and their mining on proof-of-work networks as “Protocol Mining.”[4]
Protocol Mining
Networks rely upon cryptography and economic mechanism design to eliminate the need for designated trusted intermediaries to verify network transactions and provide settlement assurances to users. The operation of each network is governed by an underlying software protocol, consisting of computer code, that programmatically enforces certain network rules, technical requirements, and rewards distributions. Each protocol incorporates a “consensus mechanism,” or method for enabling the distributed network of unrelated computers (known as “nodes”) that maintain the peer-to-peer network to agree on the “state,” or authoritative record of network address ownership balances, transactions, smart contract code, and other data, of the network. Public, permissionless networks allow anyone to participate in the network’s operation, including the validation of new transactions to the network in accordance with the network’s consensus mechanism.
Proof-of-work (“PoW”) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants, called “miners,” who operate nodes adding computational resources to the network.[5] PoW involves validating transactions on a network and adding them in blocks to the distributed ledger. The “work” in PoW is the computational resources that miners contribute to validate transactions and add new blocks to the network. Miners do not have to own the network’s Covered Crypto Asset to validate transactions.
Miners use computers to solve complex mathematical equations in the form of cryptographic puzzles. Miners compete with their peers to solve these puzzles, and the first miner to solve a puzzle is tasked with accepting batches of transactions from other nodes and validating (or proposing) new blocks of transactions to the network. In exchange for providing validation services, miners earn “Rewards” in the form of newly “minted” or created Covered Crypto Assets that are delivered under the terms of the protocol.[6] In this way, PoW creates an incentive for miners to invest the resources necessary to add valid blocks to the network.
A miner providing validation services receives the Reward only after the other nodes in the network verify, through the protocol, that the solution is correct and valid. To this end, once a miner finds the correct solution, it broadcasts this information to other miners who can verify whether the miner properly solved the puzzle to receive the Reward. Once verified, all miners then add the new block to their own copies of the network. PoW is designed to secure the network by requiring miners to spend considerable time and computational resources to authenticate transactions. When the validation process functions in this way, it not only makes it less likely that someone would seek to undermine a network but also makes it less likely that miners could include altered transactions, such as those enabling the “double spending” of Covered Crypto Assets.[7]
In addition to self (or solo) mining, miners can join “mining pools,” which allow miners to combine their computational resources to increase their chances of successfully validating transactions and mining new blocks on the network. Mining pools have developed into various types, each with differing methods of operation and Reward distribution.[8] A pool operator typically is responsible for coordinating the miners’ computational resources, maintaining the pool’s mining hardware and software, overseeing the pool’s security measures to protect against theft and cyberattacks, and ensuring that the miners are paid their Rewards. In return, the pool operator charges a fee that is deducted from the miners’ share of the Rewards earned by the mining pool. Reward payouts vary among pools, although Rewards often are distributed across the mining pool in proportion to the amount of computational resources that each miner contributes to the pool. Miners have no obligation to stay in a pool and can choose to leave a pool at any time.
Division’s View on Protocol Mining Activities
It is the Division’s view that “Mining Activities” (defined in this statement) in connection with Protocol Mining, under the circumstances described in this statement, do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) and Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”).[9] Accordingly, it is the Division’s view that participants in Mining Activities do not need to register transactions with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration in connection with these Mining Activities.
Protocol Mining Activities Covered by this Statement
The Division’s view pertains to the following Protocol Mining activities and transactions (“Mining Activities” and each a “Mining Activity”): (1) mining Covered Crypto Assets on a PoW network; and (2) the roles of mining pools and pool operators involved in the Protocol Mining process, including their roles in connection with the earning and distribution of Rewards. Only Mining Activities undertaken in connection with the following types of Protocol Mining are addressed in this statement.
- Self (or Solo) Mining, which involves a miner mining Covered Crypto Assets using its own computational resources. The miner may work alone or together with others to operate a node and mine Covered Crypto Assets.
- Mining Pool, which involves miners combining their computational resources with other miners to increase their chances of successfully validating transactions and mining new blocks on the network. Reward payments may flow from the network directly to the miners or indirectly to them through the pool operator.
Discussion
Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “bond.” Because a Covered Crypto Asset does not constitute any of the financial instruments that are specifically enumerated in the definition of “security,” we conduct our analysis of certain transactions involving Covered Crypto Assets in the context of Protocol Mining under the “investment contract” test set forth in SEC v. W.J. Howey Co.[10] The “Howey test” is used to analyze arrangements or instruments not listed in those statutory sections based on their “economic realities.”[11]
In evaluating the economic realities of a transaction, the test is whether there is an investment of money in an enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.[12] Federal courts since Howey have explained that Howey’s “efforts of others” requirement is satisfied when “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”[13]
Self (or Solo) Mining
A miner’s Self (or Solo) Mining is not undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Rather, a miner contributes its own computational resources, which secure the network and enable the miner to earn Rewards issued by the network in accordance with its software protocol. To earn Rewards, the miner’s activities must comply with the rules of the protocol. By adding its computational resources to the network, the miner merely is engaging in an administrative or ministerial activity to secure the network, validate transactions and add new blocks, and receive Rewards. A miner’s expectation to receive Rewards is not derived from any third party’s managerial or entrepreneurial efforts upon which the network’s success depends. Instead, the expected financial incentive from the protocol is derived from the administrative or ministerial act of Protocol Mining performed by the miner. As such, Rewards are payments to the miner in exchange for services it provides to the network rather than profits derived from the entrepreneurial or managerial efforts of others.
Mining Pool
Likewise, when a miner combines its computational resources with other miners to increase their chances of successfully mining new blocks on the network, the miner has no expectation of profit derived from the entrepreneurial or managerial efforts of others. By adding its own computational resources to a mining pool, the miner merely is engaging in an administrative or ministerial activity to secure the network, validate transactions and add new blocks, and receive Rewards. In addition, any expectation of profits that the miners have is not derived from the efforts of a third party, such as a pool operator. Even when participating in a mining pool, individual miners still perform the actual mining activity by contributing their computational power to solve the cryptographic puzzles for validation of new blocks. Moreover, whether a miner self (or solo) mines or mines as a member of a mining pool does not alter the nature of Protocol Mining for purposes of the Howey analysis. In either case, Protocol Mining, as described in this statement, remains an administrative or ministerial activity. Further, a pool operator’s activities in operating the mining pool using the combined computational resources of participating miners primarily are administrative or ministerial in nature. While some of the pool operator’s activities may benefit the group of miners, any such efforts are not sufficient to satisfy Howey’s “efforts of others” requirement because miners primarily are relying on the computational resources that they provide in conjunction with other members to the mining pool to earn profits. To this end, a miner does not join a mining pool based on the ability to earn profits passively from the activities of the pool operator.
For further information, please contact the Division’s Office of Chief Counsel by submitting a web-based request form at https://www.sec.gov/forms/corp_fin_interpretive.
[1] For purposes of this statement, a “crypto asset” is an asset that is generated, issued, and/or transferred using a blockchain or similar distributed ledger technology network (“crypto network”), including, but not limited to, assets known as “tokens,” “digital assets,” “virtual currencies,” and “coins,” and that relies on cryptographic protocols. In addition, for purposes of this statement, a “network” refers to a crypto network.
[2] This statement represents the views of the staff of the Division of Corporation Finance (the “Division”). It is not a rule, regulation, guidance, or statement of the U.S. Securities and Exchange Commission (“Commission”), and the Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
[3] This statement only addresses certain activities involving Covered Crypto Assets that do not have intrinsic economic properties or rights, such as generating a passive yield or conveying rights to future income, profits, or assets of a business enterprise.
[4] This statement only addresses transactions involving Covered Crypto Assets in connection with Protocol Mining and not other transactions involving Covered Crypto Assets.
[5] This statement addresses PoW generally rather than all of PoW’s variations or any specific PoW protocol.
[6] The protocol establishes rules on Rewards. Miners cannot change the Rewards they receive as the Reward structure is predetermined by the protocol.
[7] Double spending involves the same crypto assets being sent to two recipients and can occur when ledger entries are altered.
[8] For example, in a “pay-per-share” model, miners receive a payment for each valid share or block they contribute to the mining pool; regardless of whether the pool successfully mines a block; in a “peer-to-peer” model, the pool operator’s role is decentralized among pool members; and in a “proportional” model, miners receive Rewards proportional to the amount of work they contribute to successfully mine a block. There also may be hybrid pools that offer a combination of different operational and payout methods.
[9] The Division’s view is not dispositive as to whether any specific Mining Activity (defined in this statement) involves the offer and sale of a security. A definitive determination requires analyzing the facts relating to the specific Mining Activity. Where facts vary from those presented in this statement – such as 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 – the Division’s view as to whether the specific Mining Activity involves the offer and sale of a security may be different.
[10] 328 U.S. 293 (1946).
[11] See Landreth Timber Co. v. Landreth, 471 U.S. 681, 689 (1985), in which the U.S. Supreme Court suggested that the proper test for determining whether a particular instrument that is not clearly within the definition of “stock” as set forth in Section 2(a)(1) of the Securities Act, or that otherwise is of an unusual nature, is the economic realities test set forth in Howey. In analyzing whether an instrument is a security, “form should be disregarded for substance,” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), “and the emphasis should be on economic realities underlying a transaction, and not on the name appended thereto.” United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975).
[12] Forman, 421 U.S. at 852.
[13] See, e.g., SEC v. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973).
Last Reviewed or Updated: March 20, 2025