Crypto-Assets: What Are They and Why Do We Care? 68 BANKING PERSPECTIVES QUARTER 4 2018 respect to any expectation of profits by those purchasers. As a result, even in the case of tokens that are called “utility tokens” as opposed to “security tokens” because the tokens provide purchasers with a utility function on a blockchain platform (rather than merely an economic interest) the tokens may be (and likely will be) deemed to be investment contracts, and therefore securities, if the value of the tokens is based on the efforts of the ICO issuer/promoter. As stated by the SEC, “[w]hether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.” 2 To date, the SEC has demonstrated a very careful and nuanced application of the Howey case to cryptocurrencies that shows an appreciation for the variation among cryptocurrencies. As mentioned above, the SEC staff has distinguished between what it has determined to be truly decentralized cryptocurrencies, bitcoin and Ether, which it believes are not investment contracts and therefore not securities and other types of cryptocurrencies. In a landmark speech on June 14, 2018, William Hinman, director for the Division of Corporation Finance of the SEC, stated that the analysis of whether a token is a security is “not static and does not strictly inhere to the instrument.” 3 As a result, decentralization could develop over time, even after an initial token sale launch, and therefore a token that starts its life cycle as a security could at some point become a non-security. This means that, unlike records stored on a blockchain, a token’s treatment under U.S. federal securities laws is mutable. 4 The SEC and its staff have yet to apply Howey or any alternate security analysis to the context of a stablecoin. Under a Howey analysis, it is not clear that stablecoins should be deemed to be securities. Unlike the more volatile cryptocurrencies or the ICO tokens, stablecoins would seem to “fail” one of the principal Howey factors: that a purchaser must have an expectation of profit. A purchaser of a stablecoin has no such expectation; rather, a purchaser of a stablecoin expects the value of the stablecoin to remain constant. We predict, therefore, that stablecoins, as described above, will not be determined to be investment contracts under the analysis in Howey , although it is possible that stablecoins could be deemed to be securities under other rationales. TREATMENT OF STABLECOINS BY THE N.Y. DEPARTMENT OF FINANCIAL SERVICES On September 10, 2018, the New York Department of Financial Services (NYDFS) approved the issuance of stablecoins by both Gemini Trust Company and Paxos Trust Company, both New York limited-purpose trust companies chartered under New York State banking law. 5 As conditions for approval, both Gemini and Paxos represented to NYDFS that they would – along with a list of other anti-fraud, anti-money laundering (AML), and consumer protection measures – (1) ensure that the stablecoins are fully exchangeable for a U.S. dollar, with provisions to ensure monitoring and recordkeeping; 6 (2) implement, monitor, and update effective risk-based controls and appropriate Bank Secrecy Act/AML and Office of Foreign Assets Control controls to prevent the stablecoins from being used in connection with money laundering or terrorist financing; and (3) maintain policies and procedures for consumer protection and to promptly address and resolve customer complaints. Interestingly, the NYDFS approval of Gemini Dollar and Paxos Standard makes no mention of securities law and in no way indicates that New York State thinks that the issuance of the collateral-backed stablecoins constitutes the issuance of a security. CRYPTOCURRENCY: THE COMMODITY LAW PERSPECTIVE Whether or not a cryptocurrency is determined to be a security, the Commodity Futures Trading Commission (CFTC) takes the position that all varieties of cryptocurrencies are commodities for purposes of the CEA. 7 The term “commodity,” defined in Section 1a(9) of Stablecoins are a class of cryptocurrencies that seek to maintain price stability with respect to an asset with a stable value, such as U.S. dollars.