Law Scholars Challenge SEC's Theory on Investment Contracts

15 August 2023

Welcome, and thank you for being part of the MyZucoins community! Let's get into an interesting piece of crypto, finance or tech news to stay ahead. This newsletter has a bit of important legal jargon in it, so strap in, we've tried to break it down well enough to be quickly digestible. Please let us know how we did. :)

Six law scholars recently stepped up to support Coinbase, a major player in the crypto world, by filing an amicus brief.

An amicus brief is an official document submitted by non-participants with a serious interest in a legal case, offering extra information to the court.

These scholars, from prestigious institutions like UCLA, Yale, and Boston University, argue the SEC's understanding of "investment contracts" is flawed.

These legal experts traced the history of "investment contracts" right back to the 1930s when the Federal Securities Act was born.

According to them, the term meant an agreement that allowed an investor to earn a share of the seller's future income or profits. They found no evidence of "investment contracts" without these essential features in state-court decisions.

Fast forward to the Howey decision—a landmark legal case for what investments are considered "securities" and why—the scholars observed a consistent definition of "investment contracts."

They argue that investors must be promised a continuous interest in the business's income, profits, or assets because of their investment.

The scholars aimed the SEC's claim that tokens traded on Coinbase are securities, insisting that every "investment contract" acknowledged by the Supreme Court includes a promise to grant a surviving stake in the business.

In their view, this commitment is the "key ingredient" that separates investment contracts from other agreements. Their arguments may change the narrative around cryptocurrencies, impacting the SEC's claim against Coinbase and other similar platforms. Read more here.

This case is extremely important for the future of crypto trading in the US and other similarly aligned countries, potentially including Australia, New Zealand, Canada, amongst others. For more background on this ongoing situation, we've covered other parts here, here and here.

What Emerging Crypto Products Can Learn From Legal Encounters

Zucoins, as a newer entrant in the crypto space, can take valuable cues from the legal tussle between Coinbase and the SEC. The key contention here is the definition of "investment contracts."

After completing audit and investigation processes from Australia's Austrac and ASIC regulators during 2022 and 2023, the Zucoins team is cautious of the fine line they need to follow.

As the SEC vs Coinbase legal case indicates, cryptos like Zucoins could emphasize the token's utility in facilitating efficient transactions amongst users, instead of focusing on future expectations.

What's more, a further emphasis on encouraging the wider Zucoins ecosystem and participants to get involved themselves would be welcomed. A portion of Zucoin users have started doing this already.

Given the evolving nature of regulatory landscapes, Zucoins and Splitchain have an opportunity to participate in shaping the game's rules. If any Zucoin holders are up for it, they could actively engage in discussions around cryptocurrency regulations, advocating for rules that both protect users and encourage innovation in the space.

This proactive stance could help Zucoins stay ahead of the regulatory curve and position these Zucoin holders as thought leaders in the cryptocurrency industry.

Of course, the biggest piece is the continued work on increasing decentralization. A true commodity should be permissionless (anyone can participate) and further decentralized (harder to centrally control), which has been a core focus for the product team.

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All the best,
Peter & Rob
MyZucoins

Disclaimer: Of course, this is not advice, financial or otherwise. It’s also important to consider the risks and challenges associated with these potential benefits.

Disclaimer: Of course, this is not advice, financial or otherwise. It’s also important to consider the risks and challenges associated with any potential benefits.