The former chairman of the U.S. Commodity Futures Trading Commission (CFTC) has said that most tokens from initial coin offerings (ICOs) are securities.

Howey Test

Gary Gensler was speaking during the Institutional Crypto: Laying the Foundation conference in New York when he made his comments, reports Bloomberg.

In order to determine whether an asset is a security, the Howey Test is administered. This is a test created by the U.S. Supreme Court to establish whether transactions qualify as investment contracts. If they do, then they are considered as securities. Consequently, it also means that they are subject to greater scrutiny and requirements.


In the U.S., all securities offered are required to be registered with the Securities and Exchange Commission (SEC). According to Gensler, Ether initially met the requirements of the Howey Test due to the investment of money into a common enterprise, with the expectation of a profit through a third party. However, he noted that it has since become decentralized.

As per the test, a transaction is an investment contract if:

  • It is an investment of money;
  • There is an expectation of profits from the investment;
  • The investment of money is in a common enterprise; and
  • Any profit comes from the efforts of a promoter or third party.

Considering that most ICOs are conducted with profit in mind, it would seem that most of them constitute as securities. This, however, has been an ongoing discussion of late, particularly when it comes to protecting investors’ funds.

Jay Clayton, chair of the SEC, has been keen to voice his concern about ICOs. Clayton has said in the past that the ICO market and its widespread promotion as a new investment opportunity has provided the ideal environment for bad actors.

To highlight this, in May, the SEC launched its own fake ICO website, notably called The idea is to educate would-be investors on the risks that ICOs can present.


Mulling Regulations

In recent years, the ICO market has rapidly expanded. As a result, different jurisdictions have been considering regulations for it.

Earlier this month, it was reported that the EU watchdog was mulling regulations. Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said:

Some of these ICOs are like a financial instrument. Once it is a financial instrument it comes under a whole regulatory framework. The subsequent question is what do we do with those ICOs that are outside the regulatory world.

Overall, ICOs and their tokens have faced increased scrutiny over the last year, with a number of countries passing some form of legislation. It seems that the debate of ICO tokens being considered a security or commodity continues as governments come to terms with regulating the cryptocurrency ecosystem.

Do you think most ICOs are securities? Should the industry be regulated? Let us know in the comments below.

Images courtesy of Shutterstock.

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