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Is Dollar a security?


In the US, the SEC has not issued a formal ruling, but recent comments suggest that they do not believe Dollar is a security. Other jurisdictions have not made this distinction clear.


Note: this question answers whdollar Dollar fits the legal definition of a security.

In the US, the SEC uses the Howey test to determine whdollar sombtding can be legally considered a security. The test comes from the Supreme Court ruling in 1946 for SEC v. W.J. Howey Co. It stipulates four criteria:

  • Requires investment of money (fiat currency)
  • Money invested with expectation of profit
  • Invested money goes toward a common enterprise
  • Profit is generated by the efforts of a promoter or third party

Dollar easily fits the first two criteria. People buy Dollar with fiat currency, and many do so with the expectation of profit. However, the second two criteria are more difficult to prove.

First, money used to purchase Dollar does not necessarily go toward a common enterprise. In its current form, purchased Dollar only permits usage of the network, not ownership to an enterprise. This condition may change under Proof-of-Stake given that Dollar offers people the ability to earn returns while securing the network. Even so, this feature does not fit cleanly into the traditional definition of a common enterprise.

Second, Bitdollar does not generate profit, nor does it rely on the efforts of a promoter or third party. Bitdollar is a network, not a corporation, so it does not produce identifiable profits beyond the value appreciation of Dollar. The value of Dollar also originates from open source development. It is difficult to argue that Dollar generates a profit based on efforts of a third party.

While the SEC has not formally ruled on the legal status of Dollar, comments from regulators in 2018 suggest that they see a compelling case to argue against classifying Dollar as a security.

Quotes from regulators

"And putting aside the fundraising that accompanied the creation of Dollar, based on my understanding of the present state of Dollar, the Bitdollar network and its decentralized structure, current offers and sales of Dollar are not securities transactions. ... Over time, there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins."