Source: U.S. SEC Division of Corporation Finance; Translated by AIMan@
In order to clarify the applicability of federal securities laws to crypto assets, the SEC's Division of Corporation Finance is issuing guidance on certain activities on proof-of-work networks, referred to as "mining."
Specifically, this statement pertains to the mining of crypto assets that are intrinsically linked to the programmatic operation of public, permissionless networks. These crypto assets are used to participate in the consensus mechanism of such networks and/or are obtained through participation in such mechanisms, or are used to maintain the technical operation and security of such networks and/or are obtained through maintaining the technical operation and security of such networks. In this statement, we refer to these crypto assets as "Covered Crypto Assets," and their mining on proof-of-work networks as "Protocol Mining."
The network relies on cryptographic technology and economic mechanisms designed to eliminate the need for a designated trusted intermediary to validate network transactions and provide settlement guarantees to users. The operation of each network is controlled by an underlying software protocol, which consists of computer code that programmatically executes certain network rules, technical requirements, and reward distributions. Each protocol contains a "consensus mechanism" or method for enabling a distributed network of unrelated computers (referred to as "nodes") that maintain the peer-to-peer network to reach an authoritative record of the network's "state" or the ownership balances of network addresses, transactions, smart contract code, and other data. Public, permissionless networks allow anyone to participate in the operation of the network, including validating new transactions on the network according to the network's consensus mechanism.
Proof of Work ( "PoW" ) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants (known as "miners"). These participants operate nodes and contribute computational resources to the network. PoW involves validating transactions on the network and adding them to the distributed ledger in the form of blocks. The "work" in PoW refers to the computational resources that miners contribute to validate transactions and add new blocks to the network. Miners do not need to own the underlying crypto assets of the network 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 batch transactions from other nodes and proposing (or validating) new transaction blocks to the network. In exchange for providing validation services, miners receive "rewards" in the form of newly "minted" or created protected cryptographic assets, which are delivered according to the terms of the protocol. In this way, PoW incentivizes miners to invest the necessary resources to add valid blocks to the network.
Miners providing validation services can only receive rewards after other nodes in the network verify that the solution is correct and valid through the protocol. To achieve this, once a miner finds the correct solution, they broadcast this information to other miners, who can verify whether the miner has correctly solved the problem to earn the reward. Once validated, all miners will add the new block to their own copies of the network. PoW aims to protect the network by requiring miners to spend significant time and computational resources to validate transactions. When the validation process operates in this way, it not only reduces the likelihood of someone attempting to compromise the network but also decreases the probability of miners including altered transactions (such as those allowing for "double spending" of regulated crypto assets).
In addition to mining on their own, miners can also join "mining pools". Mining pools allow miners to combine their computational resources to increase the chances of successfully verifying transactions and mining new blocks on the network. Mining pools have developed into various types, each with different operating methods and reward distribution systems. Pool operators are typically responsible for coordinating the computational resources of miners, maintaining the mining hardware and software of the pool, supervising the security measures of the pool to prevent theft and cyber attacks, and ensuring that miners receive their rewards. In return, pool operators charge a fee, which is deducted from the share of rewards that miners earn from the pool. The reward payments from different pools vary, but rewards are usually distributed proportionally to the total computational resources contributed by each miner to the pool. Miners are not obligated to stay in the pool and can choose to leave at any time.
The department believes that under the circumstances described in this statement, the "mining activities" related to protocol mining (as defined in this statement) do not involve the issuance and sale of securities as defined in Section 2(a)(1) of the Securities Act of 1933 ("Securities Act") and Section 3(a)(10) of the Securities Exchange Act of 1934 ("Exchange Act"). Therefore, the department believes that participants in mining activities are not required to register trades with the U.S. SEC under the Securities Act, nor do they need to comply with any of the exemptions from registration under the Securities Act for these mining activities.
The department's perspective involves the following protocol mining activities and transactions ("mining activities" and each "mining activity"): (1) mining protected cryptocurrencies on a PoW network; (2) the roles of mining pools and pool operators participating in the protocol mining process, including their roles in earning and distributing rewards. This statement only pertains to mining activities related to the following types of protocol mining.
Solo mining, where miners use their own computing resources to mine protected crypto assets. Miners can operate nodes and mine protected crypto assets either individually or in collaboration with others.
Mining pools allow miners to combine their computing resources with other miners to increase the chances of successfully validating transactions and mining new blocks on the network. Reward payments may flow directly from the network to the miners or may be indirectly distributed to the miners through the pool operators.
The Securities Law, Article 2(a)(1) and the Trading Law, Article 3(a)(10) define "securities" by listing various financial instruments (including "stocks", "bonds", and "debentures"). Since the covered crypto assets do not constitute any financial instruments explicitly listed in the definition of "securities", we analyze certain transactions involving covered crypto assets in the context of protocol mining based on the "investment contract" test established in SEC v. WJ Howey Co. The "Howey Test" is used to analyze arrangements or instruments not listed in these statutory terms based on their "economic reality."
When assessing the economic reality of a transaction, the standard to be examined is whether there is an investment of funds in the business, and whether that investment is based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Since the Howey case, federal courts have explained that the requirement for "the efforts of others" in the Howey case is that "the efforts made by persons other than the investors are undoubtedly significant and are necessary management efforts that affect the success or failure of the enterprise."
Mining by miners themselves (or solo mining) is not a reasonable expectation to gain profits from the entrepreneurial or managerial efforts of others. Instead, miners contribute their computing resources, which can protect the network and allow them to receive rewards distributed by the network according to their software protocol. To earn rewards, miners' activities must comply with the protocol rules. By adding their computing resources to the network, miners are merely engaging in organized or contributory activities to protect the network, validate transactions, and add new blocks in order to receive rewards. The expectation of miners receiving rewards does not stem from the management or entrepreneurial efforts of any third party relied upon for the network's success. Rather, the expected economic incentives of the protocol come from the administrative or operational actions of miners executing protocol mining. Therefore, rewards are compensation for the services miners provide to the network, not profits gained from the entrepreneurial or managerial efforts of others.
Similarly, when miners combine their computing resources with other miners to increase their chances of successfully mining new blocks on the network, miners do not expect to make a profit from other people's entrepreneurial or managerial efforts. By adding their own computing resources to a mining pool, miners are simply engaging in administrative or administrative activities to secure the network, validate transactions, and add new blocks and earn rewards. In addition, any profit expectations of miners are not from the efforts of third parties, such as mining pool operators. Even participating in mining pools, individual miners still perform actual mining activities by contributing their computing power to solve cryptographic puzzles used to validate new blocks. In addition, neither mining by the miners themselves (or individually) or as members of the mining pool does not change the nature of protocol mining for the purposes of the Howey test. In either case, protocol mining remains an organizational or contributing activity, as described in this statement. In addition, the activities of the mining pool operator to operate the mining pool using the combined computing resources of the participating miners are mainly of an organizational or contributing nature. While some of the activities of the pool operator may benefit the miner community, any such effort will not be sufficient to satisfy OmniVision's "efforts of others" requirement, as miners primarily rely on the computing resources they provide to the pool along with other members to earn profits. For this reason, miners do not join the pool based on the ability to passively earn profits from the activities of the pool operator.
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PoW Mining does not constitute securities issuance and does not require registration, see what the US SEC has to say.
Source: U.S. SEC Division of Corporation Finance; Translated by AIMan@
In order to clarify the applicability of federal securities laws to crypto assets, the SEC's Division of Corporation Finance is issuing guidance on certain activities on proof-of-work networks, referred to as "mining."
Specifically, this statement pertains to the mining of crypto assets that are intrinsically linked to the programmatic operation of public, permissionless networks. These crypto assets are used to participate in the consensus mechanism of such networks and/or are obtained through participation in such mechanisms, or are used to maintain the technical operation and security of such networks and/or are obtained through maintaining the technical operation and security of such networks. In this statement, we refer to these crypto assets as "Covered Crypto Assets," and their mining on proof-of-work networks as "Protocol Mining."
The network relies on cryptographic technology and economic mechanisms designed to eliminate the need for a designated trusted intermediary to validate network transactions and provide settlement guarantees to users. The operation of each network is controlled by an underlying software protocol, which consists of computer code that programmatically executes certain network rules, technical requirements, and reward distributions. Each protocol contains a "consensus mechanism" or method for enabling a distributed network of unrelated computers (referred to as "nodes") that maintain the peer-to-peer network to reach an authoritative record of the network's "state" or the ownership balances of network addresses, transactions, smart contract code, and other data. Public, permissionless networks allow anyone to participate in the operation of the network, including validating new transactions on the network according to the network's consensus mechanism.
Proof of Work ( "PoW" ) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants (known as "miners"). These participants operate nodes and contribute computational resources to the network. PoW involves validating transactions on the network and adding them to the distributed ledger in the form of blocks. The "work" in PoW refers to the computational resources that miners contribute to validate transactions and add new blocks to the network. Miners do not need to own the underlying crypto assets of the network 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 batch transactions from other nodes and proposing (or validating) new transaction blocks to the network. In exchange for providing validation services, miners receive "rewards" in the form of newly "minted" or created protected cryptographic assets, which are delivered according to the terms of the protocol. In this way, PoW incentivizes miners to invest the necessary resources to add valid blocks to the network.
Miners providing validation services can only receive rewards after other nodes in the network verify that the solution is correct and valid through the protocol. To achieve this, once a miner finds the correct solution, they broadcast this information to other miners, who can verify whether the miner has correctly solved the problem to earn the reward. Once validated, all miners will add the new block to their own copies of the network. PoW aims to protect the network by requiring miners to spend significant time and computational resources to validate transactions. When the validation process operates in this way, it not only reduces the likelihood of someone attempting to compromise the network but also decreases the probability of miners including altered transactions (such as those allowing for "double spending" of regulated crypto assets).
In addition to mining on their own, miners can also join "mining pools". Mining pools allow miners to combine their computational resources to increase the chances of successfully verifying transactions and mining new blocks on the network. Mining pools have developed into various types, each with different operating methods and reward distribution systems. Pool operators are typically responsible for coordinating the computational resources of miners, maintaining the mining hardware and software of the pool, supervising the security measures of the pool to prevent theft and cyber attacks, and ensuring that miners receive their rewards. In return, pool operators charge a fee, which is deducted from the share of rewards that miners earn from the pool. The reward payments from different pools vary, but rewards are usually distributed proportionally to the total computational resources contributed by each miner to the pool. Miners are not obligated to stay in the pool and can choose to leave at any time.
The department believes that under the circumstances described in this statement, the "mining activities" related to protocol mining (as defined in this statement) do not involve the issuance and sale of securities as defined in Section 2(a)(1) of the Securities Act of 1933 ("Securities Act") and Section 3(a)(10) of the Securities Exchange Act of 1934 ("Exchange Act"). Therefore, the department believes that participants in mining activities are not required to register trades with the U.S. SEC under the Securities Act, nor do they need to comply with any of the exemptions from registration under the Securities Act for these mining activities.
The department's perspective involves the following protocol mining activities and transactions ("mining activities" and each "mining activity"): (1) mining protected cryptocurrencies on a PoW network; (2) the roles of mining pools and pool operators participating in the protocol mining process, including their roles in earning and distributing rewards. This statement only pertains to mining activities related to the following types of protocol mining.
Solo mining, where miners use their own computing resources to mine protected crypto assets. Miners can operate nodes and mine protected crypto assets either individually or in collaboration with others.
Mining pools allow miners to combine their computing resources with other miners to increase the chances of successfully validating transactions and mining new blocks on the network. Reward payments may flow directly from the network to the miners or may be indirectly distributed to the miners through the pool operators.
The Securities Law, Article 2(a)(1) and the Trading Law, Article 3(a)(10) define "securities" by listing various financial instruments (including "stocks", "bonds", and "debentures"). Since the covered crypto assets do not constitute any financial instruments explicitly listed in the definition of "securities", we analyze certain transactions involving covered crypto assets in the context of protocol mining based on the "investment contract" test established in SEC v. WJ Howey Co. The "Howey Test" is used to analyze arrangements or instruments not listed in these statutory terms based on their "economic reality."
When assessing the economic reality of a transaction, the standard to be examined is whether there is an investment of funds in the business, and whether that investment is based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Since the Howey case, federal courts have explained that the requirement for "the efforts of others" in the Howey case is that "the efforts made by persons other than the investors are undoubtedly significant and are necessary management efforts that affect the success or failure of the enterprise."
Mining by miners themselves (or solo mining) is not a reasonable expectation to gain profits from the entrepreneurial or managerial efforts of others. Instead, miners contribute their computing resources, which can protect the network and allow them to receive rewards distributed by the network according to their software protocol. To earn rewards, miners' activities must comply with the protocol rules. By adding their computing resources to the network, miners are merely engaging in organized or contributory activities to protect the network, validate transactions, and add new blocks in order to receive rewards. The expectation of miners receiving rewards does not stem from the management or entrepreneurial efforts of any third party relied upon for the network's success. Rather, the expected economic incentives of the protocol come from the administrative or operational actions of miners executing protocol mining. Therefore, rewards are compensation for the services miners provide to the network, not profits gained from the entrepreneurial or managerial efforts of others.
Similarly, when miners combine their computing resources with other miners to increase their chances of successfully mining new blocks on the network, miners do not expect to make a profit from other people's entrepreneurial or managerial efforts. By adding their own computing resources to a mining pool, miners are simply engaging in administrative or administrative activities to secure the network, validate transactions, and add new blocks and earn rewards. In addition, any profit expectations of miners are not from the efforts of third parties, such as mining pool operators. Even participating in mining pools, individual miners still perform actual mining activities by contributing their computing power to solve cryptographic puzzles used to validate new blocks. In addition, neither mining by the miners themselves (or individually) or as members of the mining pool does not change the nature of protocol mining for the purposes of the Howey test. In either case, protocol mining remains an organizational or contributing activity, as described in this statement. In addition, the activities of the mining pool operator to operate the mining pool using the combined computing resources of the participating miners are mainly of an organizational or contributing nature. While some of the activities of the pool operator may benefit the miner community, any such effort will not be sufficient to satisfy OmniVision's "efforts of others" requirement, as miners primarily rely on the computing resources they provide to the pool along with other members to earn profits. For this reason, miners do not join the pool based on the ability to passively earn profits from the activities of the pool operator.