SEC Addresses Crypto Proof-of-Work Mining Activities | Stinson – Corporate & Securities Law Blog
The SEC looked favorably on designated crypto mining activities by stating that such activities are not securities. Specifically, the SEC addressed “proof-of-work” activities. According to the SEC, Proof-of-work (“PoW”) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants, called “miners,” who operate nodes adding computational resources to the network. PoW involves validating transactions on a network and adding them in blocks to the distributed ledger. The “work” in PoW is the computational resources that miners contribute to validate transactions and add new blocks to the network. Miners do not have to own the network’s Covered Crypto Asset to validate transactions.
The statement suggests solo mining is not a security. It says “A miner’s Self (or Solo) Mining is not undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Rather, a miner contributes its own computational resources, which secure the network and enable the miner to earn Rewards issued by the network in accordance with its software protocol.”
The statement also suggests pooled mining activities are not securities. It says “Likewise, when a miner combines its computational resources with other miners to increase their chances of successfully mining new blocks on the network, the miner has no expectation of profit derived from the entrepreneurial or managerial efforts of others. By adding its own computational resources to a mining pool, the miner merely is engaging in an administrative or ministerial activity to secure the network, validate transactions and add new blocks, and receive Rewards.”
Democratic Commissioner Caroline A. Crenshaw did not seem impressed. She stated:
“In short, the statement leaves us exactly where we started: with a facts and circumstances application of Howey. For the sake of investors, other market participants, and the markets themselves, I hope that readers do not mistake it for something more than it is. The meme coin statement issued by the staff similarly cautioned (again, buried in a footnote) that its discussion was limited to what it called “typical” meme coin offers and that a determination as to any specific coin would require a facts and circumstances analysis under Howey. Predictably, these cautionary footnotes were largely ignored and the statement was widely reported as a wholesale exemption for meme coins. I hope that the statement on crypto mining is more accurately understood for what it is and is not. Beware of any headlines that herald a wholesale exemption for mining. And mine the fine print.
Finally, buried in the footnotes, the statement reveals its true limitation: one actually would have to conduct a Howey analysis to know if a specific mining arrangement constitutes an investment contract. In fact, the footnote accurately notes that to make a “definitive determination” under Howey, one would need to analyze the economic realities and real-world arrangements, including “the way in which pool members may be compensated, how miners or other persons may participate in mining pools, or the activities conducted by pool operators,” and other “facts relating to the specific Mining Activity.””
