Why the Howey Test Is a Poor Fit for Modern Proof-of-Stake

Howey assumes a passive investor reliant on a promoter's efforts. In PoS, the token holder is the active security provider. Their rewards are payment for a service (block validation), not a return on capital from a third party's labor.

• Key Benefit 1: Reframes staking as a utility function, not an investment contract.
• Key Benefit 2: Aligns with the operational reality of networks like Ethereum, Solana, and Cosmos.

A modern test should assess if rewards are earned through verifiable computational work that secures the network. This separates utility tokens (like ETH, SOL) from securities.

• Key Benefit 1: Creates a clear, objective bright line based on network function.
• Key Benefit 2: Protects legitimate protocol development while targeting true fraud.

LSTs like stETH expose Howey's flaw. The underlying staking is active work, but the derivative token's price action introduces a secondary market. This conflates utility with speculative value.

• Key Benefit 1: Highlights the need to separate the staking service from the staking asset.
• Key Benefit 2: Shows why enforcement against Coinbase or Kraken staking-as-a-service misses the core innovation.

In a truly decentralized PoS chain, there is no single 'promoter' whose efforts determine profit—the protocol's code and distributed validator set do. This dismantles Howey's 'common enterprise' pillar.

• Key Benefit 1: Protects decentralized networks from misapplied securities law.
• Key Benefit 2: Correctly targets centralized staking services that do resemble investment contracts.

The SEC's core argument conflates staking rewards with a 'common enterprise' profit. In modern PoS, validators perform active, critical work securing the network, akin to AWS earning fees for compute. The reward is payment for service, not a passive dividend from a promoter's efforts.

• Key Distinction: Staking slashes capital for downtime, unlike a stock dividend.
• Real-World Impact: This misclassification threatens $100B+ in staked assets and forces protocols like Lido and Rocket Pool into legal limbo.

Former SEC Director William Hinman's 2018 speech outlined a functional, decentralized network as non-security. This is the pragmatic framework the SEC now ignores. The test is whether a third party's managerial efforts are essential for the asset's value—a condition Ethereum, Solana, and Cosmos have demonstrably outgrown.

• Precedent: Ethereum's transition from ICO to decentralized utility.
• Legal Clarity: Provides a path for sufficiently decentralized networks to operate without perpetual securities registration.

The Howey bludgeon doesn't kill crypto; it exports it. The SEC vs. Coinbase lawsuit over staking services demonstrates the overreach, pushing protocol development and capital to jurisdictions with intent-based frameworks like the EU's MiCA or Singapore's Payment Services Act.

• Consequence: US loses ground in core infrastructure (validators, R&D) while retaining speculative trading.
• Data Point: ~40% of Ethereum validators are now outside US jurisdiction, a trend accelerating with enforcement actions.

The 2023 Ripple ruling created a crucial distinction: sales to institutional investors (securities) vs. programmatic sales on exchanges (non-securities). This transaction-based test is far more nuanced than blanket asset classification and directly undermines the SEC's case against Coinbase and Binance for simply listing tokens.

• Legal Win: Affirmed that secondary market trading of an asset does not inherently constitute a securities offering.
• Strategic Impact: Forces the SEC into inefficient, transaction-by-transaction litigation instead of broad industry bans.

Applying broker-dealer rules to decentralized staking pools is a category error. A Lido node operator or Cosmos validator runs software, not a financial intermediary. They have no customer relationship, perform no custody, and execute no trades. Regulating them as brokers is like fining a cloud server for the content it hosts.

• Core Function: Provision of cryptographic compute and uptime.
• Absurd Extension: By this logic, ISPs providing internet to exchanges would also be brokers.

The SEC's campaign via enforcement (Kraken, Coinbase) creates uncertainty, not compliance. The actual solution is legislation like the FIT for the 21st Century Act or Clarity for Payment Stablecoins Act, which define digital asset securities and create tailored regimes for decentralized networks and stablecoin issuers like Circle.

• Necessity: Congress must define the perimeter, not the SEC.
• Outcome: Clear rules attract institutional capital and legitimate builders, ending the current regulatory vacuum.

Howey requires an expectation of profits solely from the efforts of others. Modern staking is a permissionless, active service.

• Validator slashing and uptime are direct efforts of the staker.
• Delegators choose validators based on performance, not passive investment.
• This active participation model aligns more with cloud computing services than a traditional security.

The 2018 SEC speech on Ethereum proposed a functional, decentralized network is not a security. This is the pragmatic path forward.

• Focus on network decentralization and consumptive utility.
• Once a token's value is driven by its use (e.g., gas on Ethereum, governance on Lido), the security label fades.
• This creates a clear, innovation-friendly off-ramp from regulation.

Bitcoin mining rewards were never classified as an investment contract, creating a glaring double standard for Proof-of-Stake.

• Both PoW and PoS are consensus mechanisms that secure a network.
• The economic incentive (block reward) is identical in function.
• Regulating the mechanism instead of the economic substance is a fundamental error that stifles technological progress.

Misapplication of Howey forces builders like Coinbase, Kraken, and Lido to operate in legal gray areas, diverting capital to compliance over R&D.

• $10B+ TVL in liquid staking derivatives exists under regulatory threat.
• VCs avoid foundational infrastructure deals due to existential legal risk.
• The result is a bottleneck on scaling solutions and core protocol development.

To mitigate Howey risk, protocols must architect for genuine decentralization or operate as pure software interfaces.

• Cosmos app-chains and Lido's dual-token model (stETH vs. LDO) separate governance from the staked asset.
• Rocket Pool's permissionless node operator model is a canonical example of decentralized staking infrastructure.
• Pure software like EigenLayer must rigorously avoid any central promise of profits.

The Howey Test will be legislatively or judicially updated. Forward-looking investors should back projects that are defining the new standard.

• The Token Taxonomy Act and SEC vs. Ripple rulings are creating new precedent.
• The winning framework will distinguish between asset sales and network participation.
• Early alignment with this emerging standard is a major competitive moat.