SEC’s Next Target Might Be — Are Its Keys Securities?

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  • faces scrutiny over the classification of its keys as securities.
  • Legal experts debate Howey Test application to keys.
  • Arguments suggest keys may not meet the criteria for securities., a rapidly emerging social media platform in the crypto space, has come under scrutiny regarding the classification of its keys as securities and whether they should be subject to regulation by the U.S. Securities and Exchange Commission (SEC).

In an Unchained Podcast episode hosted by Laura Shin, legal expert J.W. Verret and tax specialist Jason Schwartz discussed the legal and tax implications of The debate primarily centers on how will the Howey Test, a legal framework used to determine whether an investment qualifies as a security, might apply to keys.

The Howey Test consists of four prongs: [1]an investment of money, [2]in a common enterprise, [3]with an expectation of profits [4]derived primarily from the efforts of others. According to Verret, who specializes in securities law, keys might not fit this definition due to various factors.

Verret argued that keys lack several attributes usually associated with traditional securities, such as voting rights, dividends, and liquidation rights. He also contended that the common enterprise element is not clear-cut since the keys primarily provide access to chat rooms rather than a pooling of assets for profit generation.

Schwartz added another layer to the discussion, mentioning the emergence of wrapped tokens (ERC-20 tokens representing keys). The debate considered whether these wrapped tokens might be deemed securities due to the potential for secondary market trading. Nonetheless, Verret suggested that the absence of direct financial contributions to key creators could work in favor of not classifying them as securities., a rapidly emerging platform in the crypto space, has gained immense attention since its launch in August 2023. At its core, allows users to purchase keys (formerly referred to as shares) that grant access to chat rooms moderated by friends, with the price of keys determined by a bonding curve. Key holders can redeem their keys for the current market price, introducing a financial aspect to the platform.