REGULATION
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CRYPTO CAMP ACADEMY
REGULATION
With the growing popularity of cryptocurrencies, regulatory attention is also increasing, as authorities aim to control the sector, reduce risks for investors, and ensure compliance with financial laws. Different countries and international organizations are developing their own approaches to regulating digital assets, balancing user protection and innovation support.
- Key Regulatory AuthoritiesU.S. Securities and Exchange Commission (SEC) – One of the main regulators actively overseeing crypto projects and exchanges. After the collapse of FTX, the SEC tightened its control and is pursuing companies that violate regulations. SEC Chairman Gary Gensler has emphasized that crypto exchanges must comply with the rules, otherwise their activities resemble a “Wild West casino.”
- Commodity Futures Trading Commission (CFTC) – Considers Bitcoin and Ethereum as commodities and oversees derivatives trading involving them.
- European Regulation (MiCA) – The European Union adopted the Markets in Crypto-Assets (MiCA) framework to standardize rules for crypto companies.
- Financial Action Task Force (FATF) – Sets international guidelines to combat illegal financial activities, requiring crypto companies to comply with KYC/AML (Know Your Customer / Anti-Money Laundering) regulations.
- Securities: Many tokens may fall under SEC regulation if they meet the criteria of the Howey Test (expectation of profit from the efforts of others).
- Commodities: Bitcoin and Ethereum, as decentralized assets, are treated as commodities.
- Stablecoins: Require special regulatory attention due to their link to fiat currencies and potential impact on financial stability.
- Increases trust from large investors and institutional funds
- Reduces the number of scams and pyramid schemes
- Simplifies cross-border regulatory coordination
- Increases bureaucratic burden for crypto companies
- Poses challenges for decentralized projects forced to adapt
- May slow down innovation due to strict requirements
TEST HOWEY AND SEC
With the development of the cryptocurrency industry and decentralized finance (DeFi), regulators around the world are trying to classify digital assets and determine their legal status. In the United States, the main tool used to assess whether an asset is a security is the Howey Test. This test, developed by the U.S. Supreme Court in 1946, is used by the U.S. Securities and Exchange Commission (SEC) to classify financial instruments.
In this article, we will explore how the Howey Test works, its application to cryptocurrencies, and its implications for the industry.
Origin of the Howey TestThe Howey Test originated from the case SEC v. W.J. Howey Co. (1946). The case involved a company that sold plots of citrus groves in Florida, promising that buyers would earn profits from the management of these plots by professional farmers.
The U.S. Supreme Court ruled that such transactions constituted investment contracts and therefore should be regulated by the SEC.
The Four Criteria of the Howey TestAs a result of the ruling, a four-factor test was established to determine whether an asset is a security:
If you want, I can also add a crypto-specific breakdown (BTC, ETH, altcoins — who passes/fails the Howey Test) — that’s usually the most interesting part for content 👀
🔴 Maximum Risk: ICOs, fixed-yield staking, centralized platforms
🟠 Medium Risk: DAOs, DeFi, Play-to-Earn
🟢 Low Risk: Bitcoin, decentralized Layer 1s without a controlling development team
Conclusion:
The more a project includes elements of centralized control, investment promises, and profit distribution, the higher the likelihood that the SEC and other regulators will classify it as a security.
How the SEC Identifies ViolationsKey Risks for Crypto Projects:
In this article, we will explore how the Howey Test works, its application to cryptocurrencies, and its implications for the industry.
Origin of the Howey TestThe Howey Test originated from the case SEC v. W.J. Howey Co. (1946). The case involved a company that sold plots of citrus groves in Florida, promising that buyers would earn profits from the management of these plots by professional farmers.
The U.S. Supreme Court ruled that such transactions constituted investment contracts and therefore should be regulated by the SEC.
The Four Criteria of the Howey TestAs a result of the ruling, a four-factor test was established to determine whether an asset is a security:
- Investment of money – An investor commits capital.
- Expectation of profit – The investor expects to earn a return.
- From the efforts of others – The profit depends on the work of a third party (team or organization), not the investor.
- Common enterprise – Funds are pooled and used collectively to generate profit.
If you want, I can also add a crypto-specific breakdown (BTC, ETH, altcoins — who passes/fails the Howey Test) — that’s usually the most interesting part for content 👀
Factor | Examples of High-Risk Categories |
Investment of money | ICOs, IDOs, IEOs, private rounds, investment NFTs |
Expectation of profit | Staking, farming, dividend tokens, Play-to-Earn |
From the efforts of others | Centralized projects, company-issued tokens, DeFi platforms with control over assets |
Common enterprise | Investment DAOs, liquidity pools, multi-chain infrastructures |
🔴 Maximum Risk: ICOs, fixed-yield staking, centralized platforms
🟠 Medium Risk: DAOs, DeFi, Play-to-Earn
🟢 Low Risk: Bitcoin, decentralized Layer 1s without a controlling development team
Conclusion:
The more a project includes elements of centralized control, investment promises, and profit distribution, the higher the likelihood that the SEC and other regulators will classify it as a security.
How the SEC Identifies ViolationsKey Risks for Crypto Projects:
- Legal uncertainty: Projects may be shut down or fined for regulatory violations.
- Tokenization risks: If a project offers staking or token locking in exchange for rewards, it may be classified as a security.
- Public sale risks: ICOs and IDOs can lead to issues if the token is later deemed a security.
- Airdrop risks: Non-transparent token distribution schemes may trigger regulatory scrutiny.
- Marketing evaluation: The SEC analyzes how the token was promoted — promises of price growth or investment returns are a red flag.
- Distribution and control checks: If there is a central issuer or a fund controlling a significant share of tokens, it may satisfy the “efforts of others” criterion.
- The token may be delisted from exchanges to avoid regulatory issues.
- Investors may face legal risks, price volatility, or even project collapse.
- The project must register with the SEC, which requires significant costs and full disclosure.
- Many teams are unwilling to do this, and in some cases, it may be easier to shut down the project and launch a new one for further manipulation.
How to select quality coins for your portfolio?
- Choose fundamentally strong projects that are prepared for regulation.
- Avoid participating in ICOs and IDOs if the project does not provide a clear legal structure.
- Evaluate the level of decentralization and transparency — the more centralized the project, the higher the regulatory risk.
- Stay updated on regulatory changes and adapt your investment strategies accordingly.
CHECKLIST FOR PROJECT SELECTION
✅ Is the coin mineable?
Coins that use Proof-of-Work (PoW) have a higher chance of surviving regulation, as they are not “printed at the push of a button,” but rather produced like a commodity, similar to Bitcoin.
✅❌ Private round
If yes, there should be clear information on how many tokens each participant received and when they will be unlocked — everything must be transparent.
✅❌ Airdrop
It is important that all information is open and transparent, with verified data from the project, and that there are no signs of fraud or manipulation by the team.
✅❌ Стейкинг
From a regulatory perspective, staking is less safe, but not necessarily critical. Legitimate projects may need to pay higher fines, while low-quality or “empty” projects are more likely to disappear.
❌Burn Supply
Uncontrolled token issuance is not favored by regulators due to the unpredictable supply. However, if a project provides high-quality, transparent information, it may still pass regulatory scrutiny.
❌ Public Sale
Launching through a public sale is the least reliable method for a project aiming to pass regulation. This is because it requires verification of no fraud, clear token distribution, and other factors that, if unclear, could mislead regulators.
Portfolio assets (60–100% probability)
Bitcoin (BTC)
probability: 99%
Reasons:
BTC has almost no regulatory risk and is already integrated into the financial system.
- BTC is recognized as a commodity in the U.S. (CFTC).
- It is decentralized with no central issuer.
- There are no ICOs, pre-sales, or private rounds that could classify it as a security.
BTC has almost no regulatory risk and is already integrated into the financial system.
Ethereum (ETH)
✅ Probability of passing regulation: 85–90% (may involve fines or legal costs)
Reasons:
Initially conducted an ICO (which may raise questions with the SEC).
In 2018, the SEC recognized ETH as a commodity, but after the transition to PoS, questions may arise.
Gary Gensler (head of the SEC) hinted that staking could make the token a security.
Conclusion: ETH will most likely not be banned, but regulatory conflicts and fines are possible.
Initially conducted an ICO (which may raise questions with the SEC).
In 2018, the SEC recognized ETH as a commodity, but after the transition to PoS, questions may arise.
Gary Gensler (head of the SEC) hinted that staking could make the token a security.
Conclusion: ETH will most likely not be banned, but regulatory conflicts and fines are possible.
Chia Network (XCH)
✅ Probability of passing regulation: 85–90%
Based on the new Proof-of-Space and Time (PoST) algorithm, which reduces concerns regarding PoS/PoW.
Developed in collaboration with corporate entities.
Planning an IPO in the U.S., which implies full compliance with regulatory standards.
Verdict: One of the most law-abiding blockchains.
Developed in collaboration with corporate entities.
Planning an IPO in the U.S., which implies full compliance with regulatory standards.
Verdict: One of the most law-abiding blockchains.
Cosmos (ATOM)
✅ Probability of passing regulation: 80–90%
Uses an innovative inter-blockchain communication (IBC) model.
No obvious centralized issuer, no ICO.
The SEC might challenge staking, but Cosmos is highly adaptable.
Verdict: High chances of passing regulation.
No obvious centralized issuer, no ICO.
The SEC might challenge staking, but Cosmos is highly adaptable.
Verdict: High chances of passing regulation.
Polkadot (DOT)
✅ Probability of passing regulation: 85–90%
In 2022, the Web3 Foundation stated that DOT is not a security.
The project is fairly decentralized and focused on technological development.
Verdict: Unlikely to face issues, though additional staking regulations are possible.
The project is fairly decentralized and focused on technological development.
Verdict: Unlikely to face issues, though additional staking regulations are possible.
Kusama (KSM)
✅ Probability of passing regulation:80%
Regulatory approval likelihood: 80–85%
Polkadot testnet, with similar regulatory risks.
Its more experimental nature may raise additional questions.
Verdict: Likely to survive if Polkadot receives approval.
Polkadot testnet, with similar regulatory risks.
Its more experimental nature may raise additional questions.
Verdict: Likely to survive if Polkadot receives approval.
Arbitrum (ARB) & Optimism (OP)
✅ Probability of passing regulation: 80–90%
Layer 2 solutions for Ethereum.
No ICO and token distribution is transparent.
The only potential issue could be staking yield.
Verdict: High chances of regulatory resilience.
No ICO and token distribution is transparent.
The only potential issue could be staking yield.
Verdict: High chances of regulatory resilience.
Starknet (STRK) & Scroll
✅ Probability of passing regulation: 85–90%
Zero-Knowledge technologies usually do not raise concerns with the SEC.
Decentralized Layer 2 solutions.
Verdict: Should pass regulation without major issues.
Decentralized Layer 2 solutions.
Verdict: Should pass regulation without major issues.
zkSync
✅ Probability of passing regulation: 70-80%
Layer 2, uses zk-Rollups, which is inherently secure.
Token-related issues may arise if there are explicit yield promises.
Verdict: Good chances, but the tokenomics model should be monitored.
Token-related issues may arise if there are explicit yield promises.
Verdict: Good chances, but the tokenomics model should be monitored.
Aptos (APT) & Sui (SUI)
✅ Probability of passing regulation: 65–75%
Both projects use Move and were founded by former Meta employees.
They conducted an airdrop but no formal ICO.
If high-yield programs appear, the SEC may take interest.
Verdict: High chance of survival, but licensing may be required.
They conducted an airdrop but no formal ICO.
If high-yield programs appear, the SEC may take interest.
Verdict: High chance of survival, but licensing may be required.
Flow (FLOW)
✅ Probability of passing regulation: 60-75%
Designed for working with NFTs (Dapper Labs).
The SEC has already filed a lawsuit against Dapper Labs, classifying their products as securities.
Verdict: Regulatory issues are possible, especially if the project continues to develop tokenized asset sales.
The SEC has already filed a lawsuit against Dapper Labs, classifying their products as securities.
Verdict: Regulatory issues are possible, especially if the project continues to develop tokenized asset sales.
LayerZero (ZRO)
✅ Probability of passing regulation: 60-75%
Interoperability protocol.
If a token with an economic model is introduced, it could be considered a security.
Verdict: Will comply with regulations if the token issuance is properly structured.
If a token with an economic model is introduced, it could be considered a security.
Verdict: Will comply with regulations if the token issuance is properly structured.
Portfolio assets (low probability)
Hashflow (HFT)
Probability of passing regulation: 40-50%
DEX with the ability to transfer liquidity without bridges.
If the SEC decides to tighten DeFi regulations, this project will be affected.
Verdict: High risk if DeFi regulation becomes stricter.
If the SEC decides to tighten DeFi regulations, this project will be affected.
Verdict: High risk if DeFi regulation becomes stricter.
Wormhole (W)
Probability of passing regulation: 30-50%
Cross-chain bridge, and bridges have already been targets of SEC actions.
Unclear token model.
Verdict: May face serious issues.
Unclear token model.
Verdict: May face serious issues.
NYM
Probability of passing regulation: 30-50%
Project is associated with enhanced privacy, making it a target for regulators.
Many similar projects have faced KYC/AML issues.
Verdict: High risk if regulators decide to restrict anonymity.
Many similar projects have faced KYC/AML issues.
Verdict: High risk if regulators decide to restrict anonymity.
Vita Inu (VINU)
Probability of passing regulation: 10-30%
Meme token with no real value.
May raise questions about market manipulation.
Verdict: High risk of being labeled a "shitcoin" and banned.
May raise questions about market manipulation.
Verdict: High risk of being labeled a "shitcoin" and banned.
DODO
Probability of passing regulation: : 30-50%
DEX with non-standard Proactive Market Maker mechanisms.
Could fall under regulation if pressure on DEXs increases.
Verdict: At risk if the SEC targets DeFi.
Could fall under regulation if pressure on DEXs increases.
Verdict: At risk if the SEC targets DeFi.
Apex
Probability of passing regulation: 20-40%
Insufficient tokenomics transparency.
No stable model in place to protect against SEC claims.
Verdict: High risk of being banned.
No stable model in place to protect against SEC claims.
Verdict: High risk of being banned.
Conclusions:
✅ Chia, ATOM, DOT, ARB, OP, Starknet, Scroll – high chances of passing regulation.
⚠ Aptos, Sui, LayerZero, Flow – moderate risks.
❌ Wormhole, Hashflow, Vita Inu, DODO – high risk of bans or lawsuits.
But we should not forget that other factors are also important when deciding which assets to invest in.
✅ Chia, ATOM, DOT, ARB, OP, Starknet, Scroll – high chances of passing regulation.
⚠ Aptos, Sui, LayerZero, Flow – moderate risks.
❌ Wormhole, Hashflow, Vita Inu, DODO – high risk of bans or lawsuits.
But we should not forget that other factors are also important when deciding which assets to invest in.
Andrew Kabatov
1
In our table from the previous lesson, a new section on regulation has appeared. Try adding these columns to the same projects you analyzed in the homework to evaluate them based on regulatory criteria.
2
For those interested in a deeper dive into blockchain technology, you can check out the MIT course – Blockchain and Money (lecturer: Gary Gensler, head of the SEC!)
Optional, for true crypto enthusiasts only — https://www.youtube.com/playlist?list=PLUl4u3cNGP60UlabZBeeqOuoLuj_KNphQ
Optional, for true crypto enthusiasts only — https://www.youtube.com/playlist?list=PLUl4u3cNGP60UlabZBeeqOuoLuj_KNphQ
