Author | FinTax
1. Case Facts Overview: A Carefully Designed Crypto Scam
In 2023, the U.S. Securities and Exchange Commission (SEC) initiated a landmark lawsuit against the crypto company Green United LLC, accusing it of committing large-scale fraud through the sale of cryptocurrency mining machines called "Green Boxes," with the amount involved reaching up to $18 million. The SEC's complaint explicitly requested: a permanent ban on the defendants from participating in the alleged securities transactions and business activities, the forfeiture of their illegal gains, and a prohibition on Krohn and Thurston from participating in any unregistered securities offerings (including crypto asset securities). According to the ruling on September 23, 2024, Judge Ann Marie McIff Allen found that the SEC had sufficiently demonstrated that the combination of Green Boxes and the custody agreements constituted securities, and that the defendants created a false impression of investment returns through misrepresentations, ultimately supporting the SEC's request for penalties. The core of this scam was the construction of a seemingly perfect investment trap: after investors paid $3,000 to purchase a mining machine, the defendants promised a monthly return of $100, with an annual return rate as high as 40%-100%. However, the truth was far from this rosy picture: Green United did not use the mining machines for actual mining but disguised profits by purchasing unmined "GREEN" tokens, which ultimately lost all value due to a lack of secondary market liquidity.
Green United's business model was highly deceptive: on one hand, it used hardware sales as a facade, while on the other hand, it deeply bound investors through custody agreements. According to the agreements, Green United claimed it would "do all the work" to achieve the expected returns, and this "commitment + control" model became the core of the case's controversy. In September 2024, Judge Ann Marie McIff Allen of the U.S. District Court for Utah ruled that the combination of mining machine sales and custody agreements constituted securities transactions, aligning with the investment contract definition established in the 1946 SEC v. W.J. Howey Co. case. This ruling not only overturned the defendants' defense of "not involving securities transactions" but also clearly brought crypto mining machines under the scope of securities regulation.
2. Analysis of Controversy: How Were Mining Machine Transactions Classified as Securities?
2.1 The Applicability Dilemma of the Howey Test
The four elements of an investment contract established by the U.S. Supreme Court in the Howey case include: investment of money, a common enterprise, expectation of profits, and profits derived from the efforts of others. The core of Green United's defense emphasized the attribute of mining machines as "end-user self-use products," arguing that the profit promises in the custody agreements were commercial incentives rather than securities offerings, and there was no common enterprise as required for securities. However, in this case, Judge Allen's ruling broke through traditional understanding, particularly through a penetrating review, determining that the connection between control and profit sources had surpassed the realm of commodity transactions, meaning that the profits in the custody agreements had the nature of securities investment returns, ultimately categorizing mining machine transactions as a common enterprise. The judge's specific judgments were as follows:
Investment of money: Investors paid $3,000 to purchase mining machines, meeting the investment element;
Common enterprise: Investors' profits did not come from the mining capability of the machines themselves but relied on Green United's control and operation of the system, forming a common enterprise between investors and the promoters;
Expectation of profits: The promised return rate of 40%-100% far exceeded normal commercial investment returns, fitting the "expectation of profits" characteristic;
Efforts of others: Green United promised to "do all the work," requiring no participation from investors in operations, with profits entirely dependent on the promoters' efforts.
2.2 Diverse Interpretations by Legal Experts
Despite the court's ruling, there remains significant disagreement within the legal community regarding this case. Some viewpoints consider it a specific fraud; for instance, Ishmael Green, a partner at Diaz Reus law firm, pointed out that the SEC's accusations targeted Green United's false advertising and custody agreement design, not the mining machine sales themselves. As long as the mining machines are sold in a "self-use" manner, they could still evade classification as securities. More importantly, this ruling has sparked intense discussions among crypto industry practitioners and legal scholars regarding the Howey test. Supporters argue that this case embodies the core principle of the Howey test—"substance over form"—as although mining machines are physical products, the absolute control of the promoters over the system and the strong correlation with profits constitute the substantive characteristics of a "common enterprise." Opponents warn that if this logic holds, all hardware sales with profit promises (such as profit-sharing clauses included with equipment sales) could potentially be classified as securities, leading to blurred legal applicability boundaries. This divergence essentially reflects the deep challenges faced by crypto asset regulation: how to seek a balance between protecting investors and encouraging technological innovation? In the future, it is necessary to further clarify standards through judicial precedents, such as explicitly stating that when a product sale includes profit promises, it must also meet conditions like "decentralized operation" (e.g., users can independently decide node operations) and "shared risk" (e.g., investors must bear equipment maintenance costs) to exclude securities attributes.
2.3 Reference Cases for the Classification of Other Crypto Assets as Securities
Ripple Case: The SEC accused Ripple of financing through the sale of XRP, constituting the issuance of unregistered securities. The court, based on the Howey test, determined that XRP sales to institutional investors met the definition of securities. Specifically, Ripple explicitly tied the value of XRP to its own development through promotional materials (e.g., "The Ripple protocol becoming a global payment pillar will significantly increase XRP demand"), and investors' purchasing behavior constituted an investment in a common enterprise, with profit expectations entirely dependent on the Ripple team's technological development and market promotion. However, secondary market programmatic sales were not classified as securities due to a lack of profit promises and direct connections between investors and the issuer. This case first clarified the decisive impact of transaction scenarios on the classification of crypto assets.
Terraform Case: The court ruled that UST and LUNA met the definition of securities, with the core basis being the "profits derived from the efforts of others" standard. Although UST employed an algorithmic stabilization mechanism, Terraform's continuous information disclosure (e.g., the white paper's promise of "UST pegged to the dollar 1:1") and founder Do Kwon's public endorsements led investors to form a reasonable expectation that "profits come from the efforts of the Terra team." The judge specifically pointed out that the degree of decentralization is not an exclusion criterion for securities attributes—so long as there is "promoter-led marketing and profit promises," even if asset transactions are entirely executed through smart contracts, they may still fall under regulation.
3. Future Outlook on the Classification of Crypto Assets as Securities
Green United, through custody agreements, transformed the profits from mining machines into financial attributes, making the investors' actual participation a "common enterprise" reliant on the promoters' operations, rather than the mining machines themselves as hardware. In the short term, this case has a certain deterrent effect on the fraudulent packaging of crypto projects, benefiting the interests of crypto asset investors; in the long term, this case helps to promote the iteration of the securities regulatory framework. With the emergence of new technologies and concepts such as crypto assets and smart contracts, traditional financial scenarios are undergoing dramatic changes, and simply applying the Howey test can no longer meet regulatory needs. Instead, it should dynamically consider the specific forms of projects, balancing technological innovation and legal regulation. In summary, the healthy development of the crypto market relies on a deep dialogue between legal rationality and technological logic, and the future landscape of the classification of crypto assets as securities is gradually unfolding through such cases.
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