Author | FinTax
1. Case facts: A well-designed crypto scam
In 2023, the U.S. Securities and Exchange Commission (SEC) launched a landmark lawsuit against the crypto company Green United LLC, accusing it of large-scale fraud by selling cryptocurrency mining machines called "Green Boxes", involving an amount of up to $18 million. In the complaint, the SEC explicitly requested: permanently prohibit the defendants from participating in the alleged securities transactions and business activities, confiscate their illegal gains, and prohibit 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 determined that the SEC had fully proved that Green Boxes, combined with the custody agreement, constituted securities, and that the defendants created the illusion of investment returns through false statements, and ultimately supported the SEC's request for penalties. The core of this scam is to build a seemingly perfect investment trap: after investors pay $3,000 to buy mining machines, the defendants promise to earn $100 per month, with an annualized return rate of up to 40%-100%. However, the truth is far from that: Green United did not use the mining machines for actual mining, but disguised them as income by purchasing unmined "GREEN" tokens, which eventually lost their value due to lack of secondary market liquidity.
Green United's business model is extremely deceptive: on the one hand, it uses hardware sales as a cover, and on the other hand, it deeply binds investors through custody agreements. According to the agreement, Green United claims to "do all the work" to achieve the expected returns. This "commitment + control" model has become the core of the case dispute. In September 2024, Ann Marie McIff Allen, a judge in the Utah District Court, ruled that the combination of mining machine sales and custody agreements constituted securities transactions, which met the definition of investment contracts in the 1946 SEC v. WJ Howey Co. case. This ruling not only overturned the defendant's defense that "no securities transactions were involved", but also clearly included crypto mining machines in the scope of securities supervision.
2. Analysis of the focus of controversy: Why are mining machine transactions considered securities?
2.1 Dilemma in the application 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 capital, common cause, expected profit, and profit from the efforts of others. The core of Green United's defense is to emphasize the nature of mining machines as "commodities for end-user use", and to argue that the profit promises in the custody agreement are commercial incentives rather than securities issuance, and that there is no common cause required for securities. However, in this case, Judge Allen's ruling broke through traditional cognition, especially through penetrating review, determining that the correlation between control rights and the source of income has broken through the scope of commodity transactions, that is, the income in the custody agreement has the nature of securities investment income, and ultimately included mining machine transactions in the scope of common cause. The judge's specific judgment is as follows:
1. Capital investment: The investor pays $3,000 to purchase a mining machine, which meets the capital investment requirements;
2. Common cause: The investors’ income does not come from the mining capacity of the mining machine itself, but depends on Green United’s control and operation of the system, forming a common cause between investors and sponsors;
3. Profit expectations: The promise of an ultra-high rate of return of 40%-100% far exceeds the normal commercial investment return and meets the characteristics of "expected profit";
4. Efforts of others: Green United promises to "do all the work", investors do not need to participate in operations, and profits depend entirely on the efforts of the promoters.
2.2 Diverse Interpretations of Legal Experts
Although the court's verdict has been made, there are still significant differences in the legal community about this case. Some people believe that this is a specific fraud. For example, Ishmael Green, a partner at Diaz Reus Law Firm, pointed out that the SEC's charges are aimed at Green United's false advertising and custody agreement design, not denying the sale of mining machines themselves. As long as the mining machines are sold in the form of "end-user self-use", they can still circumvent the securities characterization. More importantly, this ruling has also triggered a heated discussion among crypto industry practitioners and legal scholars on the Howey test. Supporters believe that this case embodies the core meaning of the Howey test of "substance over form" - although mining machines are physical commodities, the absolute control of the initiator over the system and the strong correlation between profits in the revenue model have constituted the essential characteristics of a "common cause". Opponents warn that if this logic is established, all hardware sales with revenue promises (such as profit sharing clauses when companies sell equipment) may be identified as securities, resulting in blurred boundaries of legal application. This disagreement essentially reflects the deep challenges facing crypto asset regulation: how to strike a balance between protecting investors and encouraging technological innovation? In the future, it is urgently necessary to further clarify the standards through judicial precedents. For example, it should be made clear that when the sale of goods is accompanied by a profit promise, the conditions such as "decentralized operation" (such as users can decide node operations independently) and "risk sharing" (such as investors need to bear the cost of equipment maintenance) must be met at the same time before the securities attributes can be excluded.
2.3 Other reference cases for the qualitative classification of crypto-asset securities
Ripple case: The SEC accused Ripple of issuing unregistered securities by selling XRP. The court determined that the sale of XRP to institutional investors met the definition of securities based on the Howey test. Specifically, Ripple clearly tied the value of XRP to its own development through its brochures (such as "Ripple's protocol will greatly increase the demand for XRP as it becomes a global payment pillar"), and investors' purchases constituted capital investment in a common enterprise, and the profit expectations were entirely dependent on the Ripple team's technology development and market promotion. However, programmatic sales in the secondary market were not identified as securities due to the lack of profit commitments and direct links between investors and issuers. This case clearly defined for the first time the decisive impact of trading scenarios on the qualitative nature of crypto assets.
Terraform case: The court determined that UST and LUNA meet the definition of securities, with the core basis being the "profits come from the efforts of others" standard. Although UST uses an algorithmic stabilization mechanism, Terraform has formed a reasonable expectation among investors that "profits come from the efforts of the Terra team" through continuous information disclosure (such as the white paper's promise that "UST is pegged 1:1 with the US dollar") and the public stand of founder Do Kwon. The judge specifically pointed out that the degree of decentralization is not an exclusionary criterion for securities attributes - as long as there is "marketing and profit promises led by the promoter", even if asset transactions are fully executed through smart contracts, they may still be included in the regulation.
3. Qualitative future prospects of crypto asset securities
Green United alienates the mining machine income into financial attributes through the custody agreement, so that investors actually participate in the "common cause" that relies on the operation of the sponsor, rather than the mining machine itself as hardware. In the short term, this case has a certain deterrent effect on the fraudulent packaging of crypto projects, which is conducive to safeguarding the interests of crypto asset investors; in the long term, this case will help 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 earth-shaking changes. Simply applying the Howey test can no longer meet regulatory needs, but should dynamically consider the specific form of the project and balance the relationship between technological innovation and legal supervision. In short, the healthy development of the crypto market is inseparable from the in-depth dialogue between legal rationality and technical logic. The future picture of the qualitative nature of crypto asset securities is slowly unfolding through such cases.
