Shares of crypto miners, including those residing in ETFs like the CoinShares Valkyrie Bitcoin Miners ETF (WGMI ), often see their price action dictated by bitcoin, but there are other factors at plays.
One factor is the regulatory environment. The industry itself is young, but has encountered myriad regulatory resistance over the years. The implication there is that miners, including WGMI holdings, can derive benefit from added regulatory clarity. Some of that recently emerged when the Securities and Exchange Commission noted proof-of-work (PoW) mining activities aren’t considered securities trading.
That’s relevant to investors considering bitcoin or WGMI. And that’s because bitcoin is a (PoW) asset, as is dogecoin. Some other large, well-known digital currencies are also PoW.
SEC Mentions Howey Test
In deliberating about PoW mining constituting securities trading in the traditional sense, the SEC mentioned the Howey Test. That’s a reference the 1946 Supreme Court case SEC v. W.J. Howey Co. That case set standards for determining whether specific assets are securities.
“In evaluating the economic realities of a transaction, the test is whether there is an investment of money in an enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others,” according to the commission. “Federal courts since Howey have explained that Howey’s ‘efforts of others’ requirement is satisfied when ‘the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.’”
It’s important for investors to know how the SEC views mining activities in relation to traditional securities. In short, the commission doesn’t see parallels between mining itself. Nor do they view the rewards accrued by those companies as comparable to a security in the strictest sense.
Put simply, miners and operators of mining pools aren’t under the jurisdiction of the Securities Act. They also don’t need to register with the SEC as if they were.
“A miner’s expectation to receive Rewards is not derived from any third party’s managerial or entrepreneurial efforts upon which the network’s success depends. Instead, the expected financial incentive from the protocol is derived from the administrative or ministerial act of Protocol Mining performed by the miner,” added the commission. “As such, Rewards are payments to the miner in exchange for services it provides to the network rather than profits derived from the entrepreneurial or managerial efforts of others.”
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