U.S. SEC Defines "POW Mining Activities": Not Securities Activities
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U.S. SEC Defines "POW Mining Activities": Not Securities Activities
When miners combine their computational resources with those of other miners to increase mining success rates, they do not have a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others.
Navigating Web3 tides with focused insightsSource: SEC
Translation: Wu Shuo Blockchain
Introduction
As part of its efforts to clarify the application of federal securities laws in the crypto asset space, [1] the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) issues this statement regarding certain "proof-of-work" (PoW) network mining activities to set forth its views. [2] Specifically, this statement addresses activities involving participation in a network’s consensus mechanism through programmatically defined functions embedded within the protocol itself—on public, permissionless networks—and obtaining or using corresponding crypto assets to support the technological operation and security of such networks. This statement refers to these crypto assets as “Covered Crypto Assets,” [3] and the associated PoW network mining activity as “Protocol Mining.” [4]
Protocol Mining
Networks rely on cryptography and economic design mechanisms to validate transactions and provide settlement assurances without requiring designated trusted intermediaries. Each network operates under a specific software protocol (computer code) that programmatically enforces particular network rules, technical requirements, and reward distributions. Every protocol includes a “consensus mechanism”—a method enabling geographically dispersed, independent computer nodes across the network to reach agreement on the state of the network. Public, permissionless networks allow anyone to participate in network operations, including validating new transactions in accordance with the network's consensus mechanism.
PoW is a consensus mechanism that incentivizes transaction validation by rewarding network participants known as “miners.” [5] PoW involves verifying transactions on the network and bundling them into blocks added to a distributed ledger. The “work” in PoW refers to the computational resources miners expend to verify transactions and add new blocks. Miners do not need to possess Covered Crypto Assets on the network in order to validate transactions.
Miners use computers to solve complex cryptographic puzzles in the form of mathematical equations, competing against one another. The first miner to solve the puzzle gets to collect, verify (or propose), and add a block of transactions to the network. In return for providing validation services, miners receive a “reward,” typically consisting of newly minted or created Covered Crypto Assets issued according to the protocol’s terms. [6] Thus, PoW incentivizes miners to commit necessary resources to add valid blocks to the network.
Miners only receive rewards after other nodes on the network validate, via the protocol, that their computational results are correct and legitimate. Once a miner finds the correct solution, it broadcasts the result to other miners so they can verify the correctness of the solution and confirm the reward. Upon verification, all miners add the new block to their respective copies of the network. By requiring miners to invest substantial time and computational resources in transaction authentication, PoW secures the network. This verification process not only reduces the likelihood of network disruption but also diminishes the possibility of miners altering transactions (such as conducting double-spend attacks). [7]
In addition to solo mining, miners may join a “mining pool,” combining their computational resources with those of other miners to increase the probability of successfully validating transactions and mining new blocks. Mining pools come in various types, each with different operational models and reward distribution mechanisms. [8] Pool operators typically coordinate miners’ computing resources, maintain hardware and software infrastructure, manage security measures, and ensure miners receive their rewards. In return, pool operators deduct a fee from the rewards received by miners as commission. Reward distribution models vary among pools but generally allocate rewards based on the proportion of computational resources contributed by each miner. Miners are under no obligation to remain in any given pool and may choose to leave at any time.
Division of Corporation Finance’s Position on Protocol Mining Activities
The Division believes that, under the circumstances described in this statement, “mining activities” related to Protocol Mining (as defined below) do not constitute offers or sales of securities under Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the Securities Exchange Act of 1934. [9] Therefore, the Division is of the view that persons engaging in mining activities are not required to register the relevant transactions with the Commission pursuant to the Securities Act, nor are they required to rely on any exemptions from registration under the Securities Act.
Scope of Mining Activities Covered by This Statement
The above position of the Division applies to the following Protocol Mining activities and transactions (collectively referred to as “mining activities,” with individual instances referred to as “mining acts”):
Mining Covered Crypto Assets on a PoW network;
The roles of mining pools and pool operators in the Protocol Mining process, including their involvement in earning and distributing rewards.
Only mining activities falling within the following types of Protocol Mining are covered by this statement:
• Solo Mining: A miner uses their own computational resources to mine Covered Crypto Assets. The miner may operate a node independently or jointly with others.
• Mining Pool: A miner combines computational resources with other miners to increase the likelihood of successfully mining a new block. Rewards may be paid directly from the network to the miner or indirectly through a pool operator.
Detailed Analysis
Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act both define “security” by listing various financial instruments, including “stocks,” “notes,” and “bonds.” Since Covered Crypto Assets are not explicitly listed, we apply the “investment contract” test established by the U.S. Supreme Court in SEC v. W.J. Howey Co. (the “Howey Test”) to analyze certain Protocol Mining transactions. [10] The Howey Test is designed to assess transactional arrangements or instruments not clearly within the statutory definition based on their economic reality. [11]
The key question in the economic reality analysis is whether a transaction involves an investment of money in a common enterprise with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. [12] Federal courts have further interpreted post-Howey that such “efforts of others” must be “undeniably significant—that is, the managerial efforts upon which the success of the enterprise depends.” [13]
Solo Mining
Solo mining does not involve a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others. Miners contribute their own computational resources to secure the network and receive rewards as specified by the network protocol. The miner’s expectation of receiving rewards does not depend on the managerial efforts of any third party, but rather arises from their own performance of administrative or technical activities—maintaining the network, validating transactions, and adding new blocks. Therefore, the rewards should be viewed as compensation for services rendered to the network, rather than profits derived from the efforts of others.
Mining Pool
Likewise, when miners combine their computational resources with those of other miners to improve mining success rates, they are not doing so with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. A miner’s expected returns primarily stem from their own投入 of computational resources. While pool operators perform management functions, these are largely administrative or technical in nature. Although potentially beneficial to miners, such activities do not meet the Howey Test standard for “the efforts of others.” Miners do not join pools expecting to passively profit from the managerial activities of pool operators.
For further information, please contact the Office of the Chief Counsel, Division of Corporation Finance:
https://www.sec.gov/forms/corp_fin_interpretive
[1] For purposes of this statement, the term “crypto asset” refers to an asset created, issued, and/or transferred using blockchain or similar distributed ledger technology networks (collectively, “crypto networks”), including but not limited to assets referred to as “tokens,” “digital assets,” “virtual currencies,” and “cryptocurrencies,” which rely on cryptographic protocols. Additionally, in this statement, the term “network” refers to a crypto network.
[2] This statement reflects the views of the staff of the Division of Corporation Finance (the “Division”). It is not a rule, regulation, guidance, or formal statement of the U.S. Securities and Exchange Commission (“Commission”), and the Commission has neither approved nor disapproved its content. Like other staff statements, it is not legally binding or enforceable, does not alter or amend applicable laws, and creates no new or additional obligations for any person or entity.
[3] This statement concerns only certain specific “Covered Crypto Assets,” which themselves lack intrinsic economic attributes or rights—such as entitlement to passive income or rights to share in future revenues, profits, or assets of an enterprise.
[4] This statement addresses only Covered Crypto Asset transactions related to Protocol Mining, and not other types of Covered Crypto Asset transactions.
[5] This statement discusses the “proof-of-work (PoW)” mechanism in general terms and does not address all specific variants of PoW or any particular PoW protocol.
[6] Reward rules are predetermined by the protocol. Miners cannot alter the rewards they receive; the reward structure is entirely determined in advance by the protocol itself.
[7] Double spending refers to the situation where the same crypto asset is sent to two recipients simultaneously, which may occur if ledger records are tampered with.
[8] For example, in a “pay-per-share” model, miners are compensated for each valid share or block contributed to the pool regardless of whether the pool successfully mines a block; in a “peer-to-peer” model, the role of the pool operator is decentralized among pool members; and in a “proportional” model, miners receive rewards in proportion to their contributed computational power during successful block mining. There are also hybrid model pools that combine different operational methods and payment structures.
[9] The Division’s view does not determine whether any particular mining activity (as defined in this statement) constitutes an offer or sale of a security. The ultimate determination regarding a specific mining activity must be made based on the facts and circumstances of that activity. Where facts differ from those described in this statement—for example, how pool participants are compensated, how miners or others participate in the pool, or what activities the pool operator actually performs—the Division’s view on whether a particular mining activity involves an offer or sale of a security may differ.
[10] U.S. Supreme Court case: 328 U.S. 293 (1946).
[11] See Landreth Timber Co. v. Landreth, 471 U.S. 681, 689 (1985), where the U.S. Supreme Court stated that the proper standard for determining whether an instrument not explicitly included in the definition of “stock” under Section 2(a)(1) of the Securities Act—or some unusual instrument—is a security is the “economic realities” test established in Howey. In analyzing whether an instrument is a security, courts must “ignore form and focus on substance” (Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)) and “focus on the economic realities underlying the transaction, rather than the name appended to the instrument” (United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975)).
[12] Forman, 421 U.S. at 852.
[13] See, e.g., SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973).
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