Source: U.S. SEC Division of Corporation Finance; Translated by: AIMan@黄金财经

Foreword

In order to more clearly explain the applicability of federal securities laws to crypto assets, the SEC Division of Corporation Finance is issuing an opinion on certain activities on proof-of-work networks (referred to as "mining").

Specifically, this statement targets mining of crypto assets that are intrinsically linked to the programmatic operation of public, permissionless networks, which are used to participate in the consensus mechanisms of such networks and/or are obtained by participating in such mechanisms, or are used to maintain the technical operation and security of such networks and/or are obtained by maintaining the technical operation and security of such networks. Throughout this statement, we refer to these crypto assets as “Covered Crypto Assets” and their mining on Proof-of-Work networks as “Protocol Mining.”

Protocol Mining

Networks rely on cryptographic techniques and economic mechanism design to eliminate the need for designated trusted intermediaries to validate network transactions and provide settlement guarantees to users. The operation of each network is controlled by an underlying software protocol, which consists of computer code that programmatically enforces certain network rules, technical requirements, and reward distributions. Each protocol contains a “consensus mechanism,” or method for enabling a distributed network of unrelated computers (called “nodes”) that maintain a peer-to-peer network to agree on the “state” of the network, or the authoritative record of network address ownership balances, transactions, smart contract code, and other data. Public, permissionless networks allow anyone to participate in the operation of the network, including validating new transactions for the network in accordance with the network’s consensus mechanism.

Proof of Work (“PoW”) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants, called “miners”, who operate nodes that add computing resources to the network. PoW involves validating transactions on the network and adding them to the distributed ledger in the form of blocks. “Work” in PoW is the computing resources that miners contribute to verifying transactions and adding new blocks to the network. Miners do not have to own the network’s covered crypto assets to validate transactions.

Miners use computers to solve complex mathematical equations in the form of cryptographic puzzles. Miners compete with their peers to solve these puzzles, and the first miner to solve the puzzle is tasked with accepting batches of transactions from other nodes and validating (or proposing) a new block of transactions to the network. In exchange for providing validation services, miners receive “rewards” in the form of newly “minted” or created protected crypto assets, which are delivered according to the terms of the protocol. In this way, PoW incentivizes miners to invest the necessary resources to add valid blocks to the network.

Miners who provide validation services are only rewarded once other nodes in the network have verified that the solution is correct and valid through the protocol. To do this, once a miner finds the correct solution, it broadcasts this information to other miners, who can verify that the miner solved the puzzle correctly to receive a reward. Once verified, all miners add the new block to their own copy of the network. PoW is designed to protect the network by requiring miners to spend a lot of time and computing resources to verify transactions. When the verification process operates in this way, it not only reduces the likelihood that someone will try to disrupt the network, but also reduces the likelihood that miners will include altered transactions (such as those that allow "double spending" for regulated crypto assets).

In addition to mining on their own, miners can also join "mining pools", which allow miners to combine their computing resources to increase the chances of successfully verifying transactions and mining new blocks on the network. Mining pools have developed into various types, each with different ways of operating and distributing rewards. Mining pool operators are generally responsible for coordinating miners' computing resources, maintaining the mining hardware and software of the mining pool, overseeing the security measures of the mining pool to prevent theft and network attacks, and ensuring that miners receive rewards. In return, the mining pool operator will charge a fee that is deducted from the miner's share of the rewards received in the mining pool. Reward payments vary from pool to pool, but rewards are generally distributed to the entire pool in proportion to the amount of computing resources each miner contributes to the pool. Miners are not obligated to remain in the pool and may choose to leave the pool at any time.

SEC Division of Corporation Finance's View on Protocol Mining Activities

The Division believes that, under the circumstances described in this statement, "mining activities" (as defined in this statement) related to protocol mining do not involve the offer and sale of securities as defined in Section 2(a)(1) of the Securities Act of 1933 (the "Securities Act") and Section 3(a)(10) of the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Department holds that participants in mining activities are not required to register transactions with the SEC under the Securities Act or to qualify for one of the registration exemptions available under the Securities Act with respect to these mining activities.

Protocol Mining Activities Covered by This Statement

The Department’s view concerns the following types of protocol mining activities and transactions (“Mining Activities” and each “Mining Activity”): (1) mining protected crypto assets on PoW networks; and (2) the roles of mining pools and pool operators involved in the protocol mining process, including their roles in earning and distributing rewards. This statement concerns only mining activities related to the following types of protocol mining.

• Self-use (or solo) mining is when a miner uses his or her own computing resources to mine protected crypto assets. Miners may operate nodes and mine protected crypto assets alone or in collaboration with others.

• Mining pools are where miners combine their computing resources with other miners to increase their chances of successfully validating transactions and mining new blocks on the network. Reward payments may flow directly to miners from the network or indirectly through mining pool operators.

Discussion

Securities Act Section 2(a)(1) and Exchange Act Section 3(a)(10) define “security” by listing various financial instruments, including “stocks,” “notes,” and “bonds,” respectively. Because covered crypto assets do not constitute any of the financial instruments expressly enumerated in the definition of “security,” we analyze certain covered crypto asset transactions in the context of protocol mining under the “investment contract” test set forth in SEC v. W. J. Howey Co. The “Howey test” is used to analyze arrangements or instruments not listed in these statutory provisions based on their “economic reality.”

In assessing the economic reality of a transaction, the test is whether there is an investment of money in the enterprise and whether that investment is based on a reasonable expectation of profits from the entrepreneurial or managerial efforts of others. Since Howe, federal courts have explained that the "efforts of others" requirement in Howe is satisfied when "the efforts of persons other than the investor are unquestionably significant and are necessary managerial efforts that affect the success or failure of the enterprise."

Self-Mining (or Solo)

Miners do not mine on their own (or alone) with a reasonable expectation of profits from the entrepreneurial or managerial efforts of others. Instead, miners contribute their own computing resources, which protect the network and enable miners to receive rewards from the network in accordance with its software protocol. To receive rewards, miners' activities must comply with the rules of the protocol. By adding their computing resources to the network, miners are simply engaging in organizational or contributing activities to protect the network, verify transactions, and add new blocks and receive rewards. Miners' expectations of receiving rewards do not derive from the managerial or entrepreneurial efforts of any third party on which the network's success depends. Instead, the expected economic incentives of the protocol come from the administrative or executive actions of the miners to perform mining of the protocol. Thus, rewards are payments that miners receive for services they provide to the network, and are not profits derived from the entrepreneurial or managerial efforts of others.

Mining Pools

Similarly, when miners combine their computing resources with other miners to increase their chances of successfully mining new blocks on the network, miners do not expect to receive profits from the entrepreneurial or managerial efforts of others. By adding their own computing resources to a mining pool, miners are simply engaging in administrative or executive activities to secure the network, validate transactions, and add new blocks and receive rewards. Furthermore, any expectation of profit by miners is not derived from the efforts of third parties, such as mining pool operators. Even when participating in a mining pool, individual miners still perform actual mining activities by contributing their computing power to solve cryptographic puzzles used to validate new blocks. Furthermore, whether a miner mines on his own (or alone) or as a member of a mining pool does not change the nature of protocol mining for purposes of the Howey Test. In either case, protocol mining remains an organizational or contributing activity as described in this statement. Furthermore, the activity of a mining pool operator operating a mining pool using the combined computing resources of participating miners is primarily organizational or contributing in nature. While some activities of a pool operator may benefit the pool of miners, any such efforts are insufficient to satisfy Howey's "efforts of others" requirement because miners primarily rely on the computing resources they provide to the pool along with other members to earn profits. For this reason, miners do not join a pool based on their ability to passively earn profits from the pool operator's activities.