In-depth analysis: Why does the U.S. SEC consider FTT to be a security?

Original: 《Long Article｜Why Does the SEC Believe FTX's Platform Token FTT is a Security?》，Chain Law

According to the lawsuit filed by the U.S. Securities and Exchange Commission (SEC) against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison this Wednesday, FTX's platform token FTT is sold as an investment contract and is itself a type of "security." Industry insiders believe that this determination may have far-reaching implications for the industry.

The author has been following U.S. regulatory policies and definitions regarding crypto assets in recent years and has previously written several articles introducing and analyzing them. The author believes that the SEC's classification of FTT as a security is both unexpected and reasonable. It is unexpected due to the widespread dissemination of the FTX collapse and the influence of FTX; the SEC has deemed many crypto assets to be securities in other lawsuits, but it is rare to see such a significant impact and public discourse.

Additionally, SEC officials have repeatedly stated in public that, aside from Bitcoin and Ethereum, most other crypto assets are considered securities, so the classification of FTT as a security is also within expectations.

First, we should clarify that the current assertion that FTT is a security comes from the SEC's perspective, but it is not a final conclusion. In the U.S., whether a product or instrument qualifies as a "security" in a legal sense is ultimately determined by the courts. When the SEC believes that a market entity has issued unregistered securities and there is a dispute over whether such products are securities, the SEC has the right to file a lawsuit in court, requesting a final ruling on the nature of the disputed products. The current lawsuit filed by the SEC falls under this scenario. After all, when FTT is recognized as a security, the SEC's jurisdiction over the matter becomes legitimate.

This article is relatively long and is divided into three parts:

1. What is considered a security under U.S. Securities Law?
2. What types of crypto digital assets are securities?
3. Why does the SEC believe FTT is a security?

What is considered a security under U.S. Securities Law?

As is well known, the Howey test is the primary method for determining whether a certain crypto digital asset constitutes an investment contract under U.S. securities law.

According to Section 2(a) of the U.S. Securities Act: "The term 'security' means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a 'security', or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."

Original:

The term "security" means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

As a common law country, when discussing the SEC's determination of "securities," one cannot avoid the "Howey case."

Regarding what constitutes a security, the most widely accepted authoritative explanation appears in the U.S. Supreme Court's 1946 ruling in SEC v. Howey. According to the standards established in the Howey case, to determine whether an investment is a security, one must consider:

(1) Whether there is an investment of money;

(2) Whether it is an investment in a common enterprise;

(3) Whether the investor has an expectation of profits;

(4) Whether the profits are to be derived solely from the efforts of others.

In the Howey case, the defendants sold Florida citrus groves at a fixed price per acre to different investors and promised that their company would manage and sell the citrus on behalf of the investors, who would not participate in the day-to-day management.

In their promotions, the defendants claimed that this would yield substantial returns for investors, but the promised returns did not materialize. Investors felt deceived and filed complaints, leading the SEC to intervene and sue the defendants for selling securities without registration. The U.S. Supreme Court ultimately ruled that the investment product designed by the defendants met the definition of "security," granting the SEC jurisdiction.

Since the Howey case, new precedents have emerged. For example, in the 1976 case United Housing Foundation Inc. v. Forman, the U.S. Supreme Court reiterated the standards for determining securities from the Howey case and clarified that "the purpose of the investment is profit" is the economic substance of a security.

Subsequently, in the 1990 case Reves v. Ernst & Young, the U.S. Supreme Court listed several conditions to determine whether an investment is a "security":

(1) What is the reasonable motivation for the parties to engage in the transaction? If the fundraiser is seeking to raise operational funds for a company or project, and the investor is seeking profit, it may be a security. If the investor's purpose is consumption, then it is not a security.

(2) Is there a plan for distribution or circulation, and is it a common trading tool for speculation or investment? If so, it is a security.

(3) Is there a reasonable expectation among the general public of investors that it is a security?

(4) Is there another regulatory framework in place to mitigate the risk of loss for investors? If not, it is a security. This is known as the "Reves test." ------ Quoted from the China Law Journal by Xing Huiqiang | The Expansion of the Concept of Securities in China's Securities Law and Its Boundaries.

Based on the above standards, the Supreme Court in the Reves case determined that a financing bond issued by a farmers' cooperative with a floating interest rate was a "security."

Additionally, in the previously mentioned Forman case, the government low-income housing development company entered into an investment agreement with residents, under which residents had to prepay a certain amount to purchase shares in the development company to build low-income housing. Once the housing was completed, residents had the right to live in it and were required to pay a certain rent and management fee as agreed.

It is important to emphasize that the shares held by residents in the low-income housing development company were non-transferable, and when residents moved out, the development company would refund the residents the original purchase price.

Later, as the construction costs of low-income housing rose with inflation, the development company increased rents and management fees, leading to dissatisfaction among residents, who sued the development company for "securities fraud."

The Supreme Court ultimately ruled that the share transactions did not constitute securities and thus should not be subject to securities law. The reasoning was that the primary purpose of residents purchasing shares in the development company was to gain housing, not to obtain investment returns; in other words, economically speaking, the residents' transaction behavior was not for profit.

What types of crypto assets are securities?

However, the Howey test method is relatively abstract and has considerable uncertainty in practical application. To address this issue, the SEC released a reference analysis framework in 2019 to determine whether crypto digital assets qualify as investment contracts and further elaborated on the specific application of the Howey test.

In general, the Howey test has four key points, but for ease of understanding, we can distill it into three important points:

(1) Investment of funds;

(2) Joint investment enterprise;

(3) Reasonable expectation of profits from the efforts of others.

The second key point, "joint investment enterprise," refers to the mixing of the property income of investors with that of the initiators or third parties, depending on the operation and success of the enterprise.

Historically, based on the Howey test standards, the first two points have been relatively easy to judge, but accurately grasping the third point is not so straightforward.

The SEC believes that when assessing whether a digital asset is an investment contract, "joint investment enterprises" are generally present.

Generally speaking, the key to determining whether a digital asset meets the Howey test is to see whether the investor has a reasonable expectation of profits from the efforts of others.

When the initiators, underwriters, or other third parties and their affiliates (collectively referred to as active participants or "AP") have made sufficient and substantial efforts regarding the entity in which investors have invested, and these efforts impact the project's success or failure, if investors have a reasonable expectation of profiting from such efforts, then the digital asset involved in the project meets the third point of the Howey test.

The analysis framework released by the SEC further clarifies the third point of the Howey test, indicating that the following aspects should be considered to determine whether a digital asset meets the third point—reasonable expectation of profits from the efforts of others:

(1) How to determine whether reliance on others' efforts exists

When determining whether reliance on others' efforts exists, the following "two questions" should primarily be considered.

1. Do the purchasers of the digital asset have an expectation of relying on the efforts of active participants?

2. Do the efforts of active participants have a substantial and essential impact on the project's success or failure rather than a trivial impact?

In addition to the above two points, the more conditions that are met, the more it indicates the existence of reliance on others' efforts.

1. Active participants are responsible for the development, improvement, operation, or promotion of the digital asset network.

2. There are many tasks that must be undertaken by or expected to be undertaken by active participants, which cannot be handled by loosely organized community users.

3. Active participants create the trading market for the digital asset or determine the price of the digital asset.

For example:

(1) Active participants control the creation and issuance of the digital asset;

(2) Active participants control the total supply of the digital asset in the market through buybacks, burns, etc., to achieve the goal of controlling the price of the digital asset. (Currently, many digital asset projects, including platform tokens, are controlling the price of digital assets in this manner.)

4. Active participants play a leadership or core role in the ongoing development of the digital asset network.

5. Active participants have a sustained substantive impact on decisions or judgments regarding the characteristics of the digital asset, the digital asset network, or the rights corresponding to the digital asset.

For instance:

(1) Deciding whether and how to compensate those who provide services to the digital asset network or organization.

(2) Deciding who can obtain additional digital assets under what conditions.

6. Purchasers of the digital asset reasonably expect that active participants will work to promote their interests and enhance the value of the digital asset or digital asset network.

When determining whether a "previously sold digital asset in the form of securities" still has the "fact of reliance on others' efforts" in subsequent sales, the following facts need to be considered:

1. Whether the efforts of active participants or their successors still have a significant impact on the investment value of the digital asset;

2. Whether the digital asset network operates in a way that purchasers no longer have reasonable expectations of the efforts of active participants;

3. Whether active participants do not influence the success or failure of the investment entity.

(2) How to determine reasonable expectations of profits

The more characteristics that are met, the more it indicates the existence of "reasonable expectations of profits":

1. The digital asset grants its holders the right to share in the income, profits, or capital appreciation of the investment entity.

2. The digital asset can currently or in the future be traded on secondary markets or platforms.

3. Purchasers of the digital asset reasonably expect that the efforts of active participants will lead to capital appreciation of the digital asset, and they will profit as a result.

4. The digital asset is widely offered to potential purchasers. (This condition means that the issuance and trading volume of the digital asset is determined by investment purposes rather than normal usage purposes, meaning that its issuance and trading volume may be much larger or smaller than the amount actually needed for use.)

5. There is no obvious correlation between the trading price of the digital asset and the actual value of the goods or services it corresponds to.

6. There is no obvious correlation between the trading of the digital asset and the quantity of basic goods or services purchased or consumed by general consumers.

7. The funds raised by active participants exceed the actual needs for establishing the network or digital asset.

8. When holding assets of the same category as the publicly issued digital asset, active participants can profit.

9. Active participants continue to raise funds during operations or revenue processes to enhance the value of the digital asset or network.

10. When the digital asset is sold directly or indirectly, the following situations exist:

a) The professional skills or experience of active participants can increase the value of the digital asset or its network.

b) The digital asset is claimed to be an investment at the time of sale, or the holders of the digital asset are referred to as investors.

c) The expected use of the proceeds from the sale of the digital asset is for the development of the digital asset or its network.

d) The digital asset or its network has unrealized functions, or active participants will realize those functions in the future.

e) There is a commitment or implication to establish new businesses or operational systems rather than using existing ones.

f) The future tradability of the digital asset is a major selling point.

g) The sales or promotional materials emphasize the future profitability prospects of the digital asset network or the future appreciation prospects of the digital asset.

h) The availability of the digital asset exchange is claimed, or active participants explicitly or implicitly indicate that they will establish or otherwise support the digital asset exchange.

In addition to the above, when determining whether a "previously sold digital asset in the form of securities" still has "reasonable expectations of profits" in subsequent sales, the following facts also need to be considered:

1. The purchasers of the digital asset no longer reasonably expect that the ongoing development by active participants will be a key factor in determining the value of the digital asset;

2. The value of the digital asset has formed a direct and stable connection with the value of the goods or services it can be exchanged for;

3. The trading volume of the digital asset corresponds to the actual demand for the goods or services it represents;

4. The holders of the digital asset can use it for its intended functions, such as acquiring goods or services;

5. The benefits obtained from the appreciation of the digital asset are limited to designated uses;

6. No active participants have access to important and non-public information or other significant information about the digital asset.

(3) Others

When considering whether there is a "reasonable expectation of profits from the efforts of others," federal courts adhere to the principle that "economic substance prevails over form."

Therefore, when assessing this fact, federal courts will consider whether the investor's purchase of the digital asset is for use and consumption (rather than investment).

Although the following facts regarding the use or consumption of digital assets do not have a decisive impact on the Howey test, the more items a certain digital asset meets, the more it indicates that it does not conform to the Howey test.

1. The distributed ledger or digital asset has been fully developed and is operational;

2. The holders of the digital asset can immediately use it on the network for its intended functions, especially if the system encourages holders to do so;

3. The generation of the digital asset is structurally designed to meet user needs rather than to enhance the value of the digital asset or its network. For example, the digital asset can only be used within its network, and transactions are generally conducted only in the amounts actually needed by users;

4. The appreciation prospects of the digital asset are limited. For example, the design principles of the digital asset stipulate that its value will not change over time, and rational investors will not invest by holding the digital asset for the long term;

5. For digital assets referred to as virtual assets, they can be used for payments immediately in various situations or as a substitute for fiat currency. Specifically:

a) Such digital assets do not need to be exchanged for fiat currency or other digital assets before being used for payments;

b) Such digital assets are actually used as a store of value or means of payment.

6. For digital assets backed by goods, services, or rights, they can be exchanged for the content that supports them on already developed networks or platforms;

7. The appreciation of the digital asset is secondary to its use for its intended functions;

8. The sale of the digital asset is marketed based on its functionality rather than its appreciation prospects;

9. Potential purchasers can use the digital asset for its intended functions;

10. Restrictions on trading the digital asset are for the purpose of meeting its usage rather than promoting the development of a speculative market;

11. If the actual participants in the digital asset create a secondary market, that market is only for the trading of digital assets among users within the platform.

The SEC emphasizes that when determining whether a digital asset is an investment contract, the above factors may not be exhaustive, and no single factor is determinative. This analysis framework is for reference by those involved in the issuance and trading of digital assets.

In addition to the above, as early as 2017, the SEC, in its report on The DAO case, articulated the determination that DAO tokens are securities, and this was entirely based on the evaluative standards established in the Howey case (Howey Test).

It also explicitly pointed out the analysis that led to its classification as a security:

(1) Whether there is an investment of money: Investors invested by exchanging ETH for DAO tokens, and ETH has always been regarded as a valuable virtual commodity.

(2) Whether it is an investment in a common enterprise: All investors' ETH was pooled together for the project's development, and their investment purposes were the same.

(3) Whether investors have an expectation of profits: Through their investment, investors hoped to obtain investment returns.

(4) Whether the investment profits rely on the efforts of others: The SEC devoted considerable space to elaborating on this point regarding DAO tokens. The main reasons are twofold:

A. The management efforts of slock.it and its co-founders are essential for the enterprise.

B. Although voting rights were granted, the voting rights of token holders were limited, and they essentially relied on the management efforts of slock.it and its management team. The voting rights of token holders were insufficient to support actual control over the invested entity.

Why does the SEC believe FTT is a security?

In the documents filed by the SEC against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison, there is a clear discussion of why they believe FTT is a security.

Since the SEC's discussion and analysis are quite detailed and largely follow the structure of the Howey test and its previously issued analysis framework, and the author believes it has significant reference value for assessing other platform tokens and crypto assets, we will present their discussion on FTT as a security in a bilingual format below.

First, the SEC clearly states that since FTT was issued and sold as an investment contract, it is therefore a security.

FTT Was Offered and Sold as an Investment Contract and, Therefore, as a Security.

FTT was issued and sold as an investment contract and therefore is a security.

In sections 75-77, the SEC introduces the basic situation of FTT. According to FTX's white paper and public information, the main application scenarios for FTT include buybacks and burns, fee discounts, OTC privileges, IEO pledges, and notably, FTT can serve as collateral for platform futures trading, which greatly enhances the market demand and usage of FTT for FTX, which is already known for its derivatives trading.

There are a total of 350 million FTT tokens. 50% are held by the team, locked for three years. The other 50% includes 59.3 million tokens sold in three rounds of subscription, with 50 million, 6.5 million, and 2.8 million FTT sold respectively. The author believes that these 59.3 million FTT essentially belong to an ICO (IEO), and based on how the SEC has handled similar cases in the past, they may be required to refund the investment and pay interest.

75. On or about July 29, 2019, FTX launched a crypto asset known as "FTT." FTX launched FTT as an "exchange token" for the FTX platform (i.e., the crypto asset or token associated with a crypto trading platform).

On or about July 29, 2019, FTX launched a crypto asset known as "FTT," which was positioned as an "exchange token" for the FTX platform (i.e., the crypto asset or token associated with a crypto trading platform).

76. Before launching the FTX platform in or around May 2019, FTX had minted 350 million FTT tokens in or around April 2019. Of the 350 million tokens minted, 175 million were allocated to FTX as "company tokens," and 175 million were designated as non-company tokens. The company tokens were set to "unlock" (or become available for trading) over a three-year period after a so-called initial exchange offering ("IEO") of the token.

Before launching the FTX platform around May 2019, FTX minted 350 million FTT tokens around April 2019. Of these, 175 million were allocated to FTX as "company tokens," and 175 million were designated as non-company tokens. The company tokens were set to "unlock" (or become available for trading) over a three-year period following a so-called initial exchange offering ("IEO") of the token.

77. From the time of its offering, FTT was offered and sold as an investment contract and therefore a security.

From the time of its offering, FTT was offered and sold as an investment contract and therefore is a security.

In sections 78-80, it mentions that investors pooled funds into the FTX platform. This involves an investment of funds, and the property income of investors is mixed with that of the initiators or third parties. It is explicitly mentioned that FTX mixed the funds raised from the sale of FTT with other revenues without distinction. This aligns with the SEC's definition of "joint investment enterprise" in its digital asset securities framework analysis, where the property income of investors is mixed with that of the initiators or third parties. Specifically:

78. Of the 175 million non-company tokens, FTX offered and sold approximately 73 million FTT in so-called "pre-sales" to investors, at prices ranging from $0.10 to $0.80. FTX raised approximately $10 million from these sales of FTT prior to the IEO. The pre-sale tokens were programmed to unlock between one to three months after the IEO. FTX did not manage separate, segregated accounts for investors, but instead pooled all proceeds from the pre-sale and the IEO of FTT and treated them interchangeably.

Of the 175 million non-company tokens, FTX offered and sold approximately 73 million FTT in so-called "pre-sales" to investors, at prices ranging from $0.10 to $0.80. FTX raised approximately $10 million from these sales of FTT prior to the IEO. The pre-sale tokens were programmed to unlock between one to three months after the IEO. FTX did not manage separate, segregated accounts for investors, but instead pooled all proceeds from the pre-sale and the IEO of FTT and treated them interchangeably.

79. FTX used the pooled proceeds from FTT sales to fund the development, marketing, business operations, and growth of FTX, depending on the success of FTX and its management team in developing, operating, and marketing the trading platform. If demand for trading on the FTX platform increased, demand for the FTT token could increase, such that any price increase in FTT would benefit holders of FTT equally and in direct proportion to their FTT holdings. The large allocation of tokens to FTX incentivized the FTX management team to take steps to attract more users onto the trading platform and, therefore, increase demand for, and increase the trading price of, the FTT token.

FTX used the pooled proceeds from FTT sales to fund the development, marketing, business operations, and growth of FTX, depending on the success of FTX and its management team in developing, operating, and marketing the trading platform. If demand for trading on the FTX platform increased, demand for the FTT token could increase, such that any price increase in FTT would benefit holders of FTT equally and in direct proportion to their FTT holdings. The large allocation of tokens to FTX incentivized the FTX management team to take steps to attract more users onto the trading platform and, therefore, increase demand for, and increase the trading price of, the FTT token.

80. As a result of FTX and its management team's large holdings of FTT, the interests of the company and its management team were aligned with those of investors in FTT.

As a result of FTX and its management team's large holdings of FTT, the interests of the company and its management team were aligned with those of investors in FTT.

In sections 81-85, it elaborates on how FTX's series of marketing actions led investors to have an expectation of profits.

81. FTX's FTT marketing materials---consisting of an FTT "whitepaper" and information posted on FTX's website---described FTT as "the token powering the FTX ecosystem." The publicly available information led FTT holders to reasonably expect to share in FTX's growth and future earnings, and from appreciation in the value of FTT.

FTX's FTT marketing materials—consisting of an FTT "whitepaper" and information posted on FTX's website—described FTT as "the token powering the FTX ecosystem." The publicly available information led FTT holders to reasonably expect to share in FTX's growth and future earnings, and from appreciation in the value of FTT.

82. The FTT whitepaper specifically highlighted the profit potential of the token. For example, the whitepaper included the following statements: "We launched FTX in April and already have among the world's most liquid order books" and "[o]ur goal is to become as profitable as Bitmex and OkEx within a year." On the FTX website, FTT purchasers were offered a 5% bonus of tokens during the first three days of the IEO if they pre-funded their FTX wallets to purchase FTT, providing a potential immediate profit to investors. FTX also represented that FTT would be listed at $1.00 on July 29, 2019, and the "pre-sales" were at prices ranging from $0.10 to $0.80, which provided purchasers an immediate profit potential based on the announced listing price.

The FTT whitepaper specifically highlighted the profit potential of the token. For example, the whitepaper included the following statements: "We launched FTX in April and already have among the world's most liquid order books" and "[o]ur goal is to become as profitable as Bitmex and OkEx within a year." On the FTX website, FTT purchasers were offered a 5% bonus of tokens during the first three days of the IEO if they pre-funded their FTX wallets to purchase FTT, providing a potential immediate profit to investors. FTX also represented that FTT would be listed at $1.00 on July 29, 2019, and the "pre-sales" were at prices ranging from $0.10 to $0.80, which provided purchasers an immediate profit potential based on the announced listing price.

83. The FTX whitepaper further explained: "We have carefully designed incentive schemes to increase network effects and demand for FTT, and to decrease its circulating supply." The FTT materials stated that the token provided investors with fee rebates and discounts on FTX, and the ability to use the token as collateral for futures positions as well as for "margin trading" that FTX promised to launch "in the future." The FTT materials referred to potential gains from FTX's future repurchase and burning of FTT (the "buy and burn" program), to be funded by FTX's revenues.

The FTX whitepaper further explained: "We have carefully designed incentive schemes to increase network effects and demand for FTT, and to decrease its circulating supply." The FTT materials stated that the token provided investors with fee rebates and discounts on FTX, and the ability to use the token as collateral for futures positions as well as for "margin trading" that FTX promised to launch "in the future." The FTT materials referred to potential gains from FTX's future repurchase and burning of FTT (the "buy and burn" program), to be funded by FTX's revenues.

84. The FTX whitepaper also explained that "[c]ustomers who hold a certain amount of FTT for a period of time will receive lower FTX futures fees" and that this "will further increase demand for FTT."

The FTX whitepaper also explained that "[c]ustomers who hold a certain amount of FTT for a period of time will receive lower FTX futures fees," and that this "will further increase demand for FTT."

85. FTT was marketed as an investment that would appreciate in value as it grew and expanded in other ways. FTX represented that it "carefully designed incentive schemes to increase network effects and demand for FTT, and to decrease its circulating supply." These incentives included that FTT would be listed on FTX and thus could be traded, and FTX's "buy and burn" program would purchase FTT, thus boosting demand, and then burn those purchased tokens in order to decrease the supply of FTT and increase its price.

FTT was marketed as an investment that would appreciate in value as it grew and expanded in other ways. FTX represented that it "carefully designed incentive schemes to increase network effects and demand for FTT, and to decrease its circulating supply." These incentives included that FTT would be listed on FTX and thus could be traded, and FTX's "buy and burn" program would purchase FTT, thus boosting demand, and then burn those purchased tokens in order to decrease the supply of FTT and increase its price.

In sections 86-90, it details how FTX would take a series of actions to make investors believe that returns could be generated through its efforts. This aligns with the SEC's digital asset securities framework regarding how to determine reliance on others' efforts and reasonable expectations of profits.

86. FTX marketed FTT by encouraging purchasers to believe that its platform would succeed and provide a return based on that success. The FTT whitepaper emphasized "Why Invest? -- All-Star Team," and highlighted the importance of the management team's experience and success in developing crypto asset trading systems. For example, the whitepaper stated that FTX's "greatest strength lies in the team behind it" and touted FTX's "Track Record of Proven Success" based on the background and experience of its management team. The FTT materials made clear that FTX's core management team's efforts would drive the growth and ultimate success of FTX. The whitepaper also advertised that certain features gave FTX an advantage over competing platforms, including industry-leading risk management systems and its liquidation engine model.

FTX marketed FTT by encouraging purchasers to believe that its platform would succeed and provide a return based on that success. The FTT whitepaper emphasized "Why Invest? -- All-Star Team," and highlighted the importance of the management team's experience and success in developing crypto asset trading systems. For example, the whitepaper stated that FTX's "greatest strength lies in the team behind it" and touted FTX's "Track Record of Proven Success" based on the background and experience of its management team. The FTT materials made clear that FTX's core management team's efforts would drive the growth and ultimate success of FTX. The whitepaper also advertised that certain features gave FTX an advantage over competing platforms, including industry-leading risk management systems and its liquidation engine model.

87. FTX also marketed FTT as an asset that could be used in an "earn program" or in "staking programs" (i.e., a program promising interest payments on deposited assets), as additional ways in which investors could earn returns from FTT.

FTX also marketed FTT as an asset that could be used in an "earn program" or in "staking programs" (i.e., a program promising interest payments on deposited assets), as additional ways in which investors could earn returns from FTT.

88. FTX's whitepaper tied the prospects of FTT's investors to the growth of the FTX platform, and noted that FTX would undertake various "Strategies to Acquire Users and Grow Volume," including the employment of influential spokespeople.

FTX's whitepaper tied the prospects of FTT's investors to the growth of the FTX platform and noted that FTX would undertake various "Strategies to Acquire Users and Grow Volume," including the employment of influential spokespeople.

89. FTX's whitepaper also stated that "[t]here are many ways FTT will be used as we add more products and features to FTX. For instance, when we launch a spot exchange in the future, FTT will be used for initial exchange offerings."

FTX's whitepaper also stated that "[t]here are many ways FTT will be used as we add more products and features to FTX. For instance, when we launch a spot exchange in the future, FTT will be used for initial exchange offerings."

90. As a result of the above representations and the economic reality at that time, FTT investors had a reasonable expectation of profiting from FTX's efforts to deploy investor funds to create a use for FTT and bring demand and value to their common enterprise.

As a result of the above representations and the economic reality at that time, FTT investors had a reasonable expectation of profiting from FTX's efforts to deploy investor funds to create a use for FTT and bring demand and value to their common enterprise.

Through the above discussion, we can clearly see the SEC's logic in determining that FTT is a security. We should note that "stocks" or "bonds" as securities are often highly standardized, with significant characteristics that are easy to identify. However, "investment contracts" can take many different forms, and the recognition rules established through the Howey test and the recent enforcement status of the SEC in the field of crypto assets reflect the basic principle that the recognition of the securities nature of digital assets is "economic substance over form."

As former SEC Chairman Jay Clayton mentioned in his response to representatives of the White House: You also asked me in your letter whether I agree with Director Hyman's statements regarding digital tokens in his June 2018 speech. I agree with his analysis that "whether digital assets are issued and traded in the form of securities is not static or entirely defined by legal documents." A certain digital asset may initially be issued or traded as a security because it meets the definition of an investment contract (which is a type of security under U.S. securities law), but its connotation may change in subsequent transactions, no longer conforming to the definition of an investment contract. (The most typical example is Ethereum.)

This time, the SEC's determination that FTX's platform token FTT is a security is bound to cause a stir in the industry. The decentralized spirit embodied by blockchain does not pursue an unregulated state; rather, to some extent, using technology to solve regulatory issues is to prevent the malfeasance of central nodes and better protect investors' interests, which aligns with the goals pursued by regulation. The distributed technology of blockchain and the decentralized spirit do not conflict with regulation, let alone a highly centralized trading platform like FTX.

If FTX's self-destruction was the catalyst for the joint enforcement actions by the SEC and other departments, then looking through the phenomenon to see the essence, the road to industry compliance is long and arduous.