District Court in Connecticut weighs in on whether certain types of cryptocurrency are considered securities

Recently, the U.S. District Court for the District of Connecticut held trial for a case, Audet v. Fraser, that helped define when an asset is or is not a securities. The jury was asked to define if various forms of cryptocurrency (hashlets, hashpoints, hashtakers, or paycoin) were investment contracts, and therefore securities. The jury found, in contrast with the SEC’s prior conclusions, that none of the above were considered investment contracts.

Previously, the SEC expressed it’s views that hashlets were securities through guidance and by bringing enforcement actions. Hashlets are a form of cryptocurrency that entitle a customer to the rights to profit from a portion of the computing power owned by the company. Hashlet contracts entitle their purchasers to a share of the profits from defendants' purported “hashing power," or the computing power.

The verdict in this case poses new questions for the SEC because if hashlets are not securities, federal securities laws don't apply and the SEC does not have jurisdiction to bring enforcement actions in court.

As made clear by this decision, the SEC's view on whether a particular investment is a security is not the final word. In the 2015 case SEC v. Garza, the SEC alleged that hashlets were securities, however, ultimately that matter was resolved through a combination of default judgments and settlements. The underlying issue remained unadjudicated until hashlet investors brought a private securities class action lawsuit for damages in Connecticut in Audet v. Fraser, as described above. This result is the first time a federal jury has considered whether a cryptocurrency or virtual asset is a security under the now well-known Howey test.