The SEC’s Division of Corporation Finance has issued a statement that certain proof-of-work (PoW) mining activities do not constitute securities offerings under federal securities laws. 

The Division’s statement focuses on what is called “Protocol Mining” of covered crypto assets on PoW networks. This type of mining does not just create new coins, it involves validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger.

The SEC spoke of the “mining of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network,” and it has now determined that decentralized PoW networks should not be treated as securities.

Although the SEC’s statement did not name any specific blockchain, its views on certain PoW activities just apply to permissionless networks (that lack economic properties such as passive yields or rights to future income or profits) where mining is used to participate in the consensus mechanism. And the statement applies to solo miners and mining pools participating in such networks.

Howey test

Through its Howey test analysis, which examines whether money is invested in a common enterprise with the expectation of profits from others’ efforts, the SEC said it has concluded that both self (or solo) mining and mining pool participation do not constitute securities offerings or transactions under US securities laws.

The SEC said that mining rewards are earned through miners’ own computational contributions rather than relying on entrepreneurial efforts of third parties, and the agency characterizes mining as “an administrative or ministerial activity” that secures the network and validates transactions in exchange for programmatic rewards.

As such, the SEC said such activities do not constitute “the offer and sale of securities” as outlined in the Securities Act of 1933, so long as they meet the criteria noted above.

Crenshaw dissents

Commissioner Caroline Crenshaw issued a dissenting statement criticizing the guidance, arguing that it begins with an assumption that mining does not involve an expectation of profits based on others’ efforts and then concludes accordingly.

She also highlighted that despite its overly broad conclusions, the SEC’s own statement acknowledging that actual determinations require case-by-case analyses of specific mining arrangements and activities under the Howey test. “One actually would have to conduct a Howey analysis to know if a specific mining arrangement constitutes an investment contract,” she observed, adding that she hoped market participants do not mistake this statement for something more than it is.

She ended by saying: “Beware of any headlines that herald a wholesale exemption for mining. And mine the fine print.”

Energized and eager

The SEC’s statement represents another aspect to the SEC’s efforts to provide guidance on digital asset regulation and lighten regulatory burdens on the digital asset sector.

And the statement arrived one day before the SEC’s newly formed Crypto Task Force was set to host its inaugural roundtable, “How We Got Here and How We Get Out – Defining Security Status,” as part of its “Spring Sprint Toward Crypto Clarity” series. 

In the past several weeks, the agency has rescinded controversial crypto accounting guidance, ended some enforcement actions against major crypto industry players, released a statement regarding memecoins, and reexamined its rules affecting crypto.

Earlier this month, the executive director of the Council of Advisers on Digital Assets, Bo Hines, revealed that a comprehensive stablecoin bill could land on the president’s desk in a matter of months. 

Bitcoin, Litecoin and Dogecoin, which still use PoW consensus, stand to be most directly affected by this guidance, as US regulators have deemed them to be commodities and not securities.

Cody Carbone, president of The Digital Chamber, said the staff statement was big news for bitcoin miners. “This gives much-needed legal certainty and clears the path for the mining industry to grow in the US,” Carbone said in a post on X.