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Definition of Blockchain
A Blockchain is a decentralized, distributed digital ledger that records transactions in a secure and transparent manner. It consists of a network of computers, known as nodes, that work together to validate and record transactions on the Blockchain. Each node has a copy of the ledger, and any changes made to the ledger are verified and recorded across all nodes in the network. A Blockchain can store any type of information, not just financial transactions.
How it works?
Here is a step-by-step explanation of how a Blockchain transaction works:
Step 1: Initiation of a Transaction
A transaction is initiated when one user wants to send digital assets or cryptocurrencies to another user. This transaction includes the details of the sender, the recipient, the amount, and any other relevant information.
Step 2: Verification of the Transaction
Once the transaction is initiated, it is broadcast to the nodes on the Blockchain network. Each node verifies the transaction by checking whether the sender has sufficient funds to complete the transaction and whether the transaction meets the necessary criteria.
Step 3: Validation of the Transaction
Once the transaction is verified, it is validated by the nodes on the network. This validation process involves solving a complex mathematical problem, known as proof of work, or proof of stake, depending on the Blockchain technology being used. This process ensures that the transaction is legitimate and that the sender has the authority to make the transfer.
Step 4: Recording of the Transaction
Once the transaction is validated, it is recorded on the Blockchain. The transaction is added to a block, which is then added to a chain of blocks in a chronological order, forming an unalterable and transparent record of all transactions on the Blockchain.
Step 5: Confirmation of the Transaction
After the transaction is recorded, it needs to be confirmed by the nodes on the Blockchain network. This confirmation process involves checking the authenticity and accuracy of the transaction details and ensuring that it complies with the rules and regulations of the Blockchain network.
Step 6: Distribution of the Transaction
Once the transaction is confirmed, it is distributed across the entire network of nodes, which adds it to their copy of the ledger. This ensures that all nodes have an up-to-date and accurate copy of the ledger.
Step 7: Completion of the Transaction
Finally, the transaction is completed, and the digital assets or cryptocurrencies are transferred from the sender to the recipient. This transaction is now recorded on the Blockchain, forming an immutable and transparent record that can be verified by anyone on the network.
But Gary Gensler, the current SEC chair and scourge of crypto builders, has made clear that he does not share Hinman's view. He views "everything other than Bitcoin" as a security. Last fall, just one day after Ethereum completed its merge to become a proof-of-stake network, Gensler said that the native tokens of networks that use staking also look like securities, since "the investing public is anticipating profits based on the efforts of others."
And Gensler is using as his north star the same test that Hinman and Clayton used: a 77-year-old lawsuit involving a Florida citrus grove.
The "Howey Test" has become an infamous bogeyman for everyone in crypto, and while the industry would like it to go away, it is clear that isn't going to happen any time soon.
Hinman and Clayton are both long gone from the SEC and have moved on to advise crypto firms (naturally). But Howey remains, and Gensler has cited it to make the case that all of crypto falls under SEC jurisdiction—even though just last month, his counterpart at the CFTC said ETH is a commodity.
(Ironically, Hinman's speech in June 2018 was called "When Gary Met Howey," but he was referencing a 1985 case involving Gary Plastic Packaging that showed a non-security can become a security depending on how it's marketed; Hinman couldn't know that in a few years, a different Gary would wield Howey as a hammer against an entire trillion-dollar industry.)
The thrust of Howey is that an asset becomes an investment contract when it is marketed or sold with the expectation of profit thanks to the work of the seller or a third party. The citrus grove itself was not a security, but shares in the citrus grove were. Hinman argued that putting aside the initial Ethereum fundraise in 2014 that brought in $18 million, the network had since become sufficiently decentralized to rule out current sales of ETH as securities offerings. Gensler does not appear to agree, but more importantly—and more damaging for most new crypto projects—is that all other token sales built on Ethereum do look pretty clearly like securities under the Howey definition. Speculators buy them in the hopes that the token will go up based on the perceived success of the project.
But wait! What if the token is genuinely used in the project's ecosystem, and has real utility beyond price speculation? Doesn't matter, as Hinman said in 2018 way before Gensler showed up: "Simply labeling a digital asset a 'utility token' does not turn the asset into something that is not a security." In other words: call your token whatever you want, the SEC still thinks it's a security.
People in crypto like to say that the SEC has not given "clear guidelines" for crypto projects, but the truth is that it has. Its guiding light is the Howey Test—the industry just doesn't like it. Gensler said in front of Congress just last week: No new rules are coming, because "the regulations actually already exist."
Another problem people raise with Howey is that it's too damn old to be applied fairly anymore, but even Coinbase Chief Legal Officer Paul Grewal, a former California magistrate judge, said recently on our gm podcast that the issue with Howey is not its age: "I love legal precedents, even if they are decades old. So I have no problem with Howey or any other precedent simply because of its age."
The problem with Howey is how it's being applied to new technology.
"When it comes to the operation of a blockchain-based technology that underlies most digital assets, there is often, I think, a confusion about the role of the promoter, a confusion about what is driving any returns that might accrue to the holder of tokens, and a confusion about fundamentally how these assets work, and what real utility they bring to the networks,," Grewal said. "When it comes to networks that are based on a proof-of-stake consensus mechanism, there's a very important role that these tokens play, which is to make sure that the networks are secure, that the transactions that are confirmed on the network are accurate.