SEC Declares Proof-of-Work Mining Exempt from Securities Laws, Describes Mining as an Administrative Task

The U.S. Securities and Exchange Commission (SEC) announced, under new management, that proof-of-work mining is not subject to securities laws, and thus, crypto miners don’t have to report their activities to the SEC.

The SEC clarified its stance on mining, pointing out that the scope of its statement only applies to proof-of-work at this stage and that further policies may be made for other sectors of the crypto market.

The SEC does not consider crypto mining an investment because there is no need to acquire assets or expect a return on investment. The SEC likened mining to a lottery in that, with miners solving crypto puzzles, the rewards are random. They don’t consider mining an investment because it fails the Howey test for securities. They further point out that mining activities differ from other securities, such as stocks and bonds, with an underlying asset and making returns at a predetermined rate. The SEC also considers mining pools not to be a security because the pools, despite renting out processes, do not offer a predetermined return on investment.

“Accordingly, it is the Division’s view,” wrote the SEC, “ that participants in mining activities do not need to register their transactions with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration in connection with these Mining Activities.”

The Howey Test, a legal framework used to measure whether a transaction is an investment contract, was used to disregard mining as an investment because mining is not undertaken with a reasonable expectation of profits.

“In evaluating the economic realities of a transaction,” wrote the SEC, “the test is whether there is an investment of money in an enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”

“Federal courts since Howey have explained that Howey’s “efforts of others” requirement is satisfied when “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”

According to the SEC, a miner earns money through their own computational power and application of the network’s protocols. The miner, therefore, is not making profits from the efforts of others but is making profits from their efforts. The miner makes money through the reward system of a blockchain network and by contributing to the system’s operations. Conversely, an investment contract would involve investing money in the management or entrepreneurship of a blockchain group, with the expectation of a return from such an investment. 

The SEC demonstrates that a miner does not extract profits from other people, such as with the work of a pool operator. According to the SEC, the miner performs administrative tasks, securing the blockchain and validating transactions rather than treating a blockchain as a security. Further, and more importantly, the SEC even dismisses mining pools as investments because the miners, regardless of whether they use their computer or a mining pool, receive profits solely from their contribution. The pool miner, for example, does not receive passive income from the mining of others.

Paul Grewal, Coinbase CEO, has called for the SEC to distinguish between securities and commodities. He argues that such guidance would lead to a vibrant market of digital assets. Further, the SEC earlier ruled on meme coins, determining that they do not meet the classification standards of securities.

Coinbase, however, made a FOIA request against the SEC to discover the details of the ‘war on crypto’ and prevent such actions from happening in the future. The new Trump administration has seen a reversal of previous SEC actions. The announcement that crypto mining is not an investment contract is part of that reversal.