PoW Mining does not constitute a securities issuance and does not require registration, see what the US SEC has to say.

Source: U.S. SEC Division of Corporation Finance; Compiled by AIMan@

To clarify the applicability of federal securities laws to crypto assets, the SEC’s Division of Corporation Finance is issuing guidance on certain activities on proof-of-work networks, referred to as “mining.”

Specifically, this statement addresses the mining of crypto assets that are intrinsically linked to the programmatic operation of public, permissionless networks. These crypto assets are used to participate in the consensus mechanism of such networks and/or are obtained by participating in such mechanisms, or are used to maintain the technical operation and security of such networks and/or are obtained by maintaining the technical operation and security of such networks. In this statement, we refer to these crypto assets as “Covered Crypto Assets” and the mining of them on proof-of-work networks as “Protocol Mining.”

The network relies on cryptographic technology and economic mechanisms designed to eliminate the need for a designated trusted intermediary to verify network transactions and provide settlement guarantees to users. The operation of each network is controlled by an underlying software protocol, which consists of computer code that programmatically executes certain network rules, technical requirements, and reward distributions. Each protocol contains a “consensus mechanism” or method for enabling a distributed network of unrelated computers (referred to as “nodes”) that maintain the peer-to-peer network to reach agreement on the “state” of the network or authoritative records of network address ownership balances, transactions, smart contract code, and other data. Public, permissionless networks allow anyone to participate in the operation of the network, including validating new transactions on the network according to the network’s consensus mechanism.

Proof of Work ( “PoW” ) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants (referred to as “miners”). These participants operate nodes and contribute computational resources to the network. PoW involves verifying transactions on the network and adding them to a distributed ledger in the form of blocks. The “work” in PoW refers to the computational resources that miners contribute to validate transactions and add new blocks to the network. Miners do not need to own the covered crypto assets of the network to validate transactions.

Miners use computers to solve complex mathematical equations in the form of cryptographic puzzles. Miners compete with each other to solve these puzzles, and the first miner to solve a puzzle has the task of accepting bulk transactions from other nodes and validating (or proposing) new transaction blocks to the network. In exchange for providing validation services, miners receive “rewards” in the form of newly “minted” or created protected cryptographic assets, which are delivered according to the terms of the agreement. In this way, PoW incentivizes miners to invest the necessary resources to add valid blocks to the network.

Miners providing verification services can only receive rewards after other nodes in the network validate that the solution is correct and effective through the protocol. To this end, once a miner finds the correct solution, it broadcasts this information to other miners, who can verify whether the miner has correctly solved the problem to receive rewards. After validation, all miners will add the new block to their own copies of the network. PoW aims to protect the network by requiring miners to spend a significant amount of time and computational resources to verify transactions. When the verification process operates in this way, it not only reduces the likelihood of someone attempting to undermine the network but also lowers the chances of miners including altered transactions (such as those that allow for “double spending” of regulated crypto assets).

In addition to mining on their own, miners can also join a “mining pool”. Mining pools allow miners to combine their computational resources to increase the chances of successfully verifying transactions and mining new blocks on the network. Mining pools have developed into various types, each with different operational methods and reward distribution mechanisms. Pool operators are typically responsible for coordinating the computational resources of miners, maintaining the mining hardware and software of the pool, overseeing the security measures of the pool to prevent theft and cyberattacks, and ensuring that miners receive their rewards. In return, pool operators charge a fee, which is deducted from the share of rewards the miners receive in the pool. The reward payments from different pools vary, but rewards are usually distributed proportionally to the total computational resources contributed by each miner to the pool. Miners are not obligated to stay in the pool and can choose to leave at any time.

The department believes that, under the circumstances described in this statement, the “mining activities” related to protocol mining (as defined in this statement) do not involve the issuance and sale of securities as defined in Section 2(a)( of the Securities Act of 1933 (the “Securities Act”) and Section 3)a()10( of the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, the department believes that participants in mining activities do not need to register transactions with the U.S. SEC under the Securities Act, nor do they need to comply with one of the registration exemptions regarding these mining activities as specified in the Securities Act.

The department’s perspective involves the following protocol mining activities and transactions (“mining activities” and each “mining activity”): (1) mining protected crypto assets on PoW networks; (2) the roles of mining pools and mining pool operators participating in the protocol mining process, including their roles in earning and distributing rewards. This statement only pertains to mining activities related to the following types of protocol mining.

Solo mining, where miners use their own computing resources to mine protected cryptocurrency assets. Miners can operate nodes and mine protected cryptocurrency assets either individually or in collaboration with others.

Mining pool, where miners combine their computing resources with other miners to increase the chances of successfully validating transactions and mining new blocks on the network. Reward payments may flow directly from the network to the miners or may flow indirectly to the miners through the pool operator.

The Securities Law Article 2)a()1( and the Trading Law Article 3)a()10( define “securities” by listing various financial instruments (including “stocks”, “notes”, and “bonds”). Since the covered crypto assets do not constitute any financial instruments explicitly listed in the definition of “securities”, we analyze certain transactions involving covered crypto assets in the context of protocol mining based on the “investment contract” test established in SEC v. WJ Howey Co. The “Howey Test” is used to analyze arrangements or instruments not listed in these statutory terms based on their “economic reality”.

When evaluating the economic realities of a transaction, the standard to be examined is whether there is an investment of funds in the enterprise and whether that investment is based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Since the Howey case, federal courts have explained that the requirement of “efforts of others” in the Howey case is that “the efforts made by people other than the investors are undoubtedly significant and are necessary managerial efforts that affect the success or failure of the enterprise.”

Mining on one’s own (or solo) is not a reasonable expectation to profit from the entrepreneurial or managerial efforts of others. Instead, miners contribute their computational resources, which can protect the network and enable miners to earn rewards distributed by the network according to its software protocol. To receive rewards, miners’ activities must comply with the protocol rules. By adding their computational resources to the network, miners are merely engaging in organized or contributory activities to protect the network, validate transactions, and add new blocks in exchange for rewards. The expectation of rewards for miners does not stem from the managerial or entrepreneurial efforts of any third party upon which the network’s success relies. Instead, the anticipated economic incentives of the protocol come from the administrative or operational actions of miners executing protocol mining. Therefore, rewards are compensation for the services miners provide to the network, not profits derived from the entrepreneurial or managerial efforts of others.

Similarly, when miners combine their computing resources with other miners to increase their chances of successfully mining new blocks on the network, they do not expect to profit from the entrepreneurial or managerial efforts of others. By adding their computing resources to a mining pool, miners are merely engaging in administrative or managerial activities to protect the network, validate transactions, and add new blocks to receive rewards. Furthermore, any profit expectations of miners do not come from the efforts of third parties (such as mining pool operators). Even when participating in a mining pool, individual miners still perform the actual mining activities by contributing their computing power to solve the cryptographic puzzles used to validate new blocks. Additionally, whether miners mine on their own (or individually) or as members of a mining pool does not change the nature of protocol mining for the purposes of the Howey test. In either case, as stated herein, protocol mining remains an organized or contributory activity. Moreover, the activities of mining pool operators, who operate mining pools by utilizing the combined computing resources of participating miners, primarily fall under an organized or contributory nature. While certain activities of mining pool operators may benefit the group of miners, such efforts are insufficient to meet the Howey ‘efforts of others’ requirement, as miners primarily rely on the computing resources they provide to the pool alongside other members to earn profits. For this reason, miners join mining pools not based on the ability to passively earn profits from the activities of mining pool operators.