A Closer Look at Internet Computer Protocol (ICP) as a Security
One of the most thought-provoking projects to hit the cryptocurrency world recently is the Internet Computer Protocol (ICP), created by the Dfinity Foundation. Its mission? To extend the functionality of the public Internet so that it can host backend software, transforming it into a global computing platform.
But as with any novel technology, questions are raised. One of the most frequently asked questions is, “Is ICP a security?”
Understanding ICP
Before we delve into whether or not ICP fits the definition of security, it’s important to understand what ICP is. In simple terms, ICP is the native utility token of the Internet Computer blockchain. It’s used for governance, and protocol management, and is also needed to facilitate the Network Nervous System (NNS) — the autonomous software that governs the Internet computer.
What Makes Something a Security?
To determine if a token is a security, one common reference is the Howey Test. This test comes from a 1946 U.S. Supreme Court case and is used to determine whether certain transactions qualify as “investment contracts.” If so, under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and subject to certain disclosure and registration requirements.
Under the Howey Test, a transaction is an investment contract, or security, if:
1. It is an investment of money.
2. The investment is in a common enterprise.
3. There is an expectation of profits from the work of the promoters or the third party.
Is ICP a Security?
Given the Howey Test criteria, the classification of ICP as a security is not straightforward.
- Yes, purchasing ICP involves an investment of money.
- However, the ICP token isn’t tied to a common enterprise. It’s associated with the Internet Computer, which is a decentralized blockchain protocol, not a single entity or business.
- The expectation of profit depends on the token’s use. If purchased with the expectation that it will increase in value over time, it could potentially be considered a security. However, if acquired to participate in the network, such as for governance voting or to facilitate operations within the Internet Computer, it’s less likely to be seen as a security.
It’s crucial to note that the classification can change based on the jurisdiction and its respective regulations.
The Need for Clarity
There’s an ongoing debate about the regulatory framework surrounding cryptocurrencies. The space is crying out for clear guidelines that can categorize tokens in a way that protects investors without stifling innovation.
While ICP might not neatly fit the mold of security under the traditional Howey Test, this underlines the need for updated regulations that reflect the unique properties and uses of cryptocurrencies.
