The US SEC defines "POW Mining behavior": not considered a securities activity.

Compilation | Wu Says Blockchain

Introduction

As part of efforts to clarify the application of federal securities laws in the area of crypto assets, [1] the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance is issuing this statement regarding certain "Proof-of-Work" networks (PoW) to articulate its position. [2] Specifically, this statement addresses activities that involve participating in a network consensus mechanism and obtaining or utilizing corresponding crypto assets through programmatic features built into the protocol itself, in open, permissionless networks, to maintain the operational and security aspects of that network technology. This statement refers to such crypto assets as "Covered Crypto Assets," and the mining activities on PoW networks as "Protocol Mining." [3]

[4] Protocol Mining

The network relies on cryptography and economic mechanisms to verify network transactions and provide settlement guarantees for users without the need for a specifically designated trusted intermediary. The operation of each network is governed by specific software protocols (computer code), which programmatically enforce the specific network rules, technical requirements, and reward distribution. Each protocol includes a "consensus mechanism," which is a method that allows computer nodes spread across the network and not interconnected to reach a consensus on the network state. Public, permissionless networks allow anyone to participate in network operations, including validating new transactions according to the network's consensus mechanism.

PoW is a consensus mechanism that incentivizes transaction verification by rewarding network participants known as "miners". ### PoW involves validating transactions on the network and packaging them into Blocks to be added to the distributed ledger. The "work" in PoW refers to the computational resources that miners use to verify transactions and add new Blocks. Miners do not need to own the covered crypto assets on the network to verify transactions.

Miners use computers to solve complex mathematical equations in the form of cryptographic puzzles. The miners compete with each other, and the first miner to solve the puzzle is responsible for receiving and verifying (or proposing) transaction blocks from other nodes and adding them to the network. Miners receive "rewards" for providing verification services, which are typically new minted or created cryptocurrencies according to the terms of the protocol. [5] Thus, PoW incentivizes miners to invest the necessary resources to add valid blocks to the network.

Miners can only receive rewards after their computational results are verified as correct and valid by other nodes in the network through the protocol. When a miner discovers the correct answer, they broadcast it to other miners for validation to see if they have correctly solved the problem and can receive the reward. Once verified, all miners will add a new Block to their respective copies of the network. PoW ensures network security by requiring miners to invest a significant amount of time and computational resources to authenticate transactions. This verification method not only reduces the likelihood of damaging the network but also decreases the possibility of miners tampering with transactions (such as conducting double-spending attacks). [6]

In addition to Solo Mining, miners can also join a Mining Pool to combine computing resources with other miners, increasing the chances of successfully verifying transactions and mining new Blocks. Mining Pools come in various types, each with different operational methods and reward distribution mechanisms. [7] Mining Pool operators are typically responsible for coordinating the computing resources of miners, maintaining the hardware and software facilities of the pool, managing security measures, and ensuring that miners receive their rewards. In return, Mining Pool operators deduct a certain fee from the rewards obtained by miners as a commission. The reward payment model of mining pools varies, but is usually distributed according to the proportion of computing resources contributed by miners to the pool. Miners are not obligated to continue participating in a particular mining pool and can choose to leave at any time.

[8] The company's financial department's stance on protocol mining activities

The company's financial department believes that under the circumstances described in this statement, the "Mining Activities" related to agreement mining (defined below) do not constitute the issuance and sale of securities under Section 2###a()1( of the Securities Act of 1933 and Section 3)a()10( of the Securities Exchange Act of 1934. Therefore, the company's financial department believes that entities participating in mining activities are not required to register relevant transactions with the commission under the Securities Act, nor are they subject to any registration exemption provisions stipulated by the Securities Act.

) This declaration covers the agreement mining activities.

The aforementioned position of the company's financial department involves the following agreement mining activities and transactions (referred to as "mining activities", with a single action referred to as "mining behavior"):

Mining covered crypto assets on PoW networks;

The role of mining pools and mining pool operators in the protocol mining process, including their role in obtaining and distributing rewards.

Only mining activities involving the following protocol mining types are applicable to this statement:

• Solo Mining: Miners use their own computing resources to mine cryptocurrencies. Miners can operate nodes independently or collaborate with others to operate nodes.

•Mining Pool: Miners combine their computing resources with other miners to increase the chances of successfully mining new Blocks. Rewards may be paid directly from the network to the miners or may be paid indirectly through the mining pool operators.

[9] Detailed Analysis

Article 2###a###(1) of the Securities Act and the Securities and Exchange ActArticle 3(a)(10) defines "securities" by way of enumeration and includes a variety of financial instruments such as "stocks", "notes" and "bonds". Since the covered cryptoassets are not explicitly enumerated in the definition, we rely on the "investment contract" test (the "Howey Test") proposed in the SEC v. W.J. Howey & Co. case to analyze certain transactions for protocol mining. ( The "Howey Test" is designed to analyse trading arrangements or instruments that are not within the statutory definition based on economic reality. )

The key to analyzing economic reality lies in whether the transaction involves investing funds in a business, with the expectation of reasonably obtaining profits from the entrepreneurial or managerial efforts of others. [10] After the Hohwe case, the federal court further explained that this "effort of others" must be "undeniably significant, that is, managerial efforts that are decisive to the success or failure of the business." [11]

[12]# Solo Mining

Solo mining is not a reasonable expectation of profit based on the entrepreneurial or managerial efforts of others. Miners provide their own computing resources to maintain network security and receive rewards as stipulated by the network protocol. The expectation of rewards for miners does not depend on the managerial efforts of any third party but rather arises from their own administrative or technical activities, such as maintaining the network, validating transactions, and contributing to new blocks. Therefore, rewards should be regarded as compensation for the services miners provide to the network, rather than profits derived from the entrepreneurial or managerial efforts of others.

[13]# Mining Pool

Similarly, when miners combine their computing resources with other miners to increase the success rate of mining, it is not based on a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others. The expected returns for miners primarily come from their own invested computing resources. The management activities provided by pool operators are mainly of an administrative or technical nature, which may benefit miners but are not sufficient to meet the standard of "the efforts of others" as per the Howey Test. Miners choose to join mining pools not with the expectation of passively profiting from the management activities of pool operators.

For further information, please contact the Chief Advisor's Office of the company's Finance Department:

The "crypto asset" referred to in this declaration refers to assets generated, issued, and/or transferred through blockchain or similar distributed ledger technology networks (collectively referred to as "crypto networks"), including but not limited to assets referred to as "tokens", "digital assets", "virtual currencies", and "cryptocurrencies", which rely on cryptographic protocols. Furthermore, in this declaration, the term "network" refers to the crypto network.

This statement only represents the views of the staff of the company's financial department (hereinafter referred to as "the Department"). This statement is not a rule, regulation, guideline, or formal statement established by the U.S. Securities and Exchange Commission ("the Commission"), and the Commission has made no decision to approve or disapprove the content of the statement. This statement, like other staff statements, has no legal binding force or effect, does not change or amend applicable laws, and does not create any new or additional obligations for any individual or entity.

[1] This declaration only pertains to certain specific "covered cryptocurrency assets," which do not possess intrinsic economic attributes or rights, such as generating passive income or granting holders the right to future income, profits, or assets of the enterprise.

[2] This statement only pertains to the coverage of crypto asset transactions related to Protocol Mining, and does not cover other types of crypto asset transactions.

[3] This statement discusses the "Proof of Work (PoW)" mechanism in a general sense, without covering all specific variants of PoW or particular PoW protocols.

[4] The protocol pre-establishes the reward rules. Miners cannot change the rewards they receive; the reward structure is entirely determined in advance by the protocol itself.

[5] Double Spending refers to the situation where the same cryptocurrency asset is sent to two recipients at the same time, which may occur when the ledger records are tampered with.

[6] For example, in the Pay-per-share model, miners are rewarded for each valid share or Block they contribute to the mining pool, regardless of whether the pool successfully mines a Block; in the Peer-to-peer model, the role of the mining pool operator is decentralized among the pool members; and in the Proportional model, miners receive rewards based on the proportion of their computational power contributed during the successful mining of a Block. Additionally, there are some hybrid mining pools that combine different operational methods and reward payment methods.

[7] The views of the company's financial department do not determine whether any specific mining activity (as defined in this statement) constitutes the issuance and sale of securities. The final determination of specific mining activities must be based on an analysis of the facts of that activity. When there are discrepancies between the facts and what is described in this statement — for example, how pool members are compensated, how miners or other individuals participate in the pool, the actual activities conducted by the pool operator, etc. — the company's financial department's views on whether specific mining activities involve the issuance and sale of securities may vary.

[8] U.S. Supreme Court case: 328 U.S. 293 [9]1946[10].

( See U.S. Supreme Court in Landreth Timber Co. v. Landreth, 471 U.S. 681, 689 )1985[11] noted that the determination of something is not expressly covered by the Securities Act The appropriate criterion for whether an instrument or an unusual instrument in the definition of "stock" in Article 2(a)(1) is a security should be subject to the "economic realities test" established by Howey. In analysing whether an instrument is a security, "the form should be ignored and the substance should be emphasized" (Tcherepnin v. Knight, 389 U.S. 332, 336 (1967)) and "focus on the economic substance behind the transaction, not the apparent name of the instrument" (United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975)）。

( Forman case, 421 U.S. Reports page 852.

) For example, see SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 [12] 9th Cir. 1973.