Encryption eyewash hit by SEC: In-depth analysis of the Green United case

1. Case Overview: A Carefully Designed Encryption Eyewash

In 2023, the U.S. Securities and Exchange Commission filed a lawsuit against Green United LLC, accusing it of perpetrating a large-scale fraud through the sale of "Green Boxes" cryptocurrency mining machines, with the amount involved reaching $18 million. On September 23, 2024, Judge Ann Marie McIff Allen ruled that Green Boxes constituted securities in conjunction with the custodial agreement, supporting the regulatory agency's request for penalties.

The core of this eyewash lies in the construction of a seemingly perfect investment trap: after investors pay $3,000 to purchase mining machines, they are promised a monthly return of $100, with an annualized return rate as high as 40%-100%. However, in reality, Green United did not use the mining machines for actual mining but disguised the returns by purchasing unmined "GREEN" tokens, which ultimately lost value due to the lack of liquidity in the secondary market.

Green United's business model is highly misleading: it uses hardware sales as a guise to deeply bind investors through a hosting agreement. According to the agreement, the company claims it will "complete all work" to achieve expected returns, and this "commitment + control" model has become the core of the case dispute. The court determined that the combination of mining machine sales and hosting agreements constitutes a securities transaction, fitting the definition of an investment contract from the 1946 Howey case. This ruling not only overturned the defendant's defense but also clearly included encryption mining machines under securities regulation.

2. Controversy Focus: Why is Mining Machine Trading Considered Securities?

2.1 Applicability of the Howey Test

The four elements of an investment contract established by the Howey case include: investment of money, a common enterprise, expectation of profits, and profits derived from the efforts of others. The core of Green United's defense lies in emphasizing the attribute of mining machines as "goods for end users' own use", claiming that the profit promises in the hosting agreements are commercial incentives rather than securities issuance. However, Judge Allen, through a penetrating review, determined that the connection between control and sources of profit has exceeded the scope of commodity trading, bringing the mining machine transactions into the category of common enterprise.

The specific judgment of the judge is as follows:

1. Capital investment: The investor pays $3000 to purchase a mining machine, which meets the capital investment criteria.
2. Joint Venture: The returns for investors depend on Green United's control and operation of the system, forming a joint venture between the investors and the initiators.
3. Profit Expectation: A promise of ultra-high returns of 40%-100%, far exceeding normal commercial investment returns.
4. Others' Efforts: Green United promises "to complete all work," and investors do not need to participate in operations; profits rely entirely on the initiators' efforts.

2.2 Multiple Interpretations in the Legal Field

Despite the court's ruling, there are still disagreements in the legal community regarding this case. Some opinions suggest that this is a specific eyewash, and the SEC's charges target the false advertising and custodial agreement design of Green United, rather than denying the sale of mining machines itself.

Supporters believe that this case embodies the core essence of the Howey test's "substance over form"—although mining machines are physical goods, the absolute control of the initiator over the system and the strong correlation with profits in the profit model constitute the substantive characteristics of a "common enterprise." Opponents, however, warn that if this logic holds, all hardware sales with profit promises could be deemed securities, leading to a blurred boundary of legal applicability.

This divergence reflects the deep challenges faced by cryptocurrency asset regulation: how to strike a balance between protecting investors and encouraging technological innovation? In the future, judicial precedents will need to further clarify the standards, such as specifying that when the sale of goods is accompanied by profit promises, it must simultaneously meet conditions like "decentralized operation" and "shared risk" in order to exclude securities attributes.

2.3 Other encryption asset securities qualitative cases

In the Ripple case, the court determined that the sale of XRP to institutional investors meets the definition of securities based on the Howey test. Ripple linked the value of XRP to its own development through promotional materials, and the investors' purchase behavior constituted a financial investment in a common enterprise, with profit expectations entirely dependent on the technical development and marketing efforts of the Ripple team.

In the Terraform case, the court determined that UST and LUNA meet the definition of a security, with the core basis being the "profits derived from the efforts of others" standard. Although UST employs an algorithmic stabilization mechanism, Terraform, through continuous information disclosure and the public platform of its founders, led investors to form a reasonable expectation that "profits are derived from the efforts of the Terra team."

3. The Future Outlook of the Qualitative Securities of Encryption Assets

Green United transforms the mining machine profits into financial attributes through a custody agreement, allowing investors to essentially participate in a "joint venture" that relies on the initiator's operations, rather than in the mining machine hardware itself. In the short term, this case deters the fraudulent packaging of encryption projects, which is beneficial for protecting investors' interests; in the long term, this case helps promote the iteration of the securities regulatory framework.

With the emergence of new technologies such as encryption assets and smart contracts, traditional financial scenarios are undergoing transformation, and simply applying the Howey test can no longer meet regulatory needs. In the future, it is necessary to dynamically consider the specific forms of projects and balance the relationship between technological innovation and legal regulation. The healthy development of the encryption market relies on a deep dialogue between legal rationality and technological logic, and the future landscape of the classification of encryption asset securities is gradually unfolding through various cases.