In year 1946, the United States Supreme Court passed judgment on a case “SEC vs. W.J. Howey Co.” that forever set the tone & framework for the classification of assets as Securities.
The HOWEY test screens any transaction to see if they fall into the category of “investment contract”. If a transaction is found to be an “investment contract” then it is also a security, if it is not found then it is not. As a rule of thumb, an investment contract is understood to be a situations in which “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”.
As it pertains to the world of digital assets and blockchain, HOWEY tests became the GO-TO resource for establishing a digital assets relation to tradtional financial instruments. Because crypto assets have their own innate properties, HOWEY tests do not always perfectly classify them; however with the test becoming a standardized, malicious scamming has been to some degree deterred and higher quality projects have been able to flourish.