Since bank deposits and CDs are not commonly known as or treated like securities

in r2cornell •  2 months ago

Securities laws are designed to capture myriad arrangements where investors give money to a manager and expect to receive a return. For this purpose, the Securities Act and the Exchange Act define a “security” broadly as being “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest… transferable share…investment contract… or, in general, any interest or instrument commonly known as a ‘security.’”

Read more: SEC Chair Hints Some Stablecoins Are Securities
The term “investment contract” is also construed broadly, beginning with the 75-year-old decision in SEC v. W.J. Howey Co. and its eponymous “Howey Test.” This test was described by the Supreme Court as embodying “a flexible rather than static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek to use the money of others on the promise of profits.”

“But wait,” you say, “I have just such an arrangement with my bank. I give it money, it manages the money and it gives me a return. So why isn’t my checking account a registrable security?” That’s a good question, one the Supreme Court answered in Marine Bank v. Weaver in 1982.

The facts of Weaver do not bear repeating save that the case involved a $50,000 FDIC-insured CD issued by a bank, allegations of false advertising and the history of securities law. In a decision that both clarified and generalized the Exchange Act, the Supreme Court opined that the definition of “security” is context dependent.

Since bank deposits and CDs are not commonly known as or treated like securities, it was therefore unnecessary to treat them as such, due largely to the near-zero risk of default on such instruments rendering them as not security-like when considered in context.

This explains why Alabama appears to be treating BlockFi’s BIA as an investment product. It refers to the BIA not as a deposit account but a product which “BlockFi allows investors to purchase” – terminology which is not used to describe the opening of current accounts.

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