Launching a Decentralized Cosmos Chain

The Howey Test — To begin, let's consider the US securities laws as a starting point. While the legislative framework in this area is still evolving, sufficient decentralization can increase the likelihood of a network's native token not being classified as a security by US regulators. We take the US regulatory framework as the default because it is currently the most stringent legal framework, as well as the fact that failing to meet its standards could result in projects being unable to legally sell tokens to US investors.

Consequently, they would have to exclude the US market entirely, including potential future listings on US exchanges, which could pose long-term challenges for a network. To provide further context, let's briefly examine the criteria of the Howey test, which US regulators employ to determine whether a network might fall under security regulations:

• Investment of money: When people put up assets in return for another asset such as equity or tokens.

• Expectation of profits: When people anticipate earning money or other forms of returns on their investment.

• Common enterprise and efforts of others: When people expect the profits to come primarily from the work or actions of someone else within a shared or linked enterprise.

Typically, for a token to be considered a security, all three criteria of the Howey test (investment of money, expectation of profits, and common enterprise) must be met. If any one of the criteria is not satisfied, the token may not be classified as a security. In a blockchain network, the first prong of the Howey test, which is the investment of money, is typically met by default as participants contribute funds or assets to acquire tokens within the network.

However, to potentially avoid being deemed a security, blockchain networks usually consider minimizing the elements that satisfy the second and third prongs of the Howey test. When striving to avoid the second criteria, which is the expectation of profits, this can be achieved by emphasizing the utility and functionality of the tokens within the network, rather than positioning them primarily as investment opportunities. Focusing on the immediate use and utility value of the tokens can help to reduce the perception of speculative profit expectations.

To minimize the third criteria, which relates to the profits derived from the efforts of others, protocols generally promote decentralization and minimize the control and influence of a centralized entity or group such as the founders. This way blockchain networks can demonstrate that the success of the investment is not primarily dependent on the efforts of others but rather on the collective actions of network participants.