Ostensive definitions explain the meaning of a term by pointing to examples. For instance, one might define "red" by physically pointing to red objects like apples or roses. While this method can be straightforward and intuitive, it has several significant drawbacks. We’ll explain the drawbacks and how they pertain to securities and commodities.
Firstly, ostensive definitions rely heavily on the context and prior knowledge of the person receiving the definition. If the person lacks the necessary background or context, they may misinterpret the examples. Secondly, this method can be limited in scope and precision. Abstract concepts or terms that cannot be easily demonstrated through physical examples are difficult to define ostensively. This can lead to oversimplifications and misunderstandings, especially when using complex or nuanced terms.
Securities and commodities are defined ostensively based on curated lists of assets or examples that fall under each category. One item on the securities definition list that generates a lot of interest but also confusion is investment contracts, which have a more formal definition through the Howey Test. Consequently, the Howey Test, because of its formalism, creates confusion due to the public's natural gravitation toward it as the sole definition of securities as opposed to just one item, one example, on the list of the ostensive definition.
The challenge becomes even more pronounced when introducing new paradigms of assets that need to be designated as securities, commodities, or something else. Outside of the Howey and Reeves Test (which determines if a note is a security), a new asset is compared to the existing assets on the lists, the asset is put through a “resemblance test” - and then further contextualized by its facts and circumstances before a decision is made - in other words, it is incredibly nuanced. Considering these lists have been developed over a long period, it is hard to imagine that there is an asset out there that would not resemble something on this list. Yet emerging technologies have given rise to digital assets, such as cryptocurrencies and tokens, that are a challenge to resemble anything on those lists - and if the assets can’t be categorized, then what?
The point is not to say that cryptocurrencies and tokens are securities or commodities but to emphasize that the categorization decision is nuanced and can’t be left up to general interpretation. Instead, ostensive definitions require society to select the few to decide on the fate of new assets. This is the reality, and it is either not understood or seemingly not accepted. Still, it underscores how ostensive definitions are the default to describe difficult things. They are ultimately entrusted to the few who dedicate themselves to deciding based on the intricacies and nuances.
However, ostensive definitions are adaptive-grey-area definitions that constantly iterate and develop to meet the needs of society at that time. Through iterating, definitions can swing between being too prescriptive and too loose - with the hope that a steady state will be reached at some point in time. With too much prescription, innovation and growth are stifled, too loose, and people could get hurt. Before the introduction of digital assets, it could be argued that a steady state existed, but now, with digital assets, that state has been disrupted, and a new sequence of iterations has started down a new path to a new steady state. This process is ultimately fluid, and what we know about such processes is that to get to the new state quickly requires staying away from the extremes and managing the volatile swings in definitions.