Whether a cryptocurrency is a security under U.S. law depends on how the token was created, sold, and promoted, not what it is called. The Supreme Court’s Howey test is the standard regulators apply, and it asks whether buyers put money into a common enterprise expecting profits from someone else’s efforts. Bitcoin and a handful of fully decentralized assets are generally treated as commodities. Tokens sold through fundraising rounds, tied to a development team’s roadmap, or marketed on the strength of a company’s work have regularly been classified as securities. Recent legislation and a shift in enforcement priorities have redrawn some lines, but the underlying test has not changed.
The Howey Test Decides It
The standard comes from SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Federal securities law defines “security” broadly enough to include an “investment contract,” a catch-all that reaches arrangements Congress did not specifically name.1Office of the Law Revision Counsel. 15 U.S. Code 77b – Definitions A transaction is an investment contract when all four of these are present:
- An investment of money. The buyer puts up cash, another token, or something else of value.
- A common enterprise. Investors’ financial outcomes are tied together or linked to a promoter’s success.
- A reasonable expectation of profits. Buyers anticipate a return, not just use of a product.
- Derived from the efforts of others. Those expected profits depend on a team, company, or third party.
Courts look at the economic reality of the transaction, not the labels on it. A token described as a “utility token” or “governance token” can still be a security if the sale functions like an investment.2Cornell Law Institute. SEC v. Edwards That is why the test has survived into the blockchain era: it was built to adapt.
How the Test Plays Out for Tokens
In practice, tokens sold through initial coin offerings tend to check every Howey box. A team collects funds, publishes a roadmap, and promises to build something valuable. Buyers put up money, their returns depend on the team’s execution, and the marketing makes clear that early participation is meant to pay off as the project grows.
The “efforts of others” prong usually does the heavy lifting. If a token’s value depends on a specific team shipping updates, securing partnerships, or growing an ecosystem, buyers are relying on managerial effort they do not control. The SEC’s framework for analyzing digital assets treats promotional activity emphasizing a team’s expertise, business strategy, or technical accomplishments as a strong signal that the token is a security.3SEC.gov. Framework for Investment Contract Analysis of Digital Assets
Free tokens are not automatically outside the test. The SEC’s framework states that the lack of monetary consideration for airdropped tokens “does not mean that the investment of money prong is not satisfied.”3SEC.gov. Framework for Investment Contract Analysis of Digital Assets Recipients often provide personal information, hold another token, or complete tasks to qualify, and the broader scheme can still be a securities offering.
The SEC v. Ripple Labs case illustrates how the same token can produce different answers depending on the sales channel. A federal judge ruled in 2023 that XRP sold directly to institutional investors was a securities transaction, but XRP sold programmatically on public exchanges was not. The case ended in August 2025 with Ripple paying a $125 million fine. The lesson is that classification depends on the specific transaction, not on the token as an abstract asset.
When a Token May Stop Being a Security
The Howey test has a natural off-ramp. If a network becomes genuinely decentralized, with no team or coordinated group driving value, the “efforts of others” element falls away and the investment contract analysis breaks down.
This idea, often called sufficient decentralization, has become central to how regulators think about a token’s lifecycle. A project might look like a security during its fundraising phase and change character later, once the protocol runs autonomously, governance is distributed, and the original team no longer holds outsized influence.4Securities and Exchange Commission (SEC). Input to Crypto Task Force Regarding Airdrops and Incentive-Based Rewards
The SEC has not set numeric thresholds for when that line is crossed. Commissioner Hester Peirce has publicly asked whether the Commission should define objective benchmarks, such as ownership concentration or control metrics, to give projects clearer guidance.5U.S. Securities and Exchange Commission. There Must Be Some Way Out of Here As of 2026 the question is still open, and projects have to make judgment calls.
Tokens Treated as Commodities
When a digital asset does not meet the Howey test, it usually falls under the Commodity Futures Trading Commission’s authority as a commodity. The Commodity Exchange Act, codified at 7 U.S.C. § 1 et seq., gives the CFTC jurisdiction over commodities and their derivatives markets. Bitcoin is the clearest case: no central issuer, no development team promising profits, no ICO history. Its price moves on global supply and demand.6Commodity Futures Trading Commission. Digital Assets Primer
Ethereum’s status was murkier for years, but regulatory treatment has moved toward commodity status. The SEC approved spot Ethereum exchange-traded funds, and exchange filings in 2026 treat options on those ETFs as products overlying a “Commodity-Based Trust,” the same framework used for gold ETFs. The CFTC and SEC signed a memorandum of understanding in 2026 to reduce overlap, though full resolution depends on pending legislation.
Classification matters because commodities do not carry the registration and ongoing disclosure obligations securities do. The CFTC concentrates on preventing fraud and manipulation in trading markets, particularly in futures and derivatives, rather than regulating issuance.6Commodity Futures Trading Commission. Digital Assets Primer
Stablecoins Have Their Own Lane
Payment stablecoins now sit outside the securities-versus-commodity debate. The Guiding and Establishing National Innovation for U.S. Stablecoins Act, enacted in July 2025, created a dedicated federal framework. Dollar-pegged stablecoins backed by reserves have an explicit regulatory path, and the Office of the Comptroller of the Currency has issued implementing rules requiring issuers to hold reserves on at least a one-to-one basis, backed by highly liquid assets such as short-term Treasury bills, cash, and government money market funds.7Federal Register. Implementing the Guiding and Establishing National Innovation for U.S. Stablecoins Act for the Issuance of Stablecoins Compliant payment stablecoins are effectively carved out of the Howey analysis.
The Pending CLARITY Act Would Flip the Default
The Digital Asset Market Clarity Act of 2025, introduced in the House in May 2025, would narrow the SEC’s jurisdiction and classify most tokens as commodities overseen by the CFTC.9Congress.gov. H.R.3633 – Digital Asset Market Clarity Act of 2025
Where Staking Stands
Staking programs were a major enforcement target through 2023 and 2024, with the SEC arguing that staking-as-a-service offerings were unregistered securities. The agency’s position softened in 2025. A Division of Corporation Finance statement that May concluded that when a custodian takes possession of tokens and delegates them to a validator, the custodian’s role is “administrative or ministerial in nature” and does not involve the kind of managerial effort Howey requires. On that reading, protocol-level staking itself is not a securities offering.8U.S. Securities and Exchange Commission. Statement on Certain Protocol Staking Activities
The statement is narrower than it sounds. It covers protocol staking where rewards come from the blockchain’s built-in validation process. Pooled “yield” programs that lend user funds and pay returns from trading profits still look like investment contracts, and enforcement in that area has not been walked back.
What It Means If a Token Is a Security
If a token is a security, federal law prohibits selling it without either registering the offering with the SEC or qualifying for an exemption.10Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails Registration means filing a Form S-1, or Form 1-A for smaller Regulation A offerings, with detailed business, financial, and risk disclosures. The SEC’s Division of Corporation Finance has published guidance adapting standard disclosure items for blockchain projects.11U.S. Securities and Exchange Commission. Offerings and Registrations of Securities in the Crypto Asset Markets
Most crypto issuers that have attempted compliance have used Regulation D exemptions, which generally restrict who can buy and limit resale for at least six months to a year.12Investor.gov. Rule 506 of Regulation D If you hold a token that was sold under one of these exemptions, you likely cannot resell it immediately.
Selling unregistered securities without an exemption exposes promoters to SEC enforcement. The agency can seek injunctions, disgorgement of profits, and civil penalties.13Cornell Law School / Legal Information Institute (LII). Securities Act of 1933 Base statutory penalties range from $5,000 per violation for a first-tier offense by an individual up to $500,000 per violation for a third-tier corporate offense involving fraud that caused substantial losses, with annual inflation adjustments on top.14Office of the Law Revision Counsel. 15 USC 78u-2 – Civil Remedies in Administrative Proceedings Federal court actions can go higher, and the SEC routinely seeks disgorgement on top of fines.
The SEC also established a dedicated Crypto Task Force in 2025 to draw clearer lines and develop tailored disclosure frameworks for digital assets, a shift from the prior posture of pointing projects toward the same rules that govern traditional stock issuers.
Taxes Are a Separate Question
Securities classification and tax classification are not the same. The IRS treats all digital assets as property, regardless of whether a given token is a security or a commodity for regulatory purposes. Selling, exchanging, or otherwise disposing of cryptocurrency triggers a capital gain or loss.15Internal Revenue Service. Digital Assets
Tokens held one year or less produce short-term capital gains, taxed at ordinary income rates. Tokens held longer qualify for long-term rates. Income from mining, staking rewards, and hard forks is ordinary income reported on Schedule 1 of Form 1040. Every taxpayer must answer a yes-or-no digital asset question on their return.15Internal Revenue Service. Digital Assets
One consequence of the property treatment: the federal wash sale rule, which blocks stock investors from claiming a loss when they repurchase the same security within 30 days, generally does not apply to cryptocurrency. A trader who sells at a loss can repurchase the same token immediately and still take the deduction. Rules change, so this is worth watching, but as of 2026 the IRS has not extended wash sale treatment to digital assets. Starting January 1, 2026, brokers must report cost basis information on certain digital asset transactions.15Internal Revenue Service. Digital Assets