SEC Clarifies When Crypto Tokens Are Securities

Its Division of Corporation Finance released new guidance that explains when crypto tokens are considered securities.

For investors and developers alike, the message is simple. If it walks like a security and talks like a security, expect it to be regulated like one.

When Tokens Act Like Securities

The update aims to reduce confusion around digital assets by applying a modern lens to the Howey test. This is a 1946 legal standard still used to judge whether an asset qualifies as a security. According to the test, an asset is a security if there’s an investment of money and an expectation of profit. It also requires a common enterprise and profits driven by someone else’s efforts. The SEC’s 2025 rules refine how each of these factors should be applied in the crypto era.

A standout point in the guidance is the focus on “reasonable expectation of profit.” If people buy a token mainly because they think a team or promoter will make its price go up, the SEC sees it as a security. To help clarify things, the SEC laid out a new three-part framework:

• Initial sale context: Was the token pitched as an investment?

• Ongoing use: Does the token have a real use on a decentralized network?

• Issuer influence: How much control does the team still have?

Tokens sold through initial coin offerings (ICOs) with profit-focused marketing are in the SEC’s crosshairs. Governance tokens offering revenue sharing or dividends could also be flagged. Even utility tokens may be classified as securities if their promotion leans too heavily on price growth promises.

This builds on past legal decisions. In the LBRY case, a token was ruled an unregistered security. The Ripple case drew a line: XRP’s institutional sales counted as securities, but public ones didn’t. The SEC’s stance is clear—centralized control, limited utility, or pre-mining raises red flags.

When Tokens Might Avoid Securities Status

Not all crypto tokens are securities. The SEC guidance recognizes this and outlines key traits that may place tokens outside their jurisdiction.

• Stablecoins like USDC that are fully backed by fiat and independently audited tend to be safe from securities laws.

• Layer-1 tokens such as Ether (after the Merge), used mainly for paying network fees, show strong decentralized utility.

• Community-driven projects with open-source code and no single entity controlling updates or revenue tend to fall on the safe side.

A recent example is Ethereum’s shift to proof-of-stake, which removed central control from its issuance process. Today, it operates through a broad validator set, with token value tied to network use, not speculative profit.

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