Whether a cryptocurrency is a security comes down to the Howey test, a four-part standard the U.S. Supreme Court laid out in 1946 and that federal regulators apply to every digital asset. If a token is sold as an investment in a common enterprise where buyers expect profits from someone else’s work, it is a security and falls under the same registration and disclosure rules as stocks and bonds. Bitcoin sits outside that definition. Most tokens launched through fundraising events sit inside it.
The Howey Test
The standard comes from SEC v. W.J. Howey Co., a case about Florida citrus groves. The Court held that an investment contract exists whenever someone invests money in a common enterprise with an expectation of profits derived from the efforts of others. If a transaction meets that test, it is a security, regardless of whether it involves a physical asset, a digital token, or anything else.1Justia. SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
All four parts must be satisfied:
- Investment of money. A person commits cash, another digital asset, or other consideration in exchange for the token.
- Common enterprise. The buyer’s financial outcome is tied to other investors or to the promoter’s success.
- Expectation of profits. The buyer is motivated by financial return, not by using the token.
- Efforts of others. Those profits depend on work done by someone other than the buyer, usually a development team or promoter.
Howey originally said profits had to come “solely” from the efforts of others. Later court decisions and SEC guidance loosened that word to cover situations where others perform “undeniably significant” managerial or entrepreneurial work, even if the investor pitches in.2U.S. Securities and Exchange Commission. Framework for “Investment Contract” Analysis of Digital Assets
How the Test Applies to Tokens
The SEC’s Framework for “Investment Contract” Analysis of Digital Assets walks each Howey element through the token context and lists factors that weigh for or against security classification.2U.S. Securities and Exchange Commission. Framework for “Investment Contract” Analysis of Digital Assets
Investment of Money
Trading dollars, Bitcoin, Ethereum, or any other asset of value for a new token satisfies this prong. It is obvious in an initial coin offering. It also reaches less obvious situations: tokens distributed through bounty programs count because recipients supply labor, and the SEC has taken the position that even airdrops can qualify because any exchange of value, direct or indirect, is enough.3SEC.gov. Framework for “Investment Contract” Analysis of Digital Assets
Common Enterprise and Expectation of Profits
In a typical token launch, everyone who bought the token benefits if the project succeeds and loses if it fails. When promoters market a token by pointing to future exchange listings, growing adoption, or development milestones, buyers are chasing price appreciation rather than any current use. Secondary market trading confirms it: most buyers acquire tokens to sell them higher, not to spend them in a working application.
Efforts of Others
Most projects rely on a core team to write code, run security audits, attract users, and secure exchange listings. When those centralized contributors do the essential work that drives price, the efforts-of-others prong is met. Buyers who cannot maintain the network themselves are relying on that team for their returns.
When a Token Becomes “Sufficiently Decentralized”
A token that starts out as a security can, in theory, stop being one if the underlying network becomes truly decentralized. The SEC framework points to several factors that weigh against security classification:
- The network is fully developed and operational.
- Holders can immediately use the token for its intended purpose on that network.
- The token’s design serves user needs rather than price speculation.
- No single person or coordinated group carries out the essential managerial work.
When those factors line up, buyers are no longer depending on a promoter, and the token looks more like a functional tool than an investment contract.3SEC.gov. Framework for “Investment Contract” Analysis of Digital Assets There is no formal numeric threshold. The SEC has asked for public comment on whether to set one but had not adopted any as of 2026.
Where Specific Cryptocurrencies Fall
Bitcoin
Bitcoin is broadly recognized as sitting outside the securities framework. The CFTC classifies it as a commodity under the Commodity Exchange Act, placing it under futures and derivatives rules rather than equity rules.4CFTC. Bitcoin Basics The SEC has said Bitcoin buyers are not relying on the essential managerial and entrepreneurial efforts of others, so the fourth Howey prong fails. Bitcoin has no central development team driving its value, no ICO fundraising history, and a fully operational decentralized network.
Ethereum
Ethereum sits in a grayer zone. No federal agency has issued a binding classification of ETH as either a security or a commodity. The SEC approved Ethereum-based exchange-traded products, which implicitly treats ETH more like a commodity, and it dropped crypto from its 2026 examination and enforcement priorities. In practice, regulators are not treating ETH as a security right now, but no rulemaking or court decision has formally settled the question.
Altcoins and ICO Tokens
The SEC concentrates its enforcement on altcoins and tokens launched through fundraising events where a centralized team is still active. When a project raised money from investors, promised future development, and the token’s value depends on the team delivering on those promises, all four Howey prongs are typically met. The agency looks at each asset individually rather than issuing a blanket rule.
Payment Stablecoins
The GENIUS Act, signed into law on July 18, 2025, created a federal regime for payment stablecoins and states plainly that a payment stablecoin is not a security under the Securities Act of 1933, the Securities Exchange Act of 1934, or the Investment Company Act of 1940.5Federal Register. Implementing the Guiding and Establishing National Innovation for U.S. Stablecoins Act for the Issuance of Stablecoins by Entities Subject to the Jurisdiction of the Office of the Comptroller of the Currency Only stablecoins issued by permitted issuers under the Act qualify for that exclusion. Stablecoins that fall outside the Act’s requirements, or that behave more like investment products than payment instruments, can still be run through the Howey test.
Where Staking Fits In
Staking locks up tokens to help validate transactions on a blockchain, and whether it triggers securities law depends on who runs the process. In May 2025, the SEC issued a statement drawing the lines.6U.S. Securities and Exchange Commission. Statement on Certain Protocol Staking Activities
Solo staking, where you run your own validator node, does not satisfy the efforts-of-others prong. Your rewards come from your own administrative activity. The same reasoning covers self-custodial staking through a third-party platform as long as you decide whether, when, and how much to stake.
Custodial arrangements, where a service provider holds and stakes your tokens for you, can also fall outside the securities framework, but only if the custodian sticks to administrative tasks like picking a node operator or pooling tokens. If the custodian decides whether, when, or how much of your tokens to stake, the arrangement steps outside the SEC’s statement and can be analyzed as an investment contract. Programs that guarantee fixed returns, or that pool rewards in ways that cut your earnings loose from actual protocol rewards, raise the strongest red flags.
What Happens If a Token Is a Security
Classification is not academic. A token that qualifies as a security cannot be offered or sold to the public unless it is registered with the SEC or fits an exemption. Section 5 of the Securities Act of 1933 (15 U.S.C. ยง 77e) sets that requirement. Registration means filing a detailed statement covering audited financials, the business model, background on the management team, a risk prospectus, and any conflicts of interest, all of which become public through the SEC’s EDGAR system. The SEC charges a filing fee of $138.10 per million dollars of securities registered in fiscal year 2026.7U.S. Securities and Exchange Commission. Section 6(b) Filing Fee Rate Advisory for Fiscal Year 2026 Legal, accounting, and underwriting costs push the total much higher.
Because full registration is expensive, most token projects that go the securities route use an exemption instead. The most common is Rule 506 of Regulation D, which puts no cap on the amount raised but restricts the offering to accredited investors (with a narrow allowance for up to 35 sophisticated non-accredited investors under Rule 506(b)) and, under Rule 506(c), lets the issuer advertise only if it verifies every buyer’s accredited status.8Investor.gov. Rule 506 of Regulation D Regulation A+ allows public offerings up to $20 million (Tier 1) or $75 million (Tier 2) in a 12-month period with lighter disclosure than a full registration.9U.S. Securities and Exchange Commission. Regulation A Regulation S provides a safe harbor for offerings conducted entirely outside the United States. Registration also carries ongoing reporting obligations, including annual Form 10-K and quarterly Form 10-Q filings.
Penalties for Selling Unregistered Securities
Selling a token that qualifies as a security without registering or claiming an exemption exposes the issuer on three fronts.
Willful violations of the Securities Act, including offering unregistered securities or making false statements in a filing, carry a fine of up to $10,000, imprisonment for up to five years, or both.10Office of the Law Revision Counsel. 15 U.S. Code 77x – Penalties
Under Section 12(a)(1) of the Securities Act, buyers of unregistered securities can sue the seller for rescission, meaning they get their money back plus interest. A buyer who already sold the tokens can seek damages for the difference between what they paid and what they received on resale.
The SEC can bring its own enforcement action seeking disgorgement of profits, prejudgment interest, and civil penalties. Those numbers can be enormous. In one high-profile crypto action, the defendants agreed to pay over $4.5 billion in combined disgorgement, interest, and penalties.11U.S. Securities and Exchange Commission. What’s Past is Prologue: Enforcing the Federal Securities Laws in the Age of Crypto The agency can also seek court orders barring individuals from serving as officers or directors of public companies.