In a major regulatory development, the Securities and Exchange Commission (SEC) has issued an Interpretive Release stating that most digital assets will not be considered securities under the Federal Securities Laws. The Release, issued for public comment on March 17, signifies a radical shift from prior SEC pronouncements declaring that crypto assets largely would be regulated as securities and advances the pro-crypto agenda of the second Trump Administration. It is also noteworthy that the Commodity Futures Trading Commission joined the Release and the CFTC’s staff will administer the commodities laws consistent with the Release’s guidance.

Background

In 2017 the SEC issued a report stating that offers and sales of digital assets by an organization called “the DAO” were investment contracts and therefore securities under Section 2(a)(1) of the Securities Act of 1933 and Section 3(a)(10) of the Securities Exchange Act of 1934. The DAO Report and subsequent SEC proceedings relied upon the “Howey” test, based on SEC v. W.J. Howey Co., 328 U.S. 293 (1946), which states that a contract or transaction is an investment contract if it involves the investment of money in a common enterprise where the reasonable expectation of profits depends on the managerial or entrepreneurial efforts of others. The SEC invoked the Howey standard in bringing enforcement proceedings against crypto entities, which was criticized by some SEC Commissioners and other commentators as “regulation by enforcement” that created uncertainty while ignoring the realities of crypto functionality and usage.

By contrast, the SEC stated that the Interpretive Release seeks to create a “tailored regulatory framework that accommodates crypto asset innovation and entrepreneurship.” The Release addresses the application of the securities laws to various types of digital assets and transactions and provides support for Congressional efforts to enact a comprehensive crypto market structure statute.

Categories of Digital Assets

The Release classifies crypto assets into categories based on their characteristics, uses and functions, and analyzes each category concerning whether it would be considered an investment contract, and thus a security, under federal law. As discussed below, the critical analysis is whether any expectation of profit is based on the managerial efforts of others:

Digital Commodities – A digital commodity is a crypto asset that derives its value from the operation of a functional crypto system. Well-known digital commodities are Bitcoin, Ether and XRP. The Release stated that a digital commodity does not have intrinsic economic properties or rights, or assets of a business enterprise, nor is there the expectation of profits based on the managerial efforts of others. Therefore, a digital commodity would not be considered a security.
Digital Collectibles – A digital collectible is a crypto asset that is designed to be collected or convey rights to artwork, music, videos, trading cards, or digital references or representations to memes, characters, current events, or trends. Because a digital collectible’s value is not based on the managerial efforts of others, but on supply and demand, which in turn is based on popularity or scarcity, a digital collectible would not be considered to be a security. However, the offer and sale of a digital collectible that is either fractionalized or otherwise offers the ability to acquire a fractional ownership interest of a single collectible, could constitute the offer or sale of a security because profits might be derived from the managerial efforts of others.
Digital Tools – A digital tool is a crypto asset that performs a practical function, such as a membership, ticket, credential, title instrument or identity badge. They are typically issued to perform certain functions within a crypto system and are non-transferable. Because digital tools are purchased for their utility and the expectation of any profit is not based on the managerial efforts of others, they are not considered a security.
Stablecoins – A stablecoin is a type of digital asset intended to maintain a stable value relative to the U.S. dollar or another asset. The GENIUS Act, enacted by Congress last year, created a comprehensive regulatory framework for a specific type of stablecoin called a “payment stablecoin,” which is intended to be used for payment or settlement. Until the GENIUS Act is effective, the offer and sale of certain kinds of stablecoins discussed in an earlier SEC staff statement will not be subject to the securities laws.
Digital Securities – A digital security, commonly known as a “tokenized” security, is a financial instrument covered by the definition of a security that is formatted or represented by a crypto asset. Because there are different models of tokenized securities, the rights of the crypto holder may be different from the rights of the underlying security holder. The Release states that a security remains a security regardless of format or label. To the extent that a purchaser expects economic returns from a third party, the asset is considered a security.

When Crypto Assets Become A Security

A non-security crypto asset becomes an investment contract when an issuer induces the investment of money in a common enterprise with representations that it will undertake managerial efforts that provide a reasonable expectation of profits. But much will depend on the reasonableness of the purchaser’s expectation of profits because of particular promises, including their source. However, a crypto asset subject to an investment contract loses that characteristic in secondary market transactions where purchasers would not reasonably expect such promises or representations to continue, such as where the issuer fulfilled its promises or failed to satisfy them.

Protocol Mining, Protocol Staking, Wrapping And Airdrops

Certain types of transactions, characterized as mining, staking and wrapping, do not involve the offer and sales of securities. Certain crypto asset disseminations known as “airdrops” do not involve the investment of money under the Howey test and therefore do not qualify as securities.

Conclusion

The SEC’s Interpretive Release marks a significant turning point in the regulatory treatment of digital assets, providing long-awaited clarity for crypto developers, investors, and market participants. By anchoring the analysis in the Howey test's "managerial efforts of others" prong, the Release creates a workable framework that distinguishes speculative investment vehicles from functional crypto assets. While many questions remain — particularly around assets that blur category lines — the Release signals that federal regulators are prepared to engage with the crypto industry on its own terms rather than forcing digital assets into a securities framework designed for a different era. With Congress also moving toward comprehensive crypto market structure legislation, the regulatory landscape for digital assets appears to be entering a period of greater predictability and stability.

For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.

****

Disclaimer: Materials on this website are for informational purposes only and do not constitute legal advice. Transmission of materials and information on this website is not intended to create, and their receipt does not constitute, an attorney-client relationship. Although you may send us email or call us, we cannot represent you until we have determined that doing so will not create a conflict of interests. Accordingly, if you choose to communicate with us in connection with a matter in which we do not already represent you, you should not send us confidential or sensitive information, because such communication will not be treated as privileged or confidential. We can only serve as your attorney if both you and we agree, in writing, that we will do so.

The materials on this website are not intended to constitute advertising or solicitation. However, portions of this website may be considered attorney advertising in some states.

Unless otherwise specified, the attorneys listed on this website are admitted to practice in the State of California.