SEC Issues Interpretation Applying Federal Securities Laws to Crypto Assets

While crypto market structure legislation continues to work its way through Congress, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are moving forward with guidance to the crypto industry in the interim. On March 17, 2026, the SEC issued its Interpretation applying the federal securities laws to certain crypto assets as a first step toward developing a clearer regulatory framework for the SEC's treatment of crypto assets. The Interpretation provides a token taxonomy; addresses how a non-security crypto asset may become subject to, or may cease to be subject to, an investment contract; and clarifies the application of federal securities laws to protocol mining, protocol staking, and the wrapping of non-security assets. Continuing their harmonization efforts, the CFTC joined the SEC in the Interpretation to provide guidance on how the CFTC and its staff will administer the Commodity Exchange Act consistent with the Interpretation and that certain non-security crypto assets could potentially meet the definition of a "commodity" under the Commodity Exchange Act.

Token Taxonomy

The Supreme Court's decision in United States v. W.J. Howey Co., 328 U.S. 293 (1946) has been relied upon to determine whether a contract, transaction, or scheme involving an investment of money in a common enterprise with an expectation of profits derived from the efforts of others is an investment contract, and therefore a security. The application of the Howey test has proven to be difficult given the unique characteristics of crypto assets and the secondary trading of crypto assets. The Interpretation provides a coherent token taxonomy that classifies crypto assets based on their characteristics, uses, and functions:

• Digital Commodities (crypto assets intrinsically linked to and derive their value from the programmatic operation of a crypto system that is functional, as well as supply and demand dynamics, rather than from the expectation of profits from the essential managerial efforts of others, including governance tokens): not securities.
• Digital Collectibles (crypto assets designed to be collected and that may represent or convey rights to artwork, music, trading cards, memecoins, or in-game items): not securities.
• Digital Tools (crypto assets that perform a practical function such as memberships, tickets, credential title instruments, or identity badges): not securities.
• Stablecoins (payment stablecoins issued by a permitted payment stablecoin issuer as defined by the GENIUS Act): not securities.
• Digital Securities (financial instruments enumerated in the definition of a "security" that are formatted as or represented by a crypto asset where the record or ownership is maintained in whole or in part on or through one or more crypto networks): securities.

The Interpretation notes that "[a] security is a security regardless of whether it is issued, or otherwise represented, offchain or onchain," and that those instruments that have the economic characteristics of a security will be considered securities regardless of the format or label given to it.[1]

Becoming, or Ceasing to Become, Subject to an Investment Contract

The Commission's Interpretation also discusses how a non-security crypto asset may become subject to, and how it may cease to be subject to, an investment contract. A non-security crypto asset can become subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits. This determination depends on the specific facts and circumstances taken as a whole under which those representations and promises are made. Moreover, the manner, timing, and specificity in which the representations or promises are made are relevant to a purchaser's reasonable expectations.

The Interpretation also provides guidance on the nature of the representations or promises needed to form an investment contract, which includes the source of the representations or promises, the medium by which they are communicated, and the level of detail to be provided as to how the issuer's efforts will produce the profits that purchasers reasonably expect. The Interpretation assumes that an investment contract has already been created and notes that it does not address or otherwise affect the analysis regarding the creation of the investment contract under the Howey test or the application of Federal securities laws with respect to that investment contract.

However, non-security crypto assets that are offered and sold pursuant to an investment contract do not necessarily remain so in perpetuity. The Interpretation also sets forth how a non-security asset no longer is a subject of an investment contract when the contract has ended, either because the issuer fulfilled its representations or promises or the issuer has failed to satisfy its representations or promises.

Other Non-Security Crypto Assets

Notably, the Commission's Interpretation provides a detailed factual analysis of the types and nature of activities involved in mining, staking, and wrapping and it relates that analysis back to the factors of the Howey test. For example, after a description of crypto mining activity, the Interpretation notes that a miner contributes its own computational resources, and therefore mining is not undertaken with a reasonable expectation of profits to be derived from the essential managerial efforts of others: "By adding its computational resources to the [proof of work network], the miner merely is engaging in an administrative or ministerial activity to secure the [proof of work network], validate transactions[,] and add new blocks and receive rewards." This may signal a departure from prior judicial interpretations in which the presence of any economic rewards were sufficient for the classification of the activity as an investment contract.

Similar analyses prevail in connection with staking and wrapping. Again, the SEC provides a detailed factual analysis of the staking and wrapping processes and it relies on the view that, for example, in staking its own digital commodities, a node operator is "merely engaging in an administrative or ministerial activity to secure the [proof of stake network] and facilitate its operation." It goes on to note that a node operator's expectation of rewards is not derived from any third parties' "essential managerial efforts" upon which the proof of stake networks success may depend. Rewards are simply payments to the node operator in exchange for services (in validating transactions) that it provides to the proof of stake network rather than profits derived from the essential managerial efforts of others. A similar conclusion follows for liquid staking and staking receipt tokens.

As for wrapped tokens (receipts for crypto assets not subject to an investment contract), the SEC also follows the analysis that those tokens' value is derived from the value of the deposited crypto asset and not from the efforts of any third party involved in the wrapping process, which itself is an administrative or ministerial function. Moreover, the SEC finds that there is no financial incentive derived from the wrapping process because the wrapped token is redeemable for the deposited crypto asset only on a fixed one-for-one basis without any additional financial incentive or benefit.

Finally, airdrops, where crypto asset issuers disseminate their crypto assets in exchange for no or nominal consideration, do not involve an investment of money under Howey, and therefore would not be considered securities under the Interpretation.

Conclusion

The reactions from the digital asset and blockchain industry have been uniformly favorable. The belief is being expressed that the status of a crypto instrument as a security can be both transitory and fragile. One comment noted that an instrument only becomes an investment contract when an issuer makes promises of managerial efforts from which buyers expect profits, but once those promises are fulfilled, the instrument becomes a commodity. Another comment posits that an investment contract ends once a network decentralizes—which should give substantial relief to DeFi. Inevitably, these pro-crypto interpretations will be challenged in court, unless they secure direct support in the pending market structure legislation. How they fare before courts who have been weaned on the traditional application of the Howey test remains to be seen. 

While SEC Chair Atkins commented that only Congress can ensure that regulation of crypto assets is "future-proofed" through comprehensive market structure legislation, the Interpretation serves as a "bridge" to provide market participants much-needed clarity regarding the treatment of crypto assets under Federal securities laws. The Interpretation is built upon the feedback received by the SEC's Crypto Task Force and invites further comments.

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Elizabeth Davis and Stephen Gannon are partners in the financial services group in the Washington, D.C. office of DWT. For more insights, reach out to Elizabeth or another member of our financial services team or sign up for our alerts.