The Reshaping of Digital Asset Regulation: Network Tokens as Non-Securities and Their Catalyst for Decentralized Innovation

Many thanks to our sponsor Panxora who helped us prepare this research report.

Abstract

The advent of network tokens, commonly referred to as utility tokens, has heralded a profound transformation in the digital asset landscape and the nascent world of decentralized ecosystems. These tokens are fundamentally designed to grant access to specific networks, services, or functionalities, thereby establishing a distinct economic and functional profile that differentiates them from conventional investment contracts. Recent and prospective regulatory shifts, particularly the forward-looking framework proposed by SEC Chairman Paul Atkins, are increasingly advocating for the classification of many network tokens as non-securities. This pivotal stance carries far-reaching implications, promising to significantly de-risk innovation, stimulate development, and foster robust growth within decentralized platforms, largely unburdened by the stringentures of traditional securities regulation. This comprehensive research report meticulously unpacks the multifaceted economic models and diverse use cases underpinning network tokens. It critically examines the intricate criteria employed to distinguish these tokens from investment contracts, delving into the historical context and evolving interpretation of regulatory frameworks. Furthermore, it explores in substantial detail the monumental impact of their non-security status on catalysing innovation, attracting development capital, and ultimately shaping the competitive global landscape of decentralized technologies.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction: The Genesis and Evolution of Network Tokens in a Shifting Regulatory Landscape

Blockchain technology, since its inception, has not merely introduced a new form of digital ledger but has fundamentally reimagined the architecture of trust, value exchange, and decentralized coordination. At the heart of this paradigm shift lies a new class of digital assets: network tokens. These tokens are not simply digital representations of value; they are intrinsic, programmatic components within their respective blockchain ecosystems, meticulously designed to facilitate a myriad of functions. These functions span from granting granular access to specific services, enabling direct participation in network governance, and providing robust incentivization mechanisms that align participant behaviour with the network’s overarching goals.

In stark contrast to traditional securities, which are primarily conceived and marketed as instruments for passive investment with an expectation of profit derived from the efforts of others, network tokens are purposefully engineered to deliver utility and access within a defined network or platform. Their value is intrinsically linked to their functional use, whether it is paying for computational resources, storing data, verifying transactions, or participating in collective decision-making processes.

The regulatory landscape governing these innovative digital assets has, for many years, been characterized by ambiguity and a reactive approach, often attempting to fit novel technologies into existing, often outdated, legal frameworks. This uncertainty has frequently posed significant hurdles for entrepreneurs, developers, and investors alike, creating an environment where legal risk could overshadow technological promise. However, a significant pivot in this regulatory trajectory was signalled in May 2025, when SEC Chairman Paul Atkins unveiled ambitious plans to overhaul the agency’s approach to cryptocurrency regulation. His pronouncements underscored an urgent need for clear, rational, and forward-looking rules concerning the issuance, custody, and trading of crypto assets.

Atkins’ proposed framework, often referred to as ‘Project Crypto,’ aims to establish specific, unambiguous guidelines for discerning which crypto tokens legitimately qualify as securities and, critically, which do not. This initiative also indicated a proactive willingness by the SEC to explore revisions to existing rules, which could potentially enable regulated broker-dealers operating alternative trading systems (ATS) to handle non-security crypto assets, such as Bitcoin (BTC) and Ether (ETH). This move represents a substantial departure from prior regulatory stances, which often adopted a more cautious, and sometimes prohibitive, approach to digital assets, frequently presuming many to be unregistered securities by default (Reuters, 2025).

This impending regulatory shift is not merely an administrative adjustment; it signals a fundamental re-evaluation of how digital assets are perceived and integrated into the broader financial ecosystem. By providing a clearer delineation between tokens that are subject to securities laws and those that are not, the SEC endeavours to cultivate a more predictable, supportive, and innovation-friendly environment for the continued development and widespread adoption of decentralized technologies. The clarity sought through ‘Project Crypto’ is anticipated to unlock significant potential, reduce regulatory overhead for genuine utility projects, and ultimately foster a more vibrant and competitive digital asset market.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Economic Models of Network Tokens: Orchestrating Decentralized Value and Participation

Network tokens are not monolithic in their design or function; rather, they embody a diverse array of economic models, each meticulously engineered to address the specific needs, incentives, and operational objectives of the underlying blockchain network. Understanding these models is paramount to grasping how network tokens generate value, govern participation, and sustain their respective ecosystems.

2.1. The Utility Model: Accessing Functionality and Services

The utility model represents one of the foundational economic paradigms for network tokens. In this model, tokens are explicitly designed and primarily used to gain access to specific features, services, or computational resources within a blockchain ecosystem. The intrinsic value of such tokens is directly derived from their functional utility. Holders are motivated to acquire these tokens not for speculative profit from managerial efforts, but because they are essential for interacting with or consuming services offered by the network.

For example, consider a decentralized storage network like Filecoin. Its native token, FIL, is not merely an investment; it is the fundamental medium of exchange used by users to pay storage providers for storing their data. Conversely, storage providers must stake FIL to participate, ensuring their reliability and honest behaviour. Similarly, in a decentralized advertising platform such as Basic Attention Token (BAT), users earn BAT for viewing privacy-preserving advertisements, and advertisers spend BAT to run campaigns, directly funding user attention. Within gaming metaverses, tokens might unlock in-game assets, special abilities, or access to exclusive virtual events. The demand for these services directly translates into demand for the utility token, creating a self-sustaining economic loop. This model inherently links the token’s value to the network’s adoption and active utilization, reinforcing the notion of consumptive use rather than investment.

2.2. The Incentive Model: Aligning Behaviour through Rewards

Central to the operation of many decentralized networks is the incentive model, which judiciously leverages network tokens to motivate and reward participants for engaging in desired behaviours that contribute to the network’s security, efficiency, and growth. This model is critical for bootstrapping network activity, maintaining decentralization, and ensuring the long-term viability of the platform.

In Proof-of-Work (PoW) blockchains like early Bitcoin, miners are incentivized with newly minted tokens and transaction fees for validating transactions and securing the network through computational effort. In Proof-of-Stake (PoS) systems, validators are rewarded for locking up (staking) tokens and participating in block creation and validation. Beyond consensus mechanisms, incentives extend to various other contributions. Liquidity providers on decentralized exchanges (DEXs) like Uniswap or SushiSwap earn governance tokens and transaction fees for supplying liquidity to trading pools. Data providers in decentralized oracle networks like Chainlink are incentivized with LINK tokens to feed accurate real-world data to smart contracts. Content creators on decentralized social media platforms might be rewarded with native tokens for generating engaging content, fostering a creator economy. By aligning the self-interest of individual participants with the collective health and success of the network, the incentive model plays a crucial role in distributing control and fostering robust, resilient ecosystems.

2.3. The Governance Model: Decentralized Decision-Making

As blockchain networks mature, the need for adaptive and community-driven evolution becomes paramount. The governance model addresses this by integrating network tokens with voting rights, empowering token holders to directly influence key decisions regarding the protocol’s future. This decentralized decision-making process contrasts sharply with traditional corporate governance structures, where power is typically concentrated within a board of directors or management team.

Holders of governance tokens can propose and vote on a wide spectrum of issues, including protocol upgrades, changes in network parameters (e.g., fee structures, inflation rates), allocation of treasury funds, and even the election of delegates or council members. Prominent examples include MakerDAO, where MKR token holders vote on risk parameters and stability fees for the Dai stablecoin, or Aave and Compound, where AAVE and COMP token holders dictate the evolution of their respective lending protocols. This model cultivates a strong sense of community ownership and ensures that the network’s development trajectory aligns with the collective interests of its participants. However, it also introduces challenges, such as potential voter apathy, the concentration of voting power among large holders (‘whales’), and the complexities of achieving consensus on technical or strategic decisions within a diverse global community.

2.4. The Staking Model: Security, Participation, and Rewards

The staking model is a specialized form of incentive mechanism, predominantly found in Proof-of-Stake (PoS) or Delegated Proof-of-Stake (DPoS) blockchain architectures. It involves participants voluntarily locking up a certain quantity of their network tokens as a form of collateral to support critical network operations, most notably transaction validation and overall network security. In return for their commitment and participation, stakers receive rewards, typically in the form of newly minted tokens or a share of transaction fees.

This model is foundational to the security and economic stability of PoS networks. By requiring a financial commitment, stakers are incentivized to act honestly and in the network’s best interest; malicious behaviour can result in ‘slashing,’ where a portion of their staked tokens is forfeited. Staking also enhances network decentralization by allowing a broad base of token holders to participate in validation, rather than relying solely on specialized mining hardware. The economic mechanics often involve unbonding periods, during which staked tokens cannot be withdrawn, further aligning stakers with the long-term health of the network. Projects like Ethereum (post-Merge), Solana, and Cardano heavily rely on staking to secure their networks and distribute rewards to participants, fostering a robust and economically viable ecosystem while requiring significant active participation from token holders.

2.5. Hybrid and Emerging Economic Models

Beyond these core models, many network tokens incorporate hybrid designs or emerging economic mechanisms to refine their tokenomics. These can include:

• Burning Mechanisms: A portion of transaction fees or protocol revenue is used to permanently remove tokens from circulation, creating deflationary pressure.
• Buyback-and-Burn: The protocol uses its revenue to buy back tokens from the open market and then burns them, similar to a stock buyback.
• Fee Distribution: A percentage of network fees is distributed directly to token holders, stakers, or liquidity providers.
• Revenue Sharing: In some protocols, token holders may be entitled to a share of the revenue generated by the platform, though this must be carefully structured to avoid securities classification if the expectation of profit is solely from the efforts of others.

The sophisticated interplay of these economic models is crucial for designing sustainable and resilient decentralized ecosystems. They dictate how value is created, distributed, and accrued within the network, influencing everything from network security and governance to user adoption and developer engagement. The ongoing evolution of tokenomics reflects a continuous quest to optimize these mechanisms for greater efficiency, decentralization, and long-term viability.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Diverse Use Cases of Network Tokens: Powering the Decentralized Future

Network tokens, by virtue of their programmatic utility and economic models, have found a wide and continually expanding array of applications across various sectors. They are not merely speculative assets but fundamental building blocks for a new generation of decentralized applications and services.

3.1. Decentralized Finance (DeFi): Reshaping Financial Services

Decentralized Finance (DeFi) represents one of the most transformative applications of network tokens. In this sector, tokens are indispensable for facilitating lending, borrowing, trading, and earning interest, all without the necessity of traditional financial intermediaries such as banks or brokers. DeFi protocols leverage smart contracts to automate these financial operations, and network tokens are integral to their functionality, governance, and incentive structures.

Consider decentralized exchanges (DEXs) like Uniswap or SushiSwap, where liquidity providers deposit pairs of tokens into liquidity pools and receive native governance tokens (e.g., UNI, SUSHI) as rewards, along with a share of trading fees. These governance tokens allow holders to vote on key protocol changes, such as fee structures or supported asset listings. Lending protocols such as Aave and Compound utilize their native tokens (AAVE, COMP) to allow users to deposit collateral, borrow assets, and participate in protocol governance. Stablecoins, like Dai, also rely on underlying network tokens (MKR for Dai) for their collateralization and stability mechanisms. Furthermore, in DeFi, network tokens are used for yield farming (strategically moving assets between protocols to maximize returns), decentralized insurance (e.g., Nexus Mutual’s NXM token), and various other sophisticated financial primitives. The network tokens in DeFi are thus not merely currencies but represent claims on future protocol fees, governance rights, or participation in complex financial algorithms, fostering a truly open and permissionless financial system.

3.2. Non-Fungible Tokens (NFTs) and the Digital Ownership Revolution

Non-Fungible Tokens (NFTs) have emerged as a revolutionary class of digital assets, fundamentally redefining ownership in the digital realm. Unlike network tokens, which are typically fungible (interchangeable), NFTs represent unique, indivisible digital items. These can range from digital art, collectibles, and music to in-game items, virtual land in metaverses, and even tokenized real-world assets. Network tokens play a crucial role in the NFT ecosystem, serving as the primary means of exchange for purchasing, selling, and trading these unique digital assets.

For instance, Ether (ETH) is widely used on platforms like OpenSea or Rarible to buy and sell NFTs. Beyond mere payment, native network tokens of specific NFT platforms or metaverses might grant special privileges, staking rewards, or governance rights within their respective ecosystems. For example, tokens like SAND (for The Sandbox) or MANA (for Decentraland) are used to acquire virtual land, customize avatars, and participate in the governance of their respective metaverse platforms. The underlying blockchain network tokens provide the security, immutability, and transactional infrastructure necessary for NFTs to exist and thrive, establishing clear provenance and verifiable ownership in a digital world.

3.3. Supply Chain Management: Enhancing Transparency and Traceability

Blockchain technology and network tokens are poised to revolutionize supply chain management by addressing critical challenges related to transparency, traceability, and authenticity. In this application, network tokens can represent various aspects of the supply chain, from ownership of goods at different stages to verifiable certifications or compliance milestones. By leveraging the immutable and distributed nature of blockchain ledgers, enterprises can track the provenance of products from origin to consumer with unprecedented clarity.

For example, a token could represent a batch of coffee beans, recording every step from the farm, through processing, shipping, and distribution. Each transfer of ownership or change in status (e.g., organic certification, fair trade verification) could be recorded as a transaction on the blockchain, potentially consuming or minting specific network tokens. This enables real-time auditing, reduces fraud, and enhances consumer trust by providing verifiable proof of origin and quality. Companies like IBM Food Trust utilize blockchain to track food products, while others explore similar solutions for luxury goods, pharmaceuticals, and industrial components. The network tokens in these systems could be used to pay for data uploads, access restricted information, or incentivize participants to provide accurate data, thus fostering a more transparent and efficient global supply chain.

3.4. Identity Verification: Empowering Self-Sovereign Identity

Network tokens are emerging as fundamental components in the development of decentralized identity systems, empowering individuals to take control of their personal information and manage their digital identities securely. This concept, often referred to as self-sovereign identity (SSI), shifts control from centralized entities (like governments or corporations) to the individual.

In decentralized identity systems, network tokens can serve multiple functions. They might represent verifiable credentials (e.g., a token proving your age without revealing your birthdate), enable secure authentication to services, or incentivize identity providers and verifiers to participate in the network. Users could ‘stake’ tokens to establish reputation or gain access to certain identity-protected services. For instance, projects like Civic or uPort aim to create ecosystems where users own and control their identity data, selectively sharing it with third parties as needed. Network tokens in these systems would facilitate the creation, verification, and exchange of these digital credentials, ensuring privacy, security, and user autonomy. This application holds immense potential for reducing identity theft, streamlining KYC (Know Your Customer) processes, and building a more trustworthy digital ecosystem where individuals maintain true ownership of their data.

3.5. Beyond Traditional Applications: New Horizons

• Decentralized Physical Infrastructure Networks (DePIN): Tokens incentivize individuals to deploy and maintain physical infrastructure, such as Wi-Fi hotspots (e.g., Helium), environmental sensors, or charging stations, creating globally distributed networks.
• Decentralized Social Media: Tokens reward users for content creation, curation, and engagement, shifting value from platform owners to the community (e.g., Steem, Hive).
• Data Storage and Sharing: Tokens incentivize individuals to contribute unused storage space (e.g., Sia, Storj) or to share personal data securely, potentially earning rewards for doing so.
• Gaming and Metaverse Economies: Beyond NFTs, network tokens often serve as the native currency within vast virtual worlds, facilitating transactions, governance, and resource management within complex player-driven economies.

The breadth of these applications underscores the transformative potential of network tokens as fundamental tools for building and sustaining decentralized ecosystems across virtually every industry.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Criteria Differentiating Network Tokens from Investment Contracts: Navigating the Howey Labyrinth

The pivotal regulatory question for network tokens revolves around their classification: are they securities subject to rigorous oversight by bodies like the SEC, or are they non-securities, more akin to commodities or digital consumables? The distinction largely hinges on the application of the ‘Howey Test,’ a legal framework established by the US Supreme Court in 1946 in SEC v. W.J. Howey Co. While originally designed for tangible assets like citrus groves, the SEC has consistently applied its principles to novel investment schemes, including digital assets.

The Howey Test stipulates that an ‘investment contract’ exists if there is:
1. An investment of money
2. In a common enterprise
3. With an expectation of profit
4. Solely from the efforts of others.

When evaluating digital assets, the SEC focuses on the ‘economic reality’ of the transaction, rather than merely its form. The last two prongs—’expectation of profit’ and ‘solely from the efforts of others’—are particularly critical in differentiating network tokens from investment contracts.

4.1. Purpose and Functionality: Consumptive Use vs. Speculative Investment

For network tokens to be classified as non-securities, their primary design and purpose must be to provide access to a network’s services or functionalities, rather than to generate profits from the managerial or entrepreneurial efforts of others. This is often framed as the distinction between a ‘consumptive’ use case and a ‘speculative’ investment. If the token is primarily acquired to be used within the network (e.g., to pay for transactions, access features, or participate in governance), its utility-driven purpose aligns with a non-security classification.

The SEC’s ‘Framework for Investment Contract Analysis of Digital Assets’ (2019) emphasizes that tokens designed for immediate use and functionality, especially when accompanied by a robust, operational network, are less likely to be considered securities. This framework asks whether the network is truly functional or merely aspirational, whether the token is needed to use the network, and if there are actual users consuming the network’s services. Tokens sold during a pre-functional stage, where their utility is purely prospective and dependent on future development by a central team, are far more likely to be deemed securities. The transition from a security to a non-security, as famously discussed by former SEC Director William Hinman regarding Ether, often hinges on the network becoming ‘sufficiently decentralized’ and the token acquiring a consumptive utility (SEC, 2025).

4.2. Decentralization: Dispelling the ‘Efforts of Others’ Prong

The degree of decentralization of a network is arguably the most crucial factor in determining whether a network token passes the Howey Test, specifically addressing the ‘solely from the efforts of others’ prong. If a network is truly decentralized, meaning control is distributed among a broad base of participants and its future development is not reliant on a single, identifiable central entity or small group, then the expectation of profit cannot be said to derive ‘solely’ from ‘the efforts of others.’

Former SEC Director Hinman’s 2018 speech, ‘Digital Asset Transactions: When Howey Met Gary (Plastic),’ posited that once a network and its associated token become sufficiently decentralized, with no central third party responsible for building or maintaining the underlying network, the token may cease to be a security. This ‘sufficient decentralization’ implies that the network can function and evolve independently, driven by the collective will of its token holders and developers. Indicators of decentralization include:
* No single entity controls a significant portion of tokens or voting power.
* The protocol is open-source and maintained by a diverse, global developer community.
* Network participants (e.g., validators, stakers) are numerous and geographically dispersed.
* The original promoter no longer holds a controlling interest or managerial influence over the network’s development and success.

Conversely, if a central team continues to exert significant influence over the network’s development, marketing, or price appreciation, the token remains susceptible to security classification, irrespective of its purported utility. Many projects adopt a ‘progressive decentralization’ strategy, starting with a more centralized structure and gradually ceding control to the community over time, hoping to eventually achieve non-security status.

4.3. User Expectations: Objective and Subjective Intent

The expectations of token holders play a substantial, albeit complex, role in classification. The Howey Test considers whether investors are led to expect profits primarily from the managerial or entrepreneurial efforts of others. This assessment involves examining both the objective representations made by the promoters and the subjective understanding of potential purchasers.

Promoters’ marketing materials, whitepapers, public statements, and even social media presence are meticulously scrutinized. If these communications emphasize the potential for price appreciation, the efforts of a development team, or comparisons to traditional investment opportunities, it strongly suggests an expectation of profit from others’ efforts. Conversely, if the focus is predominantly on the token’s utility, its role in accessing network services, or participation in decentralized governance, the argument for non-security status is strengthened. It is crucial for projects to clearly articulate the functional purpose of their token and avoid creating the impression that it is primarily a speculative investment. This requires careful consideration of not just explicit claims, but also implicit signals that could shape user perceptions of whether they are purchasing a consumer good or an investment product (Jones Day, 2025).

4.4. Regulatory Precedents and Emerging Frameworks

Beyond the Howey Test, regulatory precedents set by past SEC enforcement actions, ‘no-action’ letters, and speeches by high-ranking officials significantly influence the understanding of these criteria. The SEC has brought numerous enforcement actions against digital asset offerings it deemed unregistered securities, providing a body of case law that refines its application of Howey.

SEC Chairman Paul Atkins’ ‘Project Crypto’ is designed to build upon these precedents while providing a more structured and predictable framework. His proposal in November 2025 outlined a potential four-tier taxonomy for crypto oversight, a ‘sliding scale’ approach intended to bring clarity (PYMNTS, 2025; Sidley Austin LLP, 2025). While specific details of the four tiers (as of the article’s context date) were not fully elaborated, the general thrust is to create clearer categories:
* Tier 1: Fully decentralized networks with a consumptive utility token (e.g., Bitcoin, Ether post-Merge) – likely non-securities.
* Tier 2: Partially decentralized networks with some ongoing central efforts but significant utility – potentially subject to lighter, tailored regulation.
* Tier 3: Centralized projects with strong reliance on promoter efforts – likely securities.
* Tier 4: Fraudulent schemes – subject to existing anti-fraud laws.

This nuanced approach aims to recognize the evolutionary nature of digital assets and apply regulation proportional to the risk and reliance on a central party. The distinction between a ‘network token’ and an ‘investment contract’ thus becomes a dynamic assessment, influenced by functionality, decentralization, user expectations, and the specific regulatory framework adopted by the SEC (Gate Learn, 2025).

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Implications of Non-Security Status for Innovation and Development: Unlocking Decentralized Potential

The reclassification of a significant category of network tokens as non-securities, particularly under a framework such as Chairman Atkins’ ‘Project Crypto,’ carries profound and far-reaching implications for the digital asset industry. This shift is expected to act as a powerful catalyst, unlocking innovation and accelerating development within decentralized ecosystems that have long been hampered by regulatory ambiguity.

5.1. Enhanced Regulatory Clarity and Reduced Legal Burden

Perhaps the most immediate and impactful implication is the provision of robust regulatory clarity. A clear delineation between what constitutes a security and what does not allows developers, entrepreneurs, and project teams to navigate the legal landscape with significantly greater confidence. The prevailing uncertainty has historically imposed substantial legal costs, discouraged investment, and stifled innovation, as projects either delayed launches or sought refuge in more permissive jurisdictions. By establishing predictable rules, the SEC reduces the legal uncertainties that previously served as formidable barriers to entry and growth. This clarity enables projects to allocate resources more efficiently towards product development and ecosystem growth, rather than disproportionately on legal compliance and risk mitigation. It also provides a defined pathway for legitimate projects to avoid inadvertent securities violations, fostering a more responsible and compliant industry from the outset.

5.2. Encouragement of Truly Decentralized Projects

The non-security status specifically encourages the development and adoption of projects that are genuinely decentralized. By clearly indicating that tokens associated with sufficiently decentralized networks are less likely to be treated as securities, the regulatory framework provides a strong incentive for projects to progressively decentralize their governance, development, and control from early stages. This reduces the onerous regulatory burden associated with traditional securities regulations, making decentralized architectures more attractive for both founders and participants. It facilitates broader community engagement, as more individuals and entities can participate in network operations, governance, and development without incurring the same level of regulatory exposure. This fostering of decentralization is critical for the long-term resilience, censorship resistance, and equitable distribution of power within blockchain ecosystems, aligning with the core ethos of Web3.

5.3. Enhanced Capital Formation and Broader Funding Avenues

With fewer regulatory constraints associated with securities law, projects built around non-security network tokens can access enhanced capital formation avenues. While not subject to the same strictures as traditional securities offerings (like IPOs or Reg D offerings), non-security tokens can be distributed and acquired through more flexible mechanisms, such as utility token sales, grants from decentralized autonomous organizations (DAOs), or community-driven funding initiatives. This enables a wider array of innovative applications and services to secure funding, particularly for open-source projects or those focused on public goods that may not fit traditional venture capital models. Moreover, the clarity may attract institutional capital that has historically shied away from the crypto market due to regulatory uncertainty, thereby increasing liquidity and overall market depth for these assets.

5.4. Global Competitiveness and Leadership in Digital Assets

A clear and progressive regulatory framework for digital assets positions the United States as a global leader in the burgeoning blockchain and digital asset space. By providing a predictable environment, the US can attract international projects, developer talent, and investment that might otherwise flow to jurisdictions perceived as having more favourable or clearer regulations. This competitive edge is crucial for fostering domestic innovation, creating jobs, and ensuring that the US remains at the forefront of technological advancement in what is rapidly becoming a global digital economy. It allows US-based companies to innovate and compete effectively on a global stage, preventing a ‘brain drain’ of talent and capital to other countries.

5.5. Increased Market Liquidity and Accessibility

The distinction of network tokens as non-securities significantly impacts their market liquidity and accessibility. Non-security crypto assets like Bitcoin and Ether can be traded on a broader range of platforms, including traditional broker-dealers operating alternative trading systems (ATS), as indicated by Atkins. This expanded access facilitates greater trading volume, deeper order books, and potentially lower volatility, benefiting both individual and institutional participants. It also simplifies the path for integrating these assets into existing financial infrastructures, potentially leading to the development of new financial products and services built around non-security tokens, further accelerating their mainstream adoption.

5.6. Institutional Adoption and Mainstream Integration

Regulatory certainty is a prerequisite for widespread institutional adoption. Major financial institutions, pension funds, and asset managers are typically bound by strict compliance mandates and risk management protocols that preclude significant exposure to assets with ambiguous legal status. By providing a clear classification, the SEC’s framework reduces the regulatory risk for these institutions, paving the way for their increased participation in the digital asset market. This could lead to a massive influx of capital, expertise, and infrastructure, accelerating the integration of decentralized technologies into the core of the global financial system.

5.7. Balanced Consumer Protection

While focused on fostering innovation, the framework for non-security tokens can also contribute to a more balanced approach to consumer protection. By clearly identifying what isn’t a security, the SEC can then concentrate its enforcement efforts more effectively on genuinely fraudulent schemes and offerings that are securities but fail to comply with registration and disclosure requirements. This targeted approach allows the agency to safeguard investors from true investment scams while avoiding over-regulation of utility-driven projects that serve a consumptive purpose within their networks. It promotes transparency through other means, such as public code, community governance, and market-driven reputation, rather than relying solely on prescriptive financial disclosures.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Challenges and Considerations in the Evolving Landscape

While the prospect of clearer regulatory guidance through frameworks like ‘Project Crypto’ is overwhelmingly positive for the digital asset space, it is imperative to acknowledge that significant challenges and complexities will persist in this evolving landscape.

6.1. The Enduring Ambiguity of Distinction

Despite efforts to clarify the criteria, the line between a utility token and a security can remain inherently blurry in practice. Many tokens exhibit characteristics of both, particularly during their nascent stages of development. A project might start with significant centralization and the promise of future decentralization, or its utility might be initially limited, leading to speculative interest. The ‘sliding scale’ approach, while more nuanced, will still require careful, fact-specific analysis, leaving some projects in a grey area. The dynamic nature of token functionality and network evolution means that a token’s classification could theoretically change over time, posing ongoing compliance challenges.

6.2. The Pace of Technological Evolution Versus Regulatory Adaptation

The rapid pace of innovation in blockchain technology and digital assets consistently outstrips the speed at which regulatory frameworks can be developed and implemented. New token models, consensus mechanisms, and decentralized applications are constantly emerging, presenting novel questions that existing regulations, even new ones, may not fully address. Regulators will face the continuous challenge of developing flexible frameworks that can adapt without stifling future innovation, requiring ongoing dialogue and collaboration between policymakers and industry experts.

6.3. Enforcement Post-Classification: Ongoing Responsibilities

Even with a clear non-security classification, projects will likely retain ongoing responsibilities. These might include maintaining decentralization, ensuring truthful marketing, and providing adequate disclosures about network risks and functionality. The SEC or other regulatory bodies may still intervene if a non-security token is later used in a manner that creates an investment contract (e.g., through new marketing or pooled investment schemes). Moreover, other regulatory bodies, such as the CFTC for commodities or FinCEN for money transmission, may still assert jurisdiction, creating a multi-faceted compliance burden.

6.4. Jurisdictional Differences and Global Coordination

Digital assets operate globally, yet regulations remain largely confined to national borders. The US approach, while influential, will exist alongside diverse and sometimes conflicting regulatory regimes in other major economies (e.g., EU’s MiCA, Singapore’s PSA, UK’s FSM Bill). This creates challenges for globally operating projects, which must navigate a patchwork of rules. Achieving greater international regulatory coordination and interoperability will be crucial for the seamless growth of the global digital asset economy, but this is a complex undertaking.

6.5. Balancing Innovation with Investor Protection

The fundamental challenge for regulators is to strike an appropriate balance between fostering innovation and adequately protecting investors. While over-regulation can stifle technological progress, insufficient oversight can expose the public to fraud and systemic risks. The ‘Project Crypto’ framework aims to address this by focusing on the ‘economic reality,’ but continuous vigilance will be required to ensure that the spirit of innovation is not exploited for illicit purposes, and that adequate safeguards remain in place for all market participants.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Conclusion: Charting a Course for Decentralized Prosperity

The proposed framework by SEC Chairman Paul Atkins for classifying network tokens as non-securities marks a pivotal and long-awaited shift in the regulatory approach to digital assets. By moving beyond a one-size-fits-all application of the Howey Test and instead focusing on the economic realities, intrinsic functionalities, and degrees of decentralization of these tokens, the SEC aims to cultivate an environment that genuinely fosters innovation and accelerates the development of decentralized ecosystems. This strategic reorientation is not merely an administrative tweak; it represents a profound acknowledgment of the evolving nature of digital assets and their potential to redefine economic paradigms.

This nuanced approach promises to provide much-needed clarity for developers, entrepreneurs, and investors, significantly reducing the legal uncertainties that have historically impeded growth within the digital asset space. By lowering regulatory barriers for genuine utility tokens, the framework incentivizes the creation of truly decentralized applications, enhances avenues for capital formation, and bolsters the United States’ competitive standing in the global race for blockchain innovation. It paves the way for greater institutional participation, increased market liquidity, and ultimately, the more seamless integration of decentralized technologies into the mainstream financial and technological infrastructure.

While challenges persist, particularly in the ongoing interpretation of ‘sufficient decentralization’ and the rapid pace of technological evolution, ‘Project Crypto’ represents a proactive and pragmatic step towards constructing a regulatory architecture fit for the digital age. By supporting rather than stifling technological advancement, this framework has the potential to unlock unprecedented levels of creativity, investment, and utility, ensuring that the transformative promise of network tokens can be fully realized for the benefit of a decentralized, more efficient, and more equitable global future.

Many thanks to our sponsor Panxora who helped us prepare this research report.

References

• Gate Learn. (2025, November 13). SEC Chair Clarifies Crypto Asset Categories: NFTs, Network Tokens, and Digital Tools Are Not. gate.com

• Jones Day. (2025, November 12). Securities on a Sliding Scale: Inside ‘Project Crypto’s’ New Approach to Digital Assets. jonesday.com

• PYMNTS. (2025, November 12). SEC Redraws Crypto Map as Tokens Freed of Securities Rules. pymnts.com

• Reuters. (2025, May 12). US SEC chair says agency plans to create new rules for crypto tokens. reuters.com

• SEC Chair Paul Atkins. (2025, November 12). The SEC’s Approach to Digital Assets: Inside ‘Project Crypto’. sec.gov

• Sidley Austin LLP. (2025, November 12). Breaking Down ‘Project Crypto’: SEC Chairman Atkins Outlines Next Phase of Digital Asset Oversight. sidley.com

• Wikipedia. (n.d.). Decentralized finance. en.wikipedia.org

• Wikipedia. (n.d.). Paul S. Atkins. en.wikipedia.org