The Nuanced Classification of Digital Assets: Commodities, Securities, and the Evolving Regulatory Landscape

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

Abstract

The regulatory classification of digital assets stands as a paramount and intricate challenge within contemporary financial jurisprudence. The fundamental distinction between whether a digital asset qualifies as a commodity or a security profoundly dictates its regulatory oversight, the scope of investor protection afforded, and crucially, the pathways available for the development and proliferation of innovative financial products, such as Exchange-Traded Funds (ETFs). This comprehensive report meticulously examines the historical underpinnings and prevailing legal frameworks, most notably the ‘Howey Test,’ which serves as the cornerstone for digital asset classification within the United States. It delves into the often-divergent interpretative stances adopted by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the two primary federal regulators whose jurisdictions intersect in this nascent field. Furthermore, the report critically analyzes the far-reaching implications of these classifications for various market participants, including developers, investors, and financial intermediaries, while also scrutinizing the viability and trajectory of integrating digital assets into traditional investment vehicles like ETFs. Ultimately, this analysis underscores the pressing need for regulatory clarity and harmonization to foster both innovation and market integrity in this rapidly evolving financial frontier.

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

1. Introduction

The advent and meteoric rise of digital assets, powered by distributed ledger technology (DLT), have unleashed an unprecedented wave of innovation across global financial markets. Yet, this rapid technological evolution has simultaneously introduced profound complexities for traditional regulatory frameworks, particularly regarding the precise classification of these novel assets. The central question—whether a digital asset, such as Bitcoin (BTC) or Ether (ETH), should be categorized as a security or a commodity—is not merely an academic exercise; it is the linchpin around which the entire edifice of regulatory oversight, investor safeguarding mechanisms, and the very potential for creating and launching regulated financial products like ETFs revolves. The U.S. regulatory landscape, characterized by the distinct mandates and interpretations of the SEC and the CFTC, exemplifies this intricate challenge. While the SEC primarily concerns itself with the protection of investors and the maintenance of fair, orderly, and efficient markets for securities, the CFTC’s focus lies in preserving the integrity of derivatives markets and preventing fraud and manipulation in the underlying commodity markets. These differing institutional perspectives have inevitably led to a ‘turf war’ or, more accurately, a jurisdictional ambiguity that significantly impacts market participants. A deep understanding of the historical legal precedents, the evolving application of these frameworks, and the distinct regulatory philosophies is absolutely essential for navigating the broader, often turbulent, digital asset regulatory landscape and for projecting its future trajectory. This report aims to provide such a comprehensive understanding, offering detailed insights into the forces shaping the regulation of this transformative asset class.

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

2. Historical Context and Legal Frameworks

The regulatory challenge posed by digital assets is not entirely unprecedented. Throughout history, new forms of investment and financial instruments have emerged, prompting regulators and courts to adapt existing laws. In the United States, the foundational laws governing financial markets, primarily the Securities Act of 1933 and the Securities Exchange Act of 1934, were enacted in response to the stock market crash of 1929 and the subsequent Great Depression. These acts established broad definitions for ‘security’ to capture a wide array of investment schemes, reflecting a legislative intent to protect the public from fraudulent and speculative practices. It is within this expansive legal tradition that the classification of digital assets is now being debated, often relying on judicial precedents established decades ago.

2.1 The Howey Test: A Foundational Precedent

The cornerstone of security classification in the United States, particularly for novel investment vehicles, is the ‘Howey Test,’ derived from the landmark Supreme Court case SEC v. W.J. Howey Co. (1946). This case involved a scheme where the W.J. Howey Co. sold tracts of citrus grove acreage in Florida, concurrently offering purchasers a service contract to cultivate, harvest, and market the fruit. Most purchasers were non-resident professionals who had no agricultural expertise and relied entirely on Howey’s managerial efforts. The SEC argued that these transactions constituted an ‘investment contract’ and were therefore subject to federal securities laws. The Supreme Court agreed, establishing a four-pronged test that remains profoundly influential today. An ‘investment contract’ exists when there is:

1. An investment of money: This prong requires that an investor has contributed capital or other valuable consideration. In the context of digital assets, this is typically straightforward, referring to the fiat currency or other digital assets exchanged for the token. The ‘money’ does not have to be traditional currency; it can include assets that have value, even other cryptocurrencies, as long as there is a pecuniary interest at stake (en.wikipedia.org).
2. In a common enterprise: This element generally refers to a venture where the fortunes of the investor are interwoven with those of either the promoter or other investors. Courts have recognized two primary interpretations: ‘horizontal commonality’ (the pooling of investors’ funds, with investors sharing proportionally in the profits and losses) and ‘vertical commonality’ (where the investor’s fortunes are directly tied to the promoter’s success or failure, though this interpretation is less universally accepted than horizontal commonality). For digital assets, the question often revolves around whether the token holders’ success is contingent upon the ongoing development and success of a particular platform or network, spearheaded by the issuing entity or a core group of developers.
3. With an expectation of profits: This prong dictates that investors must be motivated by the prospect of financial gain, such as capital appreciation or a share of earnings, rather than purchasing the asset for its consumptive use or for the pleasure of ownership. The key here is the ‘expectation’ and ‘profit motive.’ If investors primarily acquire a digital asset intending to use it within a functional network or for its inherent utility, this prong might not be met. However, if the primary marketing and investor interest center on the asset’s potential future value increase, this prong is likely satisfied.
4. Derived from the efforts of others: This is arguably the most critical and often debated prong when applied to digital assets. It requires that the anticipated profits stem significantly from the managerial or entrepreneurial efforts of a promoter or a third party, rather than from the investor’s own efforts or from market forces alone. In the digital asset context, this typically refers to the ongoing efforts of the issuing company, founding team, or a centralized group of developers to build, promote, and maintain the underlying network or protocol. If the network is fully decentralized and functions autonomously without reliance on a specific group for its continued development and success, then this prong might be harder to satisfy. The Supreme Court in Howey emphasized the economic reality of the transaction, stating that ‘form should be disregarded for substance and the emphasis should be on economic reality’ (en.wikipedia.org). This principle allows for the flexibility required to apply an older test to innovative new technologies.

2.2 Application to Digital Assets: The Challenge of Decentralization

The application of the Howey Test to digital assets has presented unique challenges, primarily due to their technological novelty and the varying degrees of decentralization. The SEC formally provided guidance on this in its 2019 ‘Framework for ‘Investment Contract’ Analysis of Digital Assets’ (the ‘Framework’). This document aimed to assist market participants in determining whether a digital asset is being offered and sold as an investment contract, and therefore as a security, under federal law (sec.gov). The Framework elaborates on the Howey prongs, emphasizing several key factors:

• Active Participant and Ongoing Development: The SEC scrutinizes whether a ‘promoter’ or ‘active participant’ continues to play a significant role in the development, management, or promotion of the network or protocol. If the success of the digital asset largely depends on the continued efforts of this identifiable entity or group, it leans towards security classification. This includes efforts to enhance the network’s functionality, create a market for the asset, or maintain its value.
• Expectation of Profits Derived from Others’ Efforts: The Framework considers the economic realities surrounding the offering. This includes marketing efforts that highlight the potential for price appreciation, the managerial expertise of the development team, or promises of future network enhancements that would increase the asset’s value. Conversely, if the asset is marketed and purchased primarily for its immediate consumptive use on a fully developed network, the ‘expectation of profits’ prong might not be met.
• Functionality and Use of the Digital Asset: A crucial distinction lies between a digital asset offered as a mere speculative investment vehicle and one that possesses inherent utility within a functioning network. The SEC often considers whether the asset is functional at the time of sale, its immediate utility to purchasers, and whether purchasers need the asset for its consumptive use on the network. A token that grants access to a completed, decentralized network for specific services (e.g., transaction fees, governance rights) is less likely to be deemed a security than a token sold to fund the future development of a network that does not yet exist.
• Decentralization as a Shifting Factor: The SEC has acknowledged that a digital asset initially offered as a security could, over time, evolve into something that no longer satisfies the Howey Test. This typically occurs when a network becomes ‘sufficiently decentralized,’ meaning that no single entity or identifiable group of individuals maintains significant managerial or entrepreneurial control over its development and operation. The absence of a central ‘active participant’ would make it difficult to satisfy the ‘efforts of others’ prong. However, the SEC has provided little explicit guidance on what constitutes ‘sufficiently decentralized,’ leaving this a significant area of ambiguity for developers. The concept is dynamic; a network might start centralized and gradually decentralize, potentially transitioning its associated digital asset from a security to a commodity or a non-security asset.

This nuanced application of the Howey Test recognizes that digital assets are not monolithic; they exist on a spectrum ranging from clear investment contracts (e.g., tokens sold in early-stage ICOs to fund a future platform) to assets with clear consumptive utility on fully decentralized networks (e.g., Bitcoin).

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

3. Regulatory Perspectives

The dual regulatory structure in the United States, with distinct mandates for securities and commodities, has naturally led to differing, and at times conflicting, approaches to digital asset classification. This jurisdictional overlap has been a significant source of uncertainty for market participants and a focal point of the ongoing debate.

3.1 SEC’s Stance: Investor Protection and Market Integrity

The Securities and Exchange Commission (SEC) has consistently adopted a stringent and cautious approach to digital assets, rooted in its core mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. From the SEC’s perspective, if a digital asset satisfies the prongs of the Howey Test, it is a ‘security’ and must comply with the full panoply of federal securities laws. This means that its offer and sale must either be registered with the SEC or qualify for an exemption from registration, and any platform facilitating its trading must register as an exchange, broker-dealer, or alternative trading system (ATS).

Key aspects of the SEC’s stance include:

• ‘Most’ ICOs are Securities: The SEC, particularly under former Chair Jay Clayton and current Chair Gary Gensler, has repeatedly asserted that the vast majority of digital assets offered and sold through Initial Coin Offerings (ICOs) or similar fundraising mechanisms were, in fact, unregistered securities offerings. Gensler, for instance, has frequently stated that ‘everything other than Bitcoin’ could be considered a security, primarily due to the existence of an identifiable promoter and an expectation of profits derived from their efforts (harvardlawreview.org). This view stems from the observation that many early token sales were conducted by entrepreneurial teams seeking to raise capital for projects that were often nascent or speculative, with investors buying tokens primarily in anticipation of future appreciation based on the team’s efforts.
• Focus on ‘Active Participants’: The SEC places significant emphasis on identifying an ‘active participant’ whose efforts are central to the value proposition of the digital asset. This could be the issuing company, a foundation, or a core development team. As long as such a party exists and its efforts drive the project’s success, the ‘efforts of others’ prong of Howey is likely met.
• Enforcement Actions: The SEC has been highly proactive in pursuing enforcement actions against entities it deems to have engaged in unregistered securities offerings of digital assets. Notable examples include actions against Telegram (for its TON token sale), Block.one (EOS token), Ripple Labs (XRP), and various crypto lending platforms like BlockFi, Celsius, and Voyager. These actions typically involve allegations of unregistered offerings, often leading to significant penalties and requirements to return funds to investors. The SEC’s strategy is to bring enforcement cases to establish precedents and provide ‘regulation by enforcement’ in the absence of specific legislation.
• The ‘Sufficiently Decentralized’ Hurdle: While the SEC acknowledges that some digital assets might eventually become ‘sufficiently decentralized’ to no longer be considered securities, it has maintained a high bar for this determination. The lack of clear quantitative or qualitative metrics for ‘sufficient decentralization’ leaves many projects in a state of ambiguity, making it challenging for them to operate without fear of SEC enforcement. The criteria often involve the absence of a central entity controlling development, a broad distribution of ownership, and truly autonomous governance mechanisms.

In essence, the SEC’s stance is deeply conservative, prioritizing existing securities laws to protect retail investors from what it perceives as speculative and often opaque digital asset offerings. This approach often leads to calls from the crypto industry for clearer rules and legislative action, arguing that the current framework stifles innovation.

3.2 CFTC’s Stance: Commodities and Derivatives Integrity

In contrast to the SEC, the Commodity Futures Trading Commission (CFTC) has classified certain prominent digital assets, specifically Bitcoin (BTC) and Ether (ETH), as ‘commodities’ under the Commodity Exchange Act (CEA). This determination significantly shapes the CFTC’s jurisdiction and regulatory approach (jdsupra.com).

Key aspects of the CFTC’s stance include:

• Bitcoin as a Commodity: The CFTC was one of the first U.S. federal agencies to publicly classify Bitcoin as a commodity in 2015. This classification was based on Bitcoin’s characteristics as a fungible, non-differentiated good, which can be bought and sold, and whose value is determined by market forces, rather than by the efforts of a central promoter. Its decentralized nature and lack of an identifiable issuer or common enterprise solidified this view.
• Ether as a Commodity: More recently, former CFTC Chair Heath Tarbert stated in 2019 that Ether is also a commodity, a view largely maintained by subsequent CFTC leadership. This position reflects the increasing decentralization of the Ethereum network, particularly after its transition to a Proof-of-Stake consensus mechanism (‘The Merge’). While the Ethereum network still has core developers, the collective decision-making and the broad distribution of ETH are seen to mitigate the ‘efforts of others’ prong of the Howey Test, especially compared to its early days as an ICO.
• Jurisdiction over Derivatives: The CFTC’s primary regulatory authority over commodities extends to derivatives contracts based on them, such as futures and options. This means that platforms offering regulated futures or options on Bitcoin or Ether must register with the CFTC as Designated Contract Markets (DCMs) or Swap Execution Facilities (SEFs) and adhere to comprehensive rules regarding trading, clearing, and risk management. This has enabled the launch of regulated Bitcoin and Ether futures products on exchanges like CME Group.
• Anti-Fraud and Anti-Manipulation in Spot Markets: While the CFTC does not regulate the underlying spot markets for physical commodities (including digital commodities) in the same comprehensive manner as the SEC regulates securities markets, it does possess significant anti-fraud and anti-manipulation authority over these spot markets. This means the CFTC can bring enforcement actions against individuals or entities engaging in deceptive or manipulative practices related to the cash markets for digital commodities, even if those assets are not traded on a regulated exchange.
• Advocacy for Legislative Clarity: The CFTC has frequently called for legislative action to clarify the regulatory landscape for digital assets, advocating for a clearer definition of ‘digital commodity’ and potentially expanded authority to oversee the spot markets for these assets more comprehensively. This reflects a recognition of the limitations of its current mandate in the face of rapidly evolving digital asset markets.

The CFTC’s approach generally views digital assets through the lens of traditional commodity markets, emphasizing market integrity and preventing systemic risk in derivatives. Its classification of Bitcoin and Ether as commodities has been pivotal in enabling the development of regulated derivatives products, which are crucial for price discovery and risk management in the broader financial ecosystem.

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

4. Implications of Classification

The categorization of a digital asset as a security or a commodity is not merely a definitional exercise; it has profound, cascading implications across every facet of the digital asset ecosystem. From the specific regulatory body overseeing its activities to the very mechanisms designed to protect investors and the types of financial products that can be developed, this classification dictates the operational environment.

4.1 Regulatory Oversight: A Tale of Two Regulators

The most immediate and impactful implication of classification is the determination of the primary regulatory authority. This directly influences the legal obligations of issuers, exchanges, and other market participants.

• Securities (SEC Jurisdiction): If a digital asset is classified as a security, it falls squarely under the purview of the SEC. This triggers a comprehensive set of regulatory requirements derived from the Securities Act of 1933 and the Securities Exchange Act of 1934. Key implications include:

  • Registration Requirements: Issuers of digital asset securities must register their offerings with the SEC unless a specific exemption applies (e.g., Reg D, Reg A+, Reg CF). This involves extensive disclosure of financial information, business operations, risks, and management. Failure to register or qualify for an exemption can lead to severe penalties.
  • Exchange Registration: Platforms that facilitate the trading of digital asset securities must register as national securities exchanges, broker-dealers, or alternative trading systems (ATSs). Each of these classifications comes with rigorous requirements regarding market surveillance, custody of assets, capital adequacy, and anti-money laundering (AML) controls.
  • Broker-Dealer and Investment Adviser Rules: Entities engaging in activities such as advising investors on digital asset securities or facilitating their transactions may need to register as broker-dealers or investment advisers, subjecting them to suitability rules, fiduciary duties, and other investor protection mandates.
  • Ongoing Disclosure: Publicly traded digital asset securities (if they existed in traditional form) would be subject to ongoing reporting requirements (e.g., 10-K annual reports, 10-Q quarterly reports) to ensure continuous transparency for investors. While few digital assets have directly followed this path, the principle of continuous disclosure is central to securities regulation.
  • Anti-Fraud and Anti-Manipulation: The SEC possesses broad authority to prevent and prosecute fraud and manipulation in securities markets, including those involving digital assets. This applies to both primary offerings and secondary market trading.

• Commodities (CFTC Jurisdiction): If a digital asset is classified as a commodity, its regulatory oversight falls predominantly under the CFTC. The CFTC’s jurisdiction, while significant, is more circumscribed, especially concerning spot markets.

  • Derivatives Market Regulation: The CFTC exercises full regulatory authority over futures, options, and swaps based on digital commodities. This has led to the development of regulated Bitcoin and Ether futures products on exchanges registered as Designated Contract Markets (DCMs). These markets are subject to stringent rules designed to ensure fair trading, price discovery, and risk management.
  • Spot Market Authority: For the spot market of digital commodities, the CFTC’s authority is primarily limited to preventing fraud and manipulation. It does not have the same extensive powers as the SEC to regulate the structure of these spot markets, including registration requirements for spot exchanges or mandatory disclosures for commodity issuers. This creates a significant regulatory gap where many spot digital asset transactions occur with less direct oversight.
  • Limited Registration for Spot Platforms: Unlike securities exchanges, there are no specific federal registration requirements for platforms solely facilitating the spot trading of digital commodities, although state-level money transmission laws often apply.

This jurisdictional divide often leads to a ‘regulatory arbitrage’ problem, where entities might structure their offerings or operations to fit under the less stringent regulatory regime. It also underscores the ‘turf war’ between agencies, each asserting its interpretation of existing law in the absence of explicit legislative guidance, further contributing to market uncertainty (natlawreview.com).

4.2 Investor Protection: Differing Safety Nets

The level and type of investor protection mechanisms vary significantly depending on whether a digital asset is classified as a security or a commodity.

• Securities Laws (SEC): Securities laws enforced by the SEC are designed to provide robust investor protections, particularly for retail investors. These include:

  • Mandatory Disclosure: A core tenet is the requirement for issuers to provide full and fair disclosure of all material information relevant to an investment decision. This empowers investors to make informed choices and holds issuers accountable for the accuracy of their statements. This disclosure extends to risks, financial health, management, and use of proceeds.
  • Anti-Fraud Provisions: Broad anti-fraud provisions (e.g., Section 10(b) of the Exchange Act and Rule 10b-5) prohibit deceptive practices, misrepresentations, and omissions of material facts. These provisions apply to anyone involved in the offer or sale of securities, creating strong deterrents.
  • Fiduciary Duties: Broker-dealers and investment advisers dealing with securities are often subject to fiduciary duties or ‘best interest’ obligations, requiring them to act in the best interests of their clients.
  • Access to Remedies: Investors harmed by securities law violations often have robust avenues for legal recourse, including private rights of action and SEC enforcement actions that can lead to disgorgement of ill-gotten gains and investor restitution.
  • Custody and Operational Safeguards: Registered exchanges and broker-dealers are subject to strict rules regarding the custody of client assets, cybersecurity, and operational resilience, which are critical for protecting investors in an environment prone to hacks and technological failures.

• Commodities Regulations (CFTC): While CFTC regulations offer protections, they are generally different in scope and focus compared to securities laws. They are primarily designed to ensure market integrity and prevent manipulation in derivatives markets, with more limited direct protections for spot market participants.

  • Market Manipulation and Fraud Prevention: The CFTC has strong powers to prevent fraud and manipulation in both the physical commodity spot markets and their derivatives. This protects the integrity of pricing and trading for digital commodities like Bitcoin and Ether.
  • Risk Management for Derivatives: For regulated derivatives products, the CFTC mandates rigorous risk management practices, margin requirements, and clearing processes, which protect participants from counterparty risk and help maintain financial stability.
  • Less Emphasis on Pre-Sale Disclosure: For spot commodity markets, there is generally no federal requirement for issuers to provide the extensive pre-sale disclosures typical of securities. Investors in spot digital commodities primarily rely on public information and their own due diligence, without the same statutory disclosure protections.
  • Limited Direct Investor Protections: While the CFTC’s actions protect the market as a whole, individual investors in spot digital commodities may have fewer direct statutory protections or recourse mechanisms compared to those investing in registered securities. For instance, there are no federal suitability rules for non-intermediated spot commodity purchases. The adequacy of these protections for the unique risks of digital assets (e.g., self-custody risks, smart contract vulnerabilities, project abandonment) is a subject of ongoing debate and legislative proposals (jdsupra.com).

The varying levels of investor protection highlight a significant challenge: retail investors entering the digital asset market may be exposed to wildly different protections depending on the asset’s classification, which is often opaque. This can lead to a false sense of security or, conversely, a chilling effect on legitimate innovation due to perceived regulatory risk.

4.3 Financial Products and Market Development: The ETF Conundrum

Regulatory classification profoundly impacts the types of financial products that can be developed, offered, and approved, particularly the highly anticipated Exchange-Traded Funds (ETFs).

• Exchange-Traded Funds (ETFs): The SEC’s long-standing reluctance to approve spot crypto ETFs, especially for Bitcoin, was a direct consequence of its concerns about market integrity and investor protection for an underlying asset that trades on largely unregulated spot markets. Key challenges cited by the SEC included:

  • Market Manipulation: Concerns that the underlying spot markets for Bitcoin and other cryptocurrencies were susceptible to manipulation, given their global, fragmented, and often unregulated nature, as well as their concentration of ownership and trading volume on a few exchanges.
  • Custody Risks: The unique challenges of securely holding digital assets, including the risk of hacks, theft, and operational failures of custodians, were a significant hurdle.
  • Valuation Issues: Ensuring reliable and consistent valuation methodologies for highly volatile and fragmented assets.
  • Lack of Surveillance-Sharing Agreements: The SEC demanded surveillance-sharing agreements with significant, regulated markets for the underlying assets to detect and deter manipulation. For many years, no such regulated market for spot Bitcoin was deemed to exist in the U.S.

  However, recent developments have marked a significant shift. The approval of Bitcoin futures ETFs (which are regulated by the CFTC) was a precursor. The eventual approval of spot Bitcoin ETFs in early 2024 by the SEC, after years of rejections, was a landmark decision. This approval was largely driven by a federal court ruling in Grayscale v. SEC, which found the SEC’s denial of Grayscale’s spot Bitcoin ETF application to be arbitrary and capricious. The court pointed out the logical inconsistency of approving Bitcoin futures ETFs while rejecting spot Bitcoin ETFs, given that both rely on the underlying spot market. This decision effectively compelled the SEC to reconsider its stance. Following this, the SEC issued new guidance on disclosure requirements for crypto-based ETFs in July 2025 (as per the original article’s futuristic date, which I will maintain for consistency), emphasizing transparency around custody arrangements, risks, and other distinctions of crypto ETFs. This signals a foundational move towards integrating crypto into mainstream investment vehicles, with similar applications for spot Ether ETFs now under consideration (reuters.com).

• Derivatives Markets (CFTC): The CFTC’s classification of Bitcoin and Ether as commodities directly enabled the development of regulated futures and options contracts on these assets. This has been crucial for providing institutional investors with regulated ways to gain exposure, hedge risk, and facilitate price discovery. The existence of these regulated derivatives markets was, ironically, a key factor that eventually helped pave the way for spot Bitcoin ETFs, as it provided a regulated market that could be monitored for manipulation.

• Impact on Innovation and Competitiveness: The regulatory uncertainty stemming from classification ambiguity has had a mixed impact on innovation. On one hand, the lack of clear rules has pushed some innovative projects outside the U.S. to jurisdictions with more defined frameworks (e.g., the EU’s MiCA regulation, specific regimes in Dubai, Singapore, or the UK). On the other hand, the eventual clarity for certain assets and the approval of products like ETFs lend legitimacy to the asset class, potentially attracting more traditional finance participants and capital. A clear regulatory framework can reduce compliance costs and legal risks, thereby encouraging more mainstream institutional involvement and fostering domestic innovation.

In sum, the classification framework acts as a powerful gatekeeper for financial product development. The shift in the SEC’s stance on ETFs, while significant, highlights the dynamic nature of regulatory interpretation in response to legal challenges and market pressures. The broader implications extend to decentralized finance (DeFi), stablecoins, and non-fungible tokens (NFTs), each presenting its own unique classification challenges that will continue to shape market development.

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

5. Case Studies

Examining specific legal cases and enforcement actions provides invaluable insight into how the Howey Test and regulatory perspectives are applied in practice to digital assets. These cases not only establish precedents but also illuminate the challenges faced by both regulators and market participants.

5.1 SEC v. W.J. Howey Co.: The Enduring Legacy

The SEC v. W.J. Howey Co. (1946) case, as discussed previously, established the four-pronged ‘Howey Test,’ which has become the seminal framework for determining what constitutes an ‘investment contract’ under U.S. securities laws. While the factual context of orange groves in mid-20th century Florida seems far removed from the digital frontier of cryptocurrencies, the principles laid down by the Supreme Court have proven remarkably adaptable. The Court’s emphasis on the ‘economic realities’ of a transaction, rather than its form, has allowed regulators to apply the test to a vast array of novel investment schemes over the decades, from pyramid schemes to exotic derivatives, and now, to digital assets (en.wikipedia.org).

The enduring legacy of Howey lies in its flexibility. It doesn’t rely on a static list of ‘securities’ but rather on a functional analysis of whether an offering constitutes a common scheme for making a profit based on the efforts of others. This flexibility, while powerful, is also the source of much of the current debate. Critics argue that applying a 78-year-old test designed for physical assets to decentralized, programmable digital tokens is anachronistic and creates legal uncertainty. However, proponents argue that the test’s broad, principles-based approach is precisely what makes it suitable for new technologies that were unimaginable in 1946. The challenge lies not in the test itself, but in its consistent and clear application by regulators in a rapidly evolving technological landscape.

5.2 SEC v. Ripple Labs: A Watershed Moment

The lawsuit filed by the SEC against Ripple Labs, its CEO Brad Garlinghouse, and co-founder Chris Larsen in December 2020 represented a pivotal moment in the regulatory battle over digital asset classification. The SEC alleged that Ripple had engaged in an unregistered, ongoing securities offering by selling approximately $1.3 billion worth of its XRP token since 2013 (investopedia.com). The case centered on whether XRP, initially distributed by Ripple, met the criteria of an investment contract under the Howey Test.

Key aspects and implications of the SEC v. Ripple case include:

• Specific Allegations: The SEC claimed that Ripple, as the issuer, created and continuously promoted XRP, making representations that XRP’s value would increase through Ripple’s entrepreneurial efforts in building its payment network. It further alleged that investors purchased XRP with an expectation of profits derived from these efforts, thus satisfying all prongs of the Howey Test.
• Ripple’s Defense: Ripple contended that XRP is not a security but rather a utility token or a virtual currency that exists independently of Ripple’s efforts, especially in secondary markets. They argued that purchasers bought XRP for its functional utility in facilitating cross-border payments, not solely for speculative profit driven by Ripple’s management.
• District Court’s Ruling (July 2023): In a significant development, the U.S. District Court for the Southern District of New York delivered a mixed ruling. Judge Analisa Torres found that:
  • Institutional Sales: Ripple’s direct sales of XRP to institutional investors constituted unregistered securities offerings. The court reasoned that in these transactions, sophisticated buyers invested money directly with Ripple, clearly with an expectation of profit derived from Ripple’s efforts to develop and promote XRP and its ecosystem.
  • Programmatic Sales: However, the court found that Ripple’s programmatic sales of XRP to retail investors on crypto exchanges did not constitute an offering of securities. The court’s rationale was that retail investors in these open market transactions did not necessarily know they were buying from Ripple, nor did they directly invest money in Ripple. Their expectation of profit, if any, was deemed to be derived from broader market forces, not specifically from Ripple’s efforts in a common enterprise with them.
  • Other Distributions: The court also ruled that XRP distributed to employees and third parties (e.g., as payment for services) did not constitute securities offerings because there was no ‘investment of money’ as part of an investment contract.
• Implications of the Ruling: The Ripple decision created significant debate and some confusion. It introduced a distinction between initial sales by an issuer (potentially securities) and secondary market sales (potentially non-securities), leading to what some refer to as ‘security at issuance, commodity later’ or ‘transactional securities.’
  • For other Digital Assets: While the ruling was specific to the facts of XRP and Ripple, it prompted questions about how other digital assets, especially those with initial issuer distributions followed by widespread secondary market trading, would be treated. It suggested that a token itself isn’t intrinsically a security or a non-security; rather, the manner of its offer and sale determines its classification.
  • Challenges for the SEC: The ruling represented a partial setback for the SEC’s broad assertion that most tokens are securities. It highlighted the complexities of applying the Howey Test to the nuances of digital asset market dynamics, particularly in secondary transactions where the direct link between an investor and an issuer’s efforts is attenuated.
  • Ongoing Litigation: The case continues, with the SEC pursuing an appeal on the programmatic sales aspect, but the initial ruling has had a chilling effect on the SEC’s regulatory-by-enforcement strategy and spurred renewed calls for legislative clarity.

5.3 Other Significant Cases and Actions

While Howey and Ripple are central, other cases underscore the breadth of the SEC’s focus:

• SEC v. Telegram Group Inc. (2020): This case involved Telegram’s unregistered ICO of ‘Gram’ tokens. The court sided with the SEC, finding that even the initial private sales of Grams (in the form of SAFTs – Simple Agreements for Future Tokens) and the subsequent planned distribution of the actual tokens to those purchasers constituted an integrated securities offering. The court prevented Telegram from distributing the tokens, emphasizing that the ‘investment contract’ could extend beyond the initial sale to the entire scheme of offering and distributing the asset, particularly when the promoter’s efforts were essential to the tokens gaining value.
• Crypto Lending Platforms (e.g., BlockFi, Celsius, Voyager): The SEC pursued enforcement actions against several crypto lending platforms, arguing that their offerings, which promised investors high returns in exchange for lending their digital assets, constituted unregistered securities. The SEC classified these as ‘investment contracts,’ similar to traditional interest-bearing deposit accounts offered by banks, but without the corresponding disclosures and protections. These cases highlighted the SEC’s focus on the economic substance of an offering, regardless of the underlying technology.

These cases collectively demonstrate the SEC’s consistent reliance on the Howey Test to assert jurisdiction over various forms of digital asset fundraising and related services, while also showcasing the judicial system’s efforts to grapple with the novel aspects of this technology.

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

6. Recent Developments and Future Outlook

The digital asset regulatory landscape is in a constant state of flux, driven by technological advancements, market evolution, and persistent calls from industry for clearer rules. Recent developments signal a gradual, albeit often contentious, movement towards greater clarity and, in some areas, harmonization.

6.1 SEC and CFTC Joint Initiatives: A Glimmer of Cooperation

In September 2025 (per the original article’s futuristic date), the SEC and CFTC announced a joint initiative aimed at coordinating their regulatory efforts concerning digital assets (reuters.com). This collaboration is crucial because, as discussed, the current legislative framework often results in jurisdictional ambiguities and potential gaps. The announced focus of this initiative is to provide guidance on the listing of leveraged, margined, or financed spot retail commodity transactions on digital assets. This specific area represents a complex intersection of the two agencies’ mandates: leveraged trading often involves elements akin to securities (borrowing, collateral) while the underlying asset may be a commodity. Key aspects of such cooperation might include:

• Information Sharing and Collaboration: Establishing formal channels for sharing intelligence, market data, and enforcement strategies to identify and mitigate risks more effectively across both securities and commodities markets.
• Joint Working Groups: Creating inter-agency working groups to develop common understandings and potentially joint guidance on specific digital asset products or services that fall into regulatory grey areas.
• Harmonizing Enforcement: Striving for consistency in enforcement actions where digital assets might trigger both agencies’ authorities, reducing confusion for market participants.
• Addressing Regulatory Gaps: Collaborating to identify areas where neither agency has clear statutory authority (e.g., some aspects of DeFi) and advocating for legislative solutions.

While such joint initiatives are a positive step towards reducing regulatory fragmentation, they are often limited by the inherent constraints of existing legislation and the distinct mandates of each agency. True regulatory clarity and harmonization may ultimately require congressional intervention to define roles and responsibilities more explicitly.

6.2 SEC’s Evolving Stance and Guidance on Crypto ETFs

The SEC’s approach to crypto-based ETFs has been a significant barometer of its evolving views on digital assets. As noted, after years of rejecting applications for spot Bitcoin ETFs due to concerns about market manipulation and investor protection, the SEC approved several spot Bitcoin ETFs in early 2024. This decision was heavily influenced by the D.C. Circuit Court of Appeals’ ruling in the Grayscale v. SEC case, which highlighted the regulatory inconsistency of approving Bitcoin futures ETFs while rejecting spot Bitcoin ETFs.

Following these approvals, the SEC, in July 2025 (as per the article’s date), issued new guidance on disclosure requirements for crypto-based ETFs (reuters.com). This guidance is seen as a pivotal step towards integrating digital assets into mainstream investment vehicles. Key aspects of this guidance and the SEC’s evolving stance include:

• Enhanced Disclosure: The SEC emphasizes the need for comprehensive and clear disclosures specific to crypto ETFs, covering unique risks such as custody, cybersecurity, volatility, forks, and regulatory changes.
• Custody Standards: The guidance likely provides clearer expectations for how digital assets underlying ETFs must be custodied, potentially pushing towards regulated custodians and robust security protocols.
• Valuation Methodologies: Requirements for transparent and consistent valuation methods, especially for assets traded on multiple, sometimes illiquid, platforms.
• Market Surveillance: Continued emphasis on the ability of exchanges to monitor and prevent market manipulation in the underlying spot markets, possibly through surveillance-sharing agreements with major spot trading platforms.
• Implications for Ether ETFs: The approval of spot Bitcoin ETFs has opened the door for similar applications for spot Ether ETFs. The SEC is currently evaluating these, and their approval would further solidify Ether’s status as a commodity in the eyes of regulators, at least for ETF purposes.

This shift indicates a pragmatic acceptance by the SEC of the growing institutional demand for regulated crypto investment products, albeit under strict conditions designed to protect investors and maintain market integrity.

6.3 Congressional Initiatives: The Quest for Legislative Clarity

Recognizing the limitations of existing laws and the ongoing ‘turf war’ between agencies, several legislative proposals have emerged in the U.S. Congress aiming to provide a comprehensive regulatory framework for digital assets. These initiatives generally seek to:

• Define Digital Assets: Establish clear statutory definitions for ‘digital asset,’ ‘digital commodity,’ and ‘digital asset security,’ moving beyond the ad-hoc application of the Howey Test.
• Assign Jurisdiction: Clearly delineate the roles and responsibilities of the SEC and CFTC, reducing overlapping claims and regulatory gaps. For instance, some proposals suggest granting the CFTC greater authority over spot digital commodity markets.
• Create New Exemptions/Frameworks: Introduce tailored regulatory frameworks for certain types of digital assets, such as stablecoins or tokens used in decentralized autonomous organizations (DAOs), which may not fit neatly into existing categories.
• Consumer Protection: Implement specific consumer protection measures for digital asset investors, potentially harmonizing elements of both securities and commodities law.

Notable legislative efforts include the Lummis-Gillibrand Responsible Financial Innovation Act and the Financial Innovation and Technology for the 21st Century Act (FIT21 Act). While these bills have faced significant hurdles in Congress due to political divisions and differing views on regulatory scope, their existence highlights the growing consensus that a legislative solution is eventually necessary to provide the long-term certainty and stability required for the digital asset industry to flourish safely within the United States.

6.4 Global Regulatory Trends

Beyond the U.S., major jurisdictions worldwide are also grappling with digital asset regulation, often moving more quickly to establish comprehensive frameworks. The European Union’s Markets in Crypto-Assets (MiCA) regulation, for example, provides a harmonized framework across all member states for crypto-asset service providers, stablecoins, and other crypto assets (excluding NFTs and highly decentralized assets like Bitcoin). Jurisdictions like the UK, Singapore, and Dubai are also developing specific regimes. These global trends underscore the urgency for the U.S. to establish its own clear framework to maintain its position as a leader in financial innovation.

6.5 Emerging Challenges and Future Directions

Looking ahead, the regulatory landscape will continue to evolve in response to new innovations:

• Decentralized Finance (DeFi): The permissionless and pseudonymous nature of DeFi protocols presents immense challenges for traditional regulatory concepts like ‘intermediary’ and ‘issuer.’ Regulators are grappling with how to apply existing laws to protocols governed by smart contracts and DAOs.
• Stablecoins: The role of stablecoins in the financial system, particularly their potential for systemic risk, is a major focus. Legislation specifically addressing stablecoin issuance, reserves, and redemption mechanisms is highly anticipated.
• Non-Fungible Tokens (NFTs): While many NFTs are likely not securities, some offerings, particularly those marketed with promises of future profits based on the efforts of a central team (e.g., fractionalized NFTs, those with royalty streams), could potentially be deemed investment contracts.
• Interoperability and Cross-Chain Transactions: As the digital asset ecosystem becomes more interconnected, regulating cross-chain activities and bridging solutions will become increasingly complex.

The future of digital asset regulation will likely involve a combination of continued enforcement actions based on existing laws, further inter-agency cooperation, and, eventually, targeted legislation. The overarching goal will remain balancing the promotion of innovation with the imperative of investor protection and financial stability.

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

7. Conclusion

The classification of digital assets as securities or commodities represents one of the most significant and enduring challenges in modern financial regulation. This fundamental distinction has profound and pervasive implications, not only for the specific regulatory body charged with oversight but also for the critical mechanisms designed to protect investors, the very structure of market operations, and the pathways available for the development of innovative financial products like Exchange-Traded Funds. The divergent, and at times conflicting, perspectives of the SEC and the CFTC underscore the inherent complexities arising from applying traditional, decades-old legal frameworks to a rapidly evolving technological paradigm.

The historical context, particularly the Howey Test, provides a flexible, principles-based analytical tool, yet its application to novel digital assets requires nuanced interpretation, as evidenced by the ongoing debate surrounding decentralization and the mixed outcomes in pivotal legal cases such as SEC v. Ripple Labs. While the SEC’s cautious, enforcement-led approach emphasizes comprehensive investor protection and market integrity, often classifying many digital assets as securities, the CFTC’s focus on derivatives market integrity and anti-fraud provisions has led it to classify Bitcoin and Ether as commodities. This jurisdictional divide creates regulatory ambiguities, fosters ‘regulation by enforcement,’ and can hinder innovation by compelling market participants to operate in an environment of legal uncertainty.

Recent developments, including the SEC’s eventual approval of spot Bitcoin ETFs and the ongoing discussions around Ether ETFs, signify a pragmatic, albeit gradual, shift in regulatory posture driven by judicial challenge and market demand. Furthermore, joint initiatives between the SEC and CFTC indicate a recognition of the need for greater inter-agency coordination. However, these steps, while positive, are insufficient to provide the comprehensive clarity and harmonized approach that the digital asset market urgently requires. The persistent calls for legislative action from industry participants and even regulators themselves underscore that a statutory framework, clearly defining digital asset categories and delineating agency responsibilities, is essential.

Ultimately, fostering a robust and responsible digital asset ecosystem demands a delicate balance. Regulation must be sufficiently adaptive to accommodate technological innovation while simultaneously being robust enough to mitigate systemic risks, prevent illicit activities, and, crucially, protect retail investors from fraud and manipulation. The journey towards a coherent and effective regulatory framework for digital assets is ongoing, requiring continuous dialogue, collaboration, and a willingness to evolve legal and policy approaches to meet the challenges and harness the potential of this transformative technology.

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

References

• SEC v. W.J. Howey Co., 328 U.S. 293 (1946). (en.wikipedia.org)
• SEC, Framework for ‘Investment Contract’ Analysis of Digital Assets. (sec.gov)
• K&L Gates LLP, CFTC and SEC Perspectives on Cryptocurrency and Digital Assets – Volume I: A Jurisdictional Overview. (jdsupra.com)
• National Law Review, CFTC and SEC Perspectives on Cryptocurrency and Digital Assets – Volume I: A Jurisdictional Overview. (natlawreview.com)
• Harvard Law Review, SEC Framework for Investment Contract Analysis of Digital Assets (2019). (harvardlawreview.org)
• Investopedia, Howey Test. (investopedia.com)
• Reuters, US Securities, Commodities Regulators Announce Joint Crypto Initiative (2025). (reuters.com)
• Reuters, US SEC’s Guidance is First Step Toward Rules Governing Crypto ETFs (2025). (reuters.com)
• SEC v. Telegram Group Inc., No. 19 Civ. 9439 (S.D.N.Y. Mar. 24, 2020).
• Grayscale Investments, LLC v. SEC, 82 F.4th 1239 (D.C. Cir. 2023).
• SEC.gov, ‘Chairman Gary Gensler: Prepared Remarks Before the Practising Law Institute’s ‘SEC Speaks’ (2023).’ (Referenced for Gensler’s views on most tokens as securities, though specific URL for this quote not provided in original or readily available through general search, reflecting general public statements).
• CFTC.gov, ‘Chairman Heath P. Tarbert: Opening Statement for the Technology Advisory Committee Meeting (2019).’ (Referenced for Tarbert’s views on Ether as a commodity, though specific URL not provided in original or readily available through general search, reflecting general public statements).