Token Taxonomy: Establishing a Clear Classification System for Digital Assets

Abstract

The rapid evolution of digital assets has necessitated the development of a clear and comprehensive classification system to distinguish between securities and commodities. This report examines the historical context of existing classification tests, analyzes legal precedents and ongoing debates surrounding specific digital assets, explores approaches taken by various international jurisdictions, and details the profound implications of classification for regulatory oversight, capital raising, exchange listings, and investor protection in the evolving digital asset landscape.

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

1. Introduction

The emergence of digital assets, including cryptocurrencies and tokenized representations of real-world assets, has introduced complexities in financial markets and regulatory frameworks. A fundamental challenge lies in classifying these assets accurately to determine appropriate regulatory oversight. Misclassification can lead to regulatory arbitrage, investor confusion, and potential market instability. Therefore, establishing a clear taxonomy is imperative for effective governance and market integrity.

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

2. Historical Context of Classification Tests

2.1 The Howey Test

The Howey Test, established by the U.S. Supreme Court in 1946, has been the cornerstone for determining whether certain transactions qualify as investment contracts under the Securities Act of 1933. The test outlines four criteria:

1. An investment of money
2. In a common enterprise
3. With an expectation of profits
4. Derived from the efforts of others

This test has been applied to various digital assets to assess their classification as securities. However, its applicability to the decentralized nature of many digital assets has been a subject of debate.

2.2 The Reves Test

The Reves Test, stemming from the 1990 Supreme Court case Reves v. Ernst & Young, provides a framework for determining whether a note is a security. It considers:

1. The motivations of the seller and buyer
2. The plan of distribution
3. The reasonable expectations of the investing public
4. Whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument

This test has been less frequently applied to digital assets but offers an alternative perspective on classification.

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

3. Legal Precedents and Ongoing Debates

3.1 SEC v. Howey Co.

The seminal case of SEC v. Howey Co. set the precedent for the Howey Test. The Supreme Court ruled that the sale of orange grove interests constituted an investment contract, thus a security, because purchasers were led to expect profits solely from the efforts of others.

3.2 SEC v. W.J. Howey Co.

This case further clarified the application of the Howey Test, emphasizing the importance of the expectation of profits derived from the efforts of others in determining the security status of an asset.

3.3 Ongoing Debates

The application of the Howey Test to digital assets has been contentious. Critics argue that the test is outdated and ill-suited for the unique characteristics of digital assets, such as decentralization and programmability. Proponents contend that it provides a consistent framework for investor protection.

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

4. International Approaches to Digital Asset Classification

4.1 United States

In November 2025, SEC Chair Paul Atkins proposed a token taxonomy to clarify the classification of digital assets. The proposed framework includes:

• Digital Commodities: Assets functioning as a medium of exchange within a decentralized network.
• Digital Collectibles: Tokenized representations of tangible or intangible goods with value beyond mere existence.
• Digital Tools: Tokens representing access rights or functionalities within a platform.
• Tokenized Securities: Digital representations of traditional securities, subject to existing securities laws.

This initiative aims to provide regulatory clarity and foster innovation in the digital asset space. (finance.yahoo.com)

4.2 European Union

The European Union introduced the Markets in Crypto-Assets Regulation (MiCA) in June 2023, applicable from December 2024. MiCA establishes a comprehensive framework for digital assets, categorizing them into:

• Asset-Referenced Tokens: Tokens referencing multiple currencies, commodities, or other assets.
• E-Money Tokens: Tokens pegged to a single currency.
• Utility Tokens: Tokens providing access to a product or service.
• Crypto-Asset Service Providers: Entities offering services related to crypto-assets.

MiCA aims to harmonize regulations across member states, ensuring investor protection and market integrity. (en.wikipedia.org)

4.3 Switzerland

Switzerland employs a modular, principles-based approach to digital asset regulation. The Swiss Financial Market Supervisory Authority (FINMA) classifies digital assets into:

• Payment Tokens: Intended as a means of payment without claims on the issuer.
• Utility Tokens: Provide access to a specific application or service.
• Asset Tokens: Represent assets such as debt or equity claims on the issuer.

This approach allows for flexibility and adaptability in the rapidly evolving digital asset landscape. (americanbar.org)

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

5. Implications of Classification for Regulatory Oversight

5.1 Regulatory Clarity

A well-defined taxonomy provides clear guidelines for market participants, reducing uncertainty and fostering innovation. It delineates the scope of regulatory authority, ensuring that entities operate within established legal frameworks.

5.2 Capital Raising

The classification of digital assets influences the methods and avenues available for capital raising. For instance, assets classified as securities are subject to stringent disclosure and registration requirements, impacting how companies can raise funds through token offerings.

5.3 Exchange Listings

Exchanges must adhere to regulatory standards when listing digital assets. A clear taxonomy aids exchanges in determining which assets they can list without violating securities laws, thereby expanding the range of tradable assets.

5.4 Investor Protection

Proper classification ensures that investors receive appropriate protections. Assets deemed securities are subject to regulations designed to prevent fraud and ensure transparency, thereby safeguarding investor interests.

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

6. Challenges and Considerations

6.1 Technological Evolution

The rapid pace of technological advancements in blockchain and digital assets presents challenges in maintaining an up-to-date taxonomy. Regulators must balance the need for clarity with the flexibility to accommodate innovation.

6.2 Jurisdictional Variations

Different jurisdictions may adopt varying approaches to classification, leading to inconsistencies and potential conflicts. International cooperation and harmonization are essential to address these disparities.

6.3 Legal Ambiguities

The application of traditional legal tests to digital assets often results in ambiguities. Courts and regulators must interpret existing laws in the context of new technologies, which can lead to divergent opinions and legal uncertainty.

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

7. Conclusion

Establishing a clear and comprehensive token taxonomy is crucial for the effective regulation of digital assets. It provides the foundation for regulatory clarity, facilitates capital raising, supports exchange listings, and ensures investor protection. While challenges exist, ongoing efforts by regulatory bodies worldwide aim to create frameworks that balance innovation with oversight, fostering a secure and dynamic digital asset ecosystem.

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

References

• SEC Chair Atkins Proposes Token Taxonomy to Limit Perpetual Securities Status. (2025, November 12). Yahoo Finance. (finance.yahoo.com)

• Markets in Crypto-Assets Regulation (MiCA). (2023, June). European Union. (en.wikipedia.org)

• Structural Themes in Global Digital Asset Regulation. (2025, August). American Bar Association. (americanbar.org)

• A Taxonomy of Digital Assets: Is It a Security, Commodity, Banking Product, or Something Else? (2022, October). Ballard Spahr. (ballardspahr.com)

• SEC Chair Proposes Taxonomy: Most Crypto Tokens May Not Qualify as Securities. (2025, November 13). COINOTAG NEWS. (en.coinotag.com)

• Wilshire and Digital Asset Research add 86 More Digital Assets to Sector Classification System. (2023, January 30). Wilshire. (wilshire.com)

• Classifying Tokenised Money: Dimensions and Design Features. (2025, December 11). arXiv. (arxiv.org)

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• Element and Everything Tokens: Two-Tier Architecture for Mobilizing Alternative Assets. (2025, August 15). arXiv. (arxiv.org)

• Crypto-Asset Reporting Framework. (n.d.). Wikipedia. (en.wikipedia.org)

• Algorithmic Contract Types Unified Standards. (n.d.). Wikipedia. (en.wikipedia.org)

• Stablecoin. (n.d.). Wikipedia. (en.wikipedia.org)

• Tokenized Real-World Asset. (n.d.). Wikipedia. (en.wikipedia.org)

• Markets in Crypto-Assets. (n.d.). Wikipedia. (en.wikipedia.org)