When is a Token, Not a Token?

In 1946, the U.S. Supreme Court looked at a Florida orange grove and created a test that still decides what is and isn’t a security in America.

W. J. Howey was selling rows of his citrus groves to hotel guests, with a contract attached for his company to farm the land and post them the profits.

The SEC said that package was a security.

The court agreed and gave us the Howey test.

The test requires four elements to be satisfied:[1]

1. There must be an investment of money by the investor,

2. The investment must be made in a common enterprise where the fortunes of the investor are tied to others,

3. There must be a reasonable expectation of profits, and

4. Those profits must be derived primarily from the efforts of others, such as the promoter or a third party.

Eighty years on, that orange grove logic has been hanging over every crypto portfolio, every token in it like, well, like a bag of rotten oranges.

Bitcoin skates through the test by the way.

There is no team, no promises, no one’s ‘efforts’ to rely on. But nearly everything else in crypto has a founding team, a foundation, a roadmap.

And the old SEC’s working position was horrendous.

Their argument was once a security, always a security. A token sold under an investment contract in 2018 is still that in 2024, no matter how decentralized the network had actually become. There was no exit once they’d made up their mind.

On Wednesday, I took you through how the ICO was back, and then we got a little derailed by Trump pumping crypto at the White House.

But here, something bigger and more important than all of that…

Buried in the SECs new crypto regulation proposal is what’s called a conditional safe harbor.

A crypto asset would be deemed to no longer be subject to an investment contract once the issuer has ‘completed or permanently ceased all essential managerial efforts’[2] it promised investors.

That line, that innocuous tiny line means that decentralzsation actually means a whole host of crypto moves from the edge of prosecution to freedom!

Build the network you sold people, hand over control, and the token that might once have got you sued through Operation Chokepoint now sets you free.

Raise under the fundraising exemption, disclose along the way, ship the thing, decentralize... and come out the other side holding an asset that trades free of the 80-year-old oranges rule.

That pathway has never existed.

Probably doesn’t make those that got sued sleep any better, but hey, better late than never.

Hester Peirce wants to take it even further. Her statement openly asked the public how crypto assets could be allowed to function more like equity,[3] with token holders sharing in the growth of the enterprise itself.

The SEC is asking how tokens can carry equity-like upside. It just further reinforces my long-standing point that soon enough, crypto, equities, it won’t matter, it’ll be all onchain, all tokenized, tradable anywhere, anytime.

A whole new world of capital markets is emerging.

Of course, there will be abuses of this if it becomes law, which I do expect it will.

You can bet projects and their team will declare their managerial efforts are complete, meanwhile, a background foundation multisig runs the whole show.

So, the SEC will still have its work cut out for it.

But really, for a decade, the question hanging over this entire market was is it a security? And for a decade, we’ve said the Howey test does not, should not, apply to crypto.

Finally, it looks like we’ve got the answer and the pathway to a sensible, reasonable, common-sense outcome.

Who’d have thought this was coming two years ago!

Trust in crypto,
Adam Atlantic

[1] https://www.law.cornell.edu/wex/howey_test

[2] https://www.sec.gov/newsroom/press-releases/2026-76-sec-proposes-new-regulation-crypto-assets

[3] https://www.sec.gov/newsroom/speeches-statements/peirce-statement-regulation-crypto-assets-081826