Are cryptocurrencies a type of security or not? Few aspects of blockchain regulation are more hotly debated than this question. Yet, while the answer has significant implications—how crypto projects can raise funds, what protections investors receive, and the rules companies must follow—it’s not easy to arrive at.
Regulators are working hard to figure out where crypto fits within existing laws. At the same time, governments are racing to keep up with the rapidly evolving technology.
Why it matters: the legal implications of cryptocurrency classification
While it’s agreed that cryptocurrency is an asset, experts don’t agree on its type. Assets generally fall into one of two categories: security or commodity. Different regulatory bodies oversee securities and commodities.
- If an asset is classified as a security, it must comply with Securities and Exchange Commission (SEC) rules, including registration, disclosures, and anti-fraud measures. Securities generally have stricter rules, making raising capital more difficult.
- If an asset is categorized as a commodity, it falls under the Commodity Futures Trading Commission’s (CFTC) jurisdiction. Commodities have fewer restrictions but can pose greater risks for investors.
The uncertainty around cryptocurrency classification can have a dampening effect on the market. When companies aren’t sure about the rules, they’re more likely to hold off on launching new projects or expanding. Similarly, investors struggle to determine risk, discouraging investment and slowing market growth.
The role of federal vs. state regulators in crypto securities laws
U.S. crypto regulation is a mix of federal and state rules that make compliance challenging. Here are the major players and their roles:
- SEC. Primarily regulates securities, focusing on token sales, initial coin offerings (ICOs), and projects with centralized control.
- CFTC. Governs commodities like Bitcoin and derivatives markets.
- State Regulators. Each state has its approach to securities laws (often called “Blue Sky” laws) and licensing requirements.
This fragmented system presents compliance challenges for crypto businesses that operate nationwide. Many companies navigate this by tailoring operations to different jurisdictions.
For example, some firms may block users from states like New York due to its stringent BitLicense requirements, while others may work with attorneys to determine if their tokens fall under federal securities laws before launching. Working with experienced legal counsel from early stages can help businesses avoid enforcement actions and preserve market access.
How the SEC determines if a cryptocurrency is a security
So, are cryptocurrencies securities? The SEC has made it clear that most—though not all—ICOs qualify as securities and must follow securities laws.
These indicators date back to the 2017 DAO Report, where the SEC warned that digital assets sold through ICOs could be classified as securities, even if marketed as utility tokens.
Since then, enforcement has escalated as lawsuits against major exchanges and token issuers reinforce the agency’s stance. Coinbase, for example, is locked in an ongoing battle with the SEC over allegations that it listed unregistered securities.
But how does the SEC decide whether an ICO is a security in the first place? The SEC relies on a legal framework that predates crypto itself—the Howey Test—to make this determination.
The Howey Test explained
If a cryptocurrency or token meets all four criteria, it’s considered a security and subject to SEC regulations. Here’s what the Howey Test asks:
- Is there an investment of money? Are people buying tokens with the expectation of financial gain?
- Is it a common enterprise? Are investor profits tied to a central project or group?
- Is there an expectation of profit? Are buyers expecting to make money through price increases or dividends?
- Is the profit dependent on the efforts of others? Are returns driven by a team or organization instead of the market itself?
Originally designed for stocks and bonds, the Howey Test now applies to crypto in new ways. Tokens backed by centralized teams—like those launched through ICOs—often check all the boxes of the Howey Test and end up classified as securities.
Even some decentralized projects could fall under SEC oversight if they promise future profits.
What happens if a cryptocurrency is a security?
If a cryptocurrency is classified as a security, it falls under SEC regulations. This will require:
- SEC registration. Token issuers must register their offerings and provide detailed disclosures about financials, risks, and project operations.
- Investor protections. Companies must follow fraud prevention and transparency rules, similar to traditional stocks.
- Ongoing reporting. Registered projects may be required to file periodic reports with the SEC.
- Legal consequences for non-compliance. If a crypto project sells unregistered securities, it could face fines and legal action and even be forced to pay back investors.
How a cryptocurrency attorney can help
Regulatory scrutiny in the crypto industry is at an all-time high. SEC investigations, lawsuits, and shifting policies create legal challenges affecting everything from token sales to exchange listings.
A cryptocurrency attorney plays a direct role in protecting businesses by:
- Assessing whether a token qualifies as a security. Before launching, companies need to know if they meet the SEC’s criteria for a security. Legal teams can evaluate token structures, governance models, and promotional materials to determine if changes are needed.
- Structuring token offerings to meet legal exemptions. Some token sales can avoid SEC registration by qualifying under exemptions like Regulation D or Regulation A+. An attorney can advise on structuring these offerings, draft required filings, and ensure compliance with federal and state regulations.
- Responding to SEC enforcement actions. If the SEC issues a Wells Notice or initiates legal proceedings, an attorney can help build a defense based on precedent and regulatory inconsistencies.
- Securing exchange listings while managing compliance risks. Exchanges face their own legal pressures and are increasingly cautious about listing certain tokens. Companies looking to be listed must meet securities law requirements, AML obligations, and platform-specific policies. Attorneys can handle due diligence processes, contract negotiations, and investor disclosures to protect issuers from liability.
- Defending against investor lawsuits. Regulatory enforcement may trigger private litigation. Investors who purchase unregistered securities may seek compensation, leading to class actions or individual claims. Legal teams can help protect against these cases by arguing that a cryptocurrency does not qualify as securities or negotiating settlements.
Early legal planning limits risk exposure and gives businesses a stronger position when dealing with regulators, exchanges, and investors.
Why the securities debate matters for crypto businesses
The future of crypto—whether it becomes a mainstream investment or stays a high-risk gamble—hinges on upcoming decisions from lawmakers and regulators. The only certainty right now is that those who stay ahead of these regulatory shifts will be in the best position to succeed.
Contact The Law Offices of Andrew Dressel LLC today to discuss compliance strategies and protect your business.
The content in this article is for general informational purposes only. It should not be construed as legal advice or a substitute for legal advice. The information above does not create an attorney-client relationship, nor do prior results guarantee future outcomes. Any reliance you place on such information is therefore strictly at your own risk.