SEC’s 2025 guidance: What tokens are (and aren’t) securities

The SEC's 2025 guidance clarifies the classification of crypto tokens as securities, emphasizing that tokens marketed with profit expectations driven by a central team are likely securities, while those with genuine utility on decentralized networks are less likely to be classified as such. The guidance introduces a three-pronged framework considering initial sale context, ongoing use, and issuer influence. Industry reactions are mixed, with some appreciating the clarity and others expressing concern that the rules may hinder crypto innovation and create legal uncertainty, especially compared to the EU's MiCA framework.

Analysis

The U.S. Securities and Exchange Commission's (SEC) Division of Corporation Finance released comprehensive guidance on April 10, 2025, aiming to reduce ambiguity in classifying crypto tokens under U.S. securities laws. This guidance updates the application of the Howey test, particularly emphasizing the "reasonable expectation of profit" criterion: if token buyers expect profits primarily from the efforts of a centralized team, the token is likely a security. A new three-pronged framework considers the initial sale context, ongoing functional utility on a decentralized network, and the degree of issuer influence. Consequently, tokens launched via ICOs with profit-centric marketing, profit-sharing governance tokens, and utility tokens with significant financial incentives or centralized control, such as pre-mined tokens, are likely to be deemed securities, referencing precedents like the LBRY case and Ripple's (XRP) institutional sales. Conversely, tokens like Ether (ETH) post-Merge, used for network operations, or fiat-backed stablecoins with transparent reserves and no investment promises are generally not considered securities. This guidance implies stricter compliance for token issuers, potentially leading to redesigns or registrations, while investors may face a reduced token selection but potentially safer markets. Exchanges, including platforms like Coinbase (COIN), are expected to enhance listing standards and may need to register as securities brokers. Industry reactions are mixed: while some, like legal analyst Jake Chervinsky, acknowledge the helpfulness, others, including Coinbase's legal officer Paul Grewal and SEC Commissioner Hester Peirce, express concerns that the rules, particularly the focus on profit expectations and issuer control, could stifle innovation and represent regulation by enforcement, creating legal uncertainty, especially for DeFi and DAOs. This approach contrasts with the EU's MiCA regulation, which offers a more rule-based framework with clear crypto-asset categories rather than a case-by-case securities determination.

Key Decisions for Investors

• Investors should meticulously evaluate new and existing token holdings against the SEC's three-pronged framework, focusing on issuer influence, marketing promises, and genuine utility to assess potential securities classification risk.
• Prepare for potential market shifts, including token delistings from U.S. exchanges and increased compliance costs for projects, which may impact token liquidity and valuation.
• Monitor ongoing SEC enforcement actions and legal interpretations, particularly concerning DeFi protocols and governance tokens, as these will further clarify the practical application of the 2025 guidance.