The regulatory uncertainty around crypto remains one of the biggest concerns that makes investors skittish.

The United States Securities and Exchange Commission, for instance, continues to assert that any cryptoasset other than Bitcoin is a security, and as such, should be brought under the jurisdiction of the SEC.

On the other hand, an opposing viewpoint from a former SEC executive suggests that cryptoassets could, in theory, be labeled as non-securities should they achieve a certain level of decentralization. Are your crypto holdings securities or commodities? Let’s get to the bottom of the debate in this article.

Securities vs. commodities: A quick rundown

Before we get into the thick of things, let’s lay out the basics of what a security and what a commodity is. For the purposes of this article, we will refer to “security” and “commodity” using the following definitions:

Security. According to the Howey Test, a financial product is categorized as a security when investors invest in it primarily with the expectation of a profit obtained from the efforts of others. In general, the profit would be generated by the promoter. Stocks and bonds are among the most common forms of securities. Securities are highly regulated under the purview of the SEC, and promoters are required to disclose risks and information to the public.
Commodities. Commodities, on the other hand, are essential goods used in the production of other goods and services. They can serve as a medium of exchange and as a store of value in certain jurisdictions. Examples of commodities include raw materials, agricultural products, and precious metals. Compared to securities, commodities are subject to fewer regulations, and are governed by the CFTC.

What is the Howey Test?

The Howey Test is a legal framework laid out by the United States Supreme Court. It takes its name from Howey v. SEC, a celebrated case from 1946. The test posits four criteria determining whether a financial instrument should be classified as an investment contract—and in turn, a security. Here are the four criteria of the Howey Test as follows:

Is the asset an investment of money?
Is there an expectation of profits?
Is there a common enterprise?
Will there be reliance on the efforts of others?

Assets that meet all four criteria are classified as securities in the United States and therefore subject to securities law and regulation. Let’s take a closer look at the four criteria to clarify how the Howey Test works.

An investment of money. This criteria indicates that a monetary investment must be involved in a transaction where the money moves from one party’s hands to the other. For instance, buying a token to invest in a security token offering or tokenized initial public offering is classified as an investment of money. However, earning those tokens by working in a company and contributing your time, expertise, and efforts doesn’t qualify under this definition.
Expectation of profit. Is there an expectation of profit arising from the investment? The reason for investing in the asset is to earn a profit from the enterprise’s success or from market movements. For instance, investing in a cryptocurrency because you expect it to skyrocket in value in the future can be categorized as an expectation of profit. On the other hand, buying a token without value to participate in governance within a DAO doesn’t fall under this criteria.
Common enterprise. Are the gains arising from the asset in question linked to the success of the issuing enterprise? This criterion determines whether the investors and the enterprise issuing the asset are linked by a financial relationship For instance, when you buy a stock that bears dividends, your ROI depends on the issuing enterprise’s success. On the other hand, the success of a decentralized network doesn’t depend on an enterprise due to its decentralized nature lacking a controlling body.
Reliance on others’ efforts. The final criterion measures how much of the success of the investment relies on other individuals’ or entities’ efforts besides the investor. In the context of a crypto or Web3 startup, the success of your investment relies on the competence and expertise of the development and management team behind the project you’ve invested in.

Ultimately, there is no boilerplate answer covering all digital assets since there are a variety of tokens. Depending on the function and utility of the blockchain, certain tokens may or may not pass the Howey Test.

Is your digital asset a security or commodity?

Bitcoin has been decisively categorized as a commodity by the Commodity Futures Trading Commission in 2015. The current SEC Chair, Gary Gensler, reinforced the classification by confirming Bitcoin’s status as a commodity in 2022.

However, the same can’t be said for Ethereum and other altcoins. Current CTFC Chair Rostin Beham, for instance, considers Ethereum as a commodity. Based on the lawsuit filed by the CTFC against Binance in 2023, the regulatory agency accused the leading crypto exchange of illegally trading cryptocurrencies such as Bitcoin, Ethereum, Tether USD, Binance USD, and Litecoin, which the agency considered commodities. Binance ultimately pled guilty to the charges and settled a $4 billion penalty as a result

Meanwhile, SEC Chair Gensler believes that Ethereum and similar proof-of-stake cryptocurrencies should fall under the categorization of securities because they pass the Howey Test. For its part, the SEC sued Coinbase in 2023 for trading a group of 13 cryptocurrencies, including Solana, Cardano, NEAR Protocol, and Polygon. The SEC also went after Kraken for offering crypto staking as a service and registering it with the SEC. The case ended with Kraken ending the program for U.S.-based users and with Kraken being levied a $30 million fine. Interesting times.

However, Ethereum might yet have an ace up its sleeve. Former SEC executive William Hinman, whose 2018 speech has been referenced in multiple SEC cases against crypto issuers, asserts that a cryptocurrency that was initially categorized as a security could be no longer considered as one provided it achieves a sufficient degree of decentralization over time.

Hinman believed that fundraising aside, Ethereum shouldn’t be considered as a security due to the Ethereum network’s decentralized structure. While the SEC itself has repeatedly asserted that Hinman’s claims represented his personal opinion instead of the market regulators, internal SEC emails dated between 2017 to 2020 released in 2023 had several SEC executives purportedly showing support for Hinman’s stance. Nevertheless, the jury remains out on this one—but they are, indeed, having that conversation.

SEC counterpoints: Why does the SEC consider your digital assets as securities?

Here are three reasons why Ethereum and the great majority of altcoins are considered securities by the SEC:

Initial coin offerings. Most cryptocurrencies, Ethereum included, underwent capital raising to kickstart their development through initial coin offerings (ICOs). ICOs involve investors exchanging fiat for crypto tokens, similar to the architecture of an initial public offering (IPO) for public companies selling shares to the general public. Additionally, the funds raised through ICOs went to the pockets of dev teams, implying that investors depended on the efforts of third parties in the expectation of profit in the form of the token appreciating in price over time. Notably, Bitcoin is one of the rare cryptocurrencies that didn’t conduct an ICO. Ethereum, meanwhile, is known for having the most successful crypto ICOs in history.
The act of selling to investors instead of users. Cryptocurrencies are sold as digital assets that can be used as a medium of exchange over the internet. However, the reality is that most people buy cryptocurrencies in the hope that the tokens they buy will appreciate in price. According to the SEC, the act of marketing cryptocurrencies as “utility tokens” does not preclude the crypto in question from being categorized as a security.
The existence of development teams. Corporate entities may not oversee and manage a crypto project. However, the project may have individual promoters and development teams that hold a substantial portion of the supply. These individuals may be motivated to boost the value of their holdings, resulting in the project becoming entirely dependent on them.

What’s so bad about SEC regulation for cryptocurrencies?

The regulation of crypto isn’t as bad as some sectors make it out to be. Considering the astronomical $16.7 billion lost to security breaches, hacks, and scams, not to mention high-profile bankruptcies and white-collar fraud, a degree of regulation could only be good for the industry as a whole.

While ideologues and purists may not agree with this opinion due to their belief in the technology as the world’s final shot at a truly decentralized financial system, the reality on the ground is that a degree of regulation is necessary for true mass adoption.

Should the US SEC succeed in reining in the regulation of crypto under their purview, crypto projects will have to become fully compliant and disclose risks, the identities of the teams behind projects, financial results, and other pertinent details on a timely, regular basis—which would, on paper, appear to be a fair trade-off.

Frequently Asked Questions

Here’s a quick rundown on the most frequently asked questions about crypto and its status as a security or commodity.

Is crypto a security or commodity?

It depends. Bitcoin, for instance, is considered as a commodity by the Commodity Futures Trading Commission (CFTC) rather than securities. This means Bitcoin falls under the jurisdiction of the CFTC instead of the SEC. On the other hand, Ethereum and similar proof-of-stake cryptocurrencies look increasingly likely to fall under securities based on recent SEC pronouncements and actions; however, nothing is yet set in stone.

What is a security vs commodity?

When you invest in commodities, you’re investing in basic raw materials such as oil, natural gas, or precious metals, while investing in securities involves buying financial instruments representing a certain value. The fundamental difference lies in what stock is being bought and sold and the potential earnings from the investment.

What is the Howey Test?

The Howey Test is an essential aspect in crypto regulation because it determines if a crypto asset should be categorized as an investment contract and therefore a security—determining whether it should be classified as a security or a commodity.

Does the classification of cryptocurrencies affect their regulation?

Absolutely. The classification of cryptocurrencies indicates which government agency oversees their regulatory treatment. Securities are regulated by the SEC, while commodities would fall under the jurisdiction of the CFTC. Their classification affects the issuer and exchange licenses, as well as the trade and sale of these crypto assets.

What are the implications of categorizing crypto as a security?

Categorizing crypto as a security gives investors greater protection, but places the entire asset class under much stricter regulations. This ranges from exchange registration requirements to investor information, all of which could affect the entire crypto industry and its participants.