The U.S. Securities and Exchange Commission issued broad guidance towards the crypto industry on Tuesday, with SEC Chair Paul Atkins declaring that “most crypto assets” would not be considered securities.
The guidance provides distinctions between which types of assets do not meet the definition of securities and what would make an asset meet that definition as an investment contract.
It also notes that protocol mining (as on Bitcoin) and staking, along with crypto airdrops—or tokens sent to a protocol’s users and contributors—do not meet that definition.
“After more than a decade of uncertainty, this interpretation will provide market participants with a clear understanding of how the Commission treats crypto assets under federal securities laws. This is what regulatory agencies are supposed to do: draw clear lines in clear terms,” said Atkins, in a statement.
“It also acknowledges what the former administration refused to recognize—that most crypto assets are not themselves securities,” he continued. “And it reflects the reality that investment contracts can come to an end. This effort serves as an important bridge for entrepreneurs and investors as Congress works to advance bipartisan market structure legislation, which I look forward to implementing with [CFTC] Chairman Selig in the near future.”
In a statement released soon after the SEC’s own, the Commodity Futures Trading Commission (CFTC) said that it would “administer the Commodity Exchange Act consistent with the SEC’s interpretation.”
“This is a major step in the agencies’ efforts to provide greater clarity regarding the treatment of crypto assets, and complements Congressional endeavors to codify a comprehensive market structure framework into statute,” the CFTC added.
Although lawmakers’ progress on the CLARITY Act has stalled in recent months, the SEC’s implementation shows that the regulator isn’t waiting for laws pertaining to the crypto market’s structure to be enacted before it establishes clearer rules for the industry.
Under the SEC’s prior leadership, the regulator focused on the classification of digital assets within the context of the Howey Test. The framework stemming from a Supreme Court case was cited frequently in enforcement actions against many crypto-native firms.
Atkins indicated that the SEC’s reliance on the Howey Test for assessing the classification of digital assets amounted to a “persistent failure to provide clarity on this question” of whether certain cryptocurrencies should be regulated by different agencies.
“We’re not the Securities and Everything Commission,” Atkins said Tuesday afternoon, prompting a burst of applause from the audience of crypto industry professionals gathered at the DC Blockchain Summit.
The taxonomy included in the SEC’s implementation divides digital assets into five groups: digital commodities, digital collectibles, digital tools, stablecoins, and digital securities.
Digital securities are the only type of digital asset that the SEC says fall squarely within its regulatory remit, according to a fact sheet. That includes tokenized securities, which are digital representations of traditional investments, including stocks and U.S. Treasuries.
In order to be classified as a digital commodity, the SEC and CFTC plan to assess whether a digital asset derives its value from the programmatic operation of a “crypto system,” as opposed to an expectation of profit that stems from the essential managerial efforts of others.
Within the context of cryptocurrencies like Bitcoin and Ethereum, which are broadly considered to be digital commodities, those assets play a foundational role in securing their respective networks across a decentralized group of market participants.
The SEC says digital collectibles are linked to creative works like music and artwork, but they can also represent in-game items or references to internet memes. The definition suggests that most NFTs and meme coins would fall under that umbrella. Those are distinct from digital tools, which can function as a membership or event ticket, along with a virtual identity.
The SEC’s implementation says “non-security crypto assets” may be classified as investment contracts under certain circumstances, depending on representations that issuers make. Still, the existence of an investment contract does not make the digital asset a security during transactions that take place on a secondary market like an exchange.
On top of that, non-security crypto assets that are tied to investment contracts may not be subject to federal securities laws if there’s no longer a reasonable expectation from a purchaser that the issuer’s representations and promises are connected to the digital asset.
On Tuesday, Atkins also previewed a potential safe harbor exemption for certain crypto projects, which the SEC has teased for some months.
The SEC chair said such exemptions could soon apply to startups worth up to $5 million seeking to experiment with crypto assets in their first four years; to entrepreneurs raising up to $75 million via investment contracts involving certain crypto assets; and to certain crypto assets once their creators have ceased all essential managerial efforts.
Atkins said he expects the SEC to release such proposed rules for public comment in “the coming weeks.”
Additional reporting by Sander Lutz
Editor’s note: This story was updated after publication with additional details and comments.
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