Security vs. Commodity Classification

The four components that frame the analysis

Security under the Howey test: an asset sold as an investment contract, meaning an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others.¹ Securities fall under SEC jurisdiction and carry registration or exemption requirements plus disclosure obligations.

Commodity under the Commodity Exchange Act: the statute reaches enumerated agricultural goods "and all other goods and articles ... and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in."² That catch-all clause, not any crypto-specific provision, is the textual hook that lets courts and the CFTC treat digital assets as commodities.

The test that decides: courts apply Howey's four prongs to the economic reality of each transaction rather than to the token in isolation.¹ One question carries most token cases. Whose work is the buyer relying on?

What determines the answer: the rights the token carries, what was promised when it was sold, and how dependent holders are on a central team's ongoing effort. Labels carry no weight. A token marketed as a utility and sold on profit expectations can still be an investment contract.

What the Howey test asks

The Howey test comes from SEC v. W.J. Howey Co., a 1946 Supreme Court case about Florida citrus groves sold together with a farming and marketing contract. The Court defined an investment contract by four elements, and all four must be present: an investment of money, in a common enterprise, with a reasonable expectation of profits, derived from the efforts of others.¹

The fourth prong does most of the work in crypto. If holders expect the token to appreciate because a named team is shipping the product, running the treasury, and marketing the network, the analysis points toward a security. Where no identifiable promoter's effort drives the value, it points away. The prong-by-prong argument lives on the Howey test page. What matters here is that a positive answer routes the transaction to the SEC whatever the asset is.

Where the two statutes actually divide

These are not two halves of one law. They are separate acts with separate triggers, and they overlap. The Securities Act reaches the deal: an offer or sale of an investment contract has to be registered or exempt, whatever the underlying asset is. The Commodity Exchange Act reaches the asset and its market, and anything qualifying as a commodity brings CFTC jurisdiction with it.²

What the CFTC gets is narrower than founders assume. Derivatives on a commodity sit under full CFTC oversight. Spot markets do not. There its authority runs to fraud and manipulation rather than registration and disclosure, and a federal court confirmed that reaches bitcoin spot trading directly.³ A commodity classification removes a registration burden, not enforcement risk.

Because the triggers differ, both can be live at once. An asset can trade as a commodity in the spot market and still be the subject of an investment contract when the issuer sells it under a negotiated agreement. That is not a contradiction: one statute tests the transaction, the other tests the asset.

Why Bitcoin is treated as a commodity

Two things carry it. The statutory definition covers goods, articles, services, rights and interests in which futures contracts are dealt in, which sweeps well past the enumerated agricultural list.² And a federal court applied it. In CFTC v. Patrick K. McDonnell, decided March 6, 2018 in the Eastern District of New York, the court held that virtual currencies including bitcoin are commodities under 7 U.S.C. section 1a(9), and that the CFTC's anti-fraud and anti-manipulation authority reaches bitcoin spot markets even without a directly implicated futures contract.³

The other half is the Howey side, and it is a factual argument rather than a statutory carve-out. No promoter's continuing managerial work drives the network's value, so the fourth prong has nothing to attach to. That reasoning does not transfer automatically to a token with a foundation, a treasury, a roadmap and a marketing function.

As of March 2026 the position has formal agency backing. The SEC issued an interpretation, joined by the CFTC, on how the federal securities laws apply to crypto assets, with the CFTC stating it will administer the Commodity Exchange Act consistently with it.⁶ Bitcoin and ether are named among sixteen digital commodities under that taxonomy.

Classification runs transaction by transaction: the Ripple ruling

On July 13, 2023, Judge Analisa Torres of the Southern District of New York granted partial summary judgment to each side in SEC v. Ripple Labs, Inc., No. 1:20-cv-10832 (AT), reported at 682 F. Supp. 3d 308. Roughly $728.9 million of XRP sold to institutional and hedge fund buyers under negotiated written contracts were unregistered securities transactions. Programmatic sales, blind bid and ask orders matched algorithmically on exchanges, were held not to be investment contracts, because those buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP."⁵

The asset was identical in both categories; transaction context decided each outcome. A third category made the point again: XRP paid to employees and developers as compensation failed the investment of money prong outright, because those recipients gave services rather than capital.⁵

The limit on that ruling matters as much as the ruling. The court did not hold that exchange sales of digital assets fall outside the securities laws as a class. It held that these programmatic sales, on this record, were not investment contracts.⁵ This page states the district court holdings and nothing further. In our view the lesson founders skip runs both ways: a clean secondary market does not retroactively clean a primary sale, and a compliant primary sale does not immunize every later distribution.

Decentralization and the efforts of others

The idea that a token can move outside Howey as its network matures traces to a June 14, 2018 speech by William Hinman, then Director of the SEC's Division of Corporation Finance. Where a digital asset gives its holder a financial interest in an enterprise, he said, it likely cannot stop being a security. But where "there is no longer any central enterprise being invested in," or the asset is sold only to buy a good or service on its network, he believed the answer was a qualified yes.⁴

Two cautions travel with that speech, and both are in it. Hinman framed the analysis as his own view rather than Commission action, and no statute or binding SEC rule has codified a decentralization threshold since.⁴ Courts apply Howey. They do not apply a decentralization score.

What changed in March 2026 is the formality, not the underlying law. The joint SEC and CFTC interpretation addresses how a non-security crypto asset may become subject to, and may cease to be subject to, an investment contract, and applies that reasoning to airdrops, protocol mining, protocol staking and wrapping.⁶ SEC Chairman Paul S. Atkins is quoted acknowledging that most crypto assets are not themselves securities and that investment contracts can come to an end. That is Commission-level interpretive guidance: not a statute, not a court holding, and revisable by a future Commission without an act of Congress.

What is settled, what is agency policy, and what is still a bill

Three tiers get blended constantly, usually at a founder's cost. Settled law is Howey and the statutory commodity definition, plus district court holdings like McDonnell and Ripple.² Agency policy is the March 2026 joint interpretive release, formal and current and revisable by the next Commission.⁶ Both are real. Only one survives a change of leadership without a vote.

Pending legislation is the third tier, and it is the one that is not law at all. The Digital Asset Market Clarity Act of 2025, H.R. 3633 in the 119th Congress, passed the House on July 17, 2025 by a recorded vote of 294 to 134 (Roll No. 199). It was referred to the Senate Committee on Banking, Housing, and Urban Affairs on September 18, 2025 and reported out with an amendment on June 1, 2026. Through that date it had not passed the Senate floor and had not been enacted. Its predecessor concept, FIT21 (H.R. 4763, 118th Congress), passed the House in May 2024 and expired unenacted.

The firm's interpretation is that pending legislation is a planning input, not a design constraint. Building a token structure that only works if a bill passes is a bet on a legislative calendar, and we have watched one version of that bet expire already. Design against the law that exists and treat a favorable statute as upside.

What this means at design time

The classification factors are visible in the design itself, before a lawyer reads it. A token that promises yield paid out of a team's work, carries a claim on protocol revenue, or is sold on price appreciation hands the Howey analysis material. A token representing redeemable ownership of an underlying asset, paying no yield, trading at a market-set price, presents a different profile. Those are mechanism choices, made in a spreadsheet months before an offering document exists.

Four things a founder controls at design time, and controls almost completely. Whether the token carries any claim on revenue or profit. Whether the team holds unilateral upgrade or treasury control, and what specific event would end it. Which distribution channels exist, and who the counterparty is in each. And what the marketing says the buyer is buying. None needs a regulator's permission to change, and all four cost more after a raise than before one.

A disclaimer is not a design lever. Economic reality and conduct decide these cases, which is why calling a token a utility in the offering documents while the team markets price appreciation produces the record an enforcement lawyer wants.

Classification should be an input to mechanism design, not a defense mounted afterward. Whether a specific design qualifies is fact specific and jurisdiction specific, and that call belongs to your legal team and, ultimately, a court. This page is reference material. It is not legal advice, and it is not a recommendation to buy, sell, or hold any asset.