The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have recently issued a joint statement providing clearer guidance on the classification of cryptocurrencies. According to The Block, a four-part classification system named "Project Crypto" distinguishes digital assets into digital commodities, collectibles, and utilities, drawing a line with tokenized securities and explicitly stating that traditional securities laws will only apply to the latter. The framework emphasizes evaluating an asset's function, degree of decentralization, and method of issuance, rather than solely its name.
This classification framework is crucial for understanding the nature of crypto assets and market regulation. While the "Howey Test" remains the fundamental basis for determining if an investment constitutes a security, the specific context and promises made at the time of issuance now carry greater weight. For a tokenized arrangement to be considered a security, the key factors are the promises made to purchasers, ongoing managerial control, and the purchasers' reliance on the efforts of others.
Regulators also elaborated on the potential pathways for assets initially issued as investment contracts but later transitioning into tokens of decentralized networks. As Paul S. Atkins pointed out in a policy speech in 2025, "Investment contracts can expire."
This move will have a direct impact on exchanges, token issuers, and investors. Exchanges may list more spot-traded digital commodity-like crypto assets on registered trading platforms that fall within the respective agencies' scope of responsibility. In the future, listing review processes may more formally include screening for whether an asset is a commodity or a security, and enhance monitoring of any tokenized securities.
Token issuers need to meticulously document their issuance structure, public statements, and whether management continues to play an active role. If relevant rights terminate and control dissipates, the initial investment contract may conclude, and the token will not be permanently considered a security as a result.
Investors can expect clearer asset labeling, such as distinctions between digital commodities and tokenized securities, along with more consistent disclosures for the latter. Market-tested assets like Bitcoin and Ethereum will continue to be viewed as digital commodities, but for assets with blurred lines, their ultimate classification will depend on specific facts and circumstances of their issuance.
Howey Test and Asset Transformation Scenarios Explained
Elements of the Howey Test Applied to Crypto Assets in Plain Language:
Courts will examine whether the following elements exist: an investment of money in a common enterprise, with a reasonable expectation of profits derived from the managerial efforts of others. If, based on the specific facts, any one of these elements is not met, the token may not be considered a security.
How Investment Contracts Terminate and Tokens Achieve Transformation:
When the initial promises are fulfilled or terminated, managerial control diminishes, and network utility surpasses the expectation of profits, the initial investment contract may end. At this point, the token's nature will depend on the current factual situation, rather than its historical issuance background.
Frequently Asked Questions about the Project Crypto Token Classification Framework
How does Project Crypto's token classification framework categorize my token (digital commodity, collectible, utility, or tokenized security)?
The classification maps based on the asset's function and issuance context. Network tokens, collectibles, and utilities generally fall outside the purview of securities laws; tokenized securities, however, remain within the securities law framework. Detailed offering documents and ongoing managerial control are decisive factors.
How will the Howey Test be applied to crypto assets in 2026, and which factors are most important?
Regulatory scrutiny will focus on the promises made by the issuer, the efforts of management, and the investor's degree of reliance. The degree of decentralization, actual functional use, and the termination of rights are significant considerations in determining that it is not a security. Facts and circumstances are the decisive factors in the assessment.