Is crypto a security? The Howey test explained

Some crypto is a security, and much of it is not. In the United States the answer turns on the Howey test, a Supreme Court standard from 1946 that asks whether buyers are counting on someone else's work to earn a profit. The same token can fall on either side depending on how it is sold.

What is the Howey test?

A security is a regulated investment such as a stock or bond. US law also covers "investment contracts", and the Supreme Court defined that term in SEC v. W.J. Howey Co. in 1946. The case involved a Florida company that sold strips of orange grove together with contracts to farm them and share the proceeds. The Court said the arrangement was a security.

The test has four parts:

1. An investment of money
2. in a common enterprise
3. with an expectation of profit
4. that comes from the efforts of others.

If all four are present, the seller must register with the SEC or use an exemption.

How has it been applied to tokens?

The question became urgent in 2017, when many projects raised money through initial coin offerings. The SEC argued that tokens were often sold as investments in a team's future work.

The best-known court test involved XRP. In July 2023 a federal judge ruled that Ripple's direct sales of XRP to institutional investors were securities transactions, while sales to the public on exchanges were not. Both sides dropped their appeals in August 2025, leaving that ruling and a $125 million penalty in place. The case showed that a token and the deal it is sold in can be treated separately.

Where do things stand in 2026?

On March 17, 2026 the SEC, joined by the CFTC, published an interpretation built on that idea. It sorts crypto assets into five groups:

• Digital commodities, such as bitcoin and ether. Not securities.
• Digital collectibles, such as most NFTs. Not securities.
• Digital tools, such as membership tokens. Not securities.
• Stablecoins. Those from issuers permitted under the GENIUS Act are excluded.
• Digital securities, such as tokenized stocks and bonds. Securities.

A non-security token can still be sold under an investment contract if the issuer makes specific promises to build something. The contract ends when those promises are fulfilled or clearly abandoned. The interpretation also says mining, staking and free airdrops are not, without more, securities transactions.

What is still unsettled?

The interpretation is the agencies' reading, not a statute. Courts decide what the law means and could disagree, and a future commission could change course. Critics, including Democratic staff on the Senate Banking Committee, say the lighter approach leaves investors with weaker protection.

Rules differ by country and state and change often. Check official sources or a qualified professional before relying on any classification.