SEC's Classification Strikes a Balance Between Fostering Innovation and Safeguarding Investors

The U.S. Securities and Exchange Commission (SEC) is advancing a long-awaited "token taxonomy" designed to clarify how cryptocurrencies are treated under securities regulations, a step that could reshape digital asset oversight. Chair Paul Atkins introduced the proposal at the Federal Reserve Bank of Philadelphia's Fintech Conference, stressing that the framework is based on the Howey Test—a 1946 Supreme Court decision used to determine what constitutes an investment contract, according to a

. The proposal aims to sort crypto assets into four categories, with the majority of currently traded tokens falling under the definition of securities, as highlighted in a .

Atkins explained that digital commodities associated with decentralized networks, collectibles such as NFTs, and utility tokens like memberships or event tickets would be excluded from securities regulation, according to the

. Conversely, tokenized securities—which represent financial stakes—would still be regulated by the SEC, as stated in the . Importantly, the new taxonomy recognizes that investment contracts may no longer be considered securities if a project becomes decentralized or if the issuer steps back from active involvement, according to a . "Most crypto tokens trading today are not themselves securities," Atkins remarked, adding that while initial sales might be subject to securities rules, subsequent transactions may not be, as noted in a .

This initiative is part of a broader push to update crypto regulation, including the SEC's "Project Crypto," which is intended to simplify compliance for both developers and investors, according to a

. Atkins also mentioned plans to permit certain tokens to be traded on platforms not overseen by the SEC, such as those regulated by the Commodity Futures Trading Commission (CFTC) or state authorities, according to the . This marks a shift from former Chair Gary Gensler's enforcement-centric approach, instead seeking a balance between fostering innovation and protecting investors, according to a .

At the same time, the SEC is working more closely with Congress. Several legislative proposals, including the House-approved CLARITY Act and various Senate bills, aim to clarify the regulatory boundaries between the SEC and CFTC regarding digital assets, as reported in a

. For example, a draft bill from the Senate Agriculture Committee would classify "digital commodities" such as and under CFTC jurisdiction, while the SEC would retain authority over "investment contracts," as explained in a . These legislative measures are intended to establish a cohesive regulatory system, reducing confusion for businesses facing overlapping requirements, according to a .

This regulatory evolution is also driving innovation in the market. Nasdaq has recently filed a pioneering application with the SEC to create a tokenized trading platform, which would enable securities to be settled via blockchain, as outlined in a

. This initiative supports the Trump administration's goal of making the U.S. the "crypto capital of the world," as mentioned in a . If approved, Nasdaq's platform would let investors trade tokenized securities alongside traditional assets, using a permissioned blockchain managed by the Depository Trust Company (DTC), according to the .

Atkins made it clear that the introduction of the new taxonomy does not mean enforcement will be relaxed. "Fraud is fraud," he asserted, reaffirming the SEC's dedication to addressing wrongdoing, according to a

. The SEC will continue to oversee tokenized versions of conventional assets, such as stocks issued on blockchains, as stated in the . The agency is also considering exemptions for "super-apps" that manage multiple asset types under a single regulatory structure, according to a .

As the SEC works to finalize its new guidelines, industry participants are watching closely to see how the taxonomy will interact with upcoming laws and market changes. With Congress targeting the passage of comprehensive crypto legislation by the end of 2025, according to a

, the U.S. is on track to strengthen its position as a global leader in fintech, according to Bernstein, who pointed to the GENIUS and CLARITY Acts as key drivers for institutional adoption, as reported in a .

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