SEC Considers New Token Taxonomy for Crypto Assets

The SEC is set to introduce a formal token taxonomy using the Howey test to classify cryptocurrencies as securities or non-securities. By applying a three-pronged framework, distinctions will be made based on initial sale, token lifecycle, and decentralization level.

The U.S. Securities and Exchange Commission (SEC), led by Chair Paul Atkins, plans to introduce a new token taxonomy based on the Howey test to determine the classification of crypto assets in the United States.

The SEC’s initiative to establish a token classification system seeks to address regulatory ambiguity in the crypto space, potentially impacting investors and digital asset markets.

The SEC plans to use the Howey test as a cornerstone to create clear guidelines for crypto assets, as highlighted in their proposal . This move aims to distinguish securities from other asset types, reducing regulatory confusion. Paul Atkins, SEC Chair, emphasized the importance of legal reasoning in distinguishing these assets. According to Atkins, “Most crypto tokens trading today are not themselves securities, though they might be part of a securities offering.”

Crypto projects and investors are urged to consider their positions, with new compliance expectations likely leading to reviews of legal structures. The SEC’s Division of Corporation Finance released guidance detailing requirements and criteria for the classification of tokens. Centralized exchanges might adjust listing criteria, potentially affecting liquidity and trading dynamics. The framework may prompt reevaluation in segments like stablecoins and governance tokens, with certain tokens subject to greater scrutiny under securities regulations.

Coins such as ETH and SOL might face scrutiny based on their utility versus investment potential. As the SEC refines its approach, projects may focus on decentralization and governance to reduce compliance risks. Previous cases like Ripple and Kik were handled individually, highlighting the value of a systematic framework. Projects once deemed securities could now transition away from such classification, contingent on decentralization. Regulatory oversight will focus on promotion practices and issuer influence, impacting how tokens are perceived.

Future market reactions could include shifts in trading volumes, potential delistings, and increased decentralization efforts within token projects. Changes may foster clarity in compliance, with stakeholders adapting to evolving industry guidelines.