Do you wonder why some crypto tokens are treated like stocks while others are not? This article explains how regulators decide if a digital asset is a security, what the Howey test looks for, and how that affects anyone trying to earn passive income from crypto.
What the Howey Test Is and How It Works
The Howey test is a legal framework created by the U.S. Supreme Court in 1946 to identify “investment contracts,” which the Securities and Exchange Commission (SEC) treats as securities. A token is considered a security if it meets four criteria:
- Investment of money: People must put money, cryptocurrency, or other valuable assets into the project.
- Common enterprise: The investors’ fortunes are linked to the success of the issuer or a shared venture.
- Expectation of profits: Investors anticipate earning a return, such as price appreciation or dividends.
- Efforts of others: The expected profit comes primarily from the efforts of the issuer or a third party, not from the investors’ own work.
If a token satisfies all four elements, U.S. securities laws apply. That means the issuer must register the token with the SEC or qualify for an exemption, and investors receive the same protections as they would with traditional stocks or bonds.
Why Regulators Keep Updating Their Guidance
Crypto is a fast‑moving space, and regulators often issue staff guidance to clarify how existing laws fit new technologies. In September 2026, the SEC updated its frequently asked questions to explain how its rules apply to “certain types of crypto assets and certain transactions involving crypto assets.” The agency emphasized that the guidance is non‑binding and does not create new legal obligations, but it offers insight into how the SEC interprets the Howey test for modern token models.
A Real‑World Illustration
In September 2026, the SEC announced that token issuers could run buyback programs for customers as long as the underlying crypto system is “functional and has no central party.” The agency said such programs would not necessarily be a “representation or promise to undertake essential managerial efforts,” meaning they might not meet the fourth Howey criterion. The same guidance applied to staking receipt tokens, which the SEC said would not always be securities. This clarification came shortly after the Commodity Futures Trading Commission (CFTC) issued similar staff answers, both agencies moving forward after Congress failed to pass a dedicated crypto market structure bill.
What This Means for You
If you are looking to earn passive income through staking, liquidity mining, or token buybacks, the regulator’s interpretation matters. Tokens that are not classified as securities can be offered without the costly registration process, potentially lowering fees and increasing accessibility. However, if a token is deemed a security, the issuer must comply with disclosure, reporting, and investor protection rules, which can affect the token’s availability on certain platforms and the legal risks for participants.
How to Evaluate a Token’s Regulatory Status
- Check the token’s purpose: Tokens meant solely to access a service (utility tokens) are less likely to be securities than those promising profit sharing.
- Look for centralization: Projects with a clear, centralized team that makes key decisions often trigger the “efforts of others” prong.
- Review official guidance: SEC and CFTC staff FAQs, as well as any public statements from the issuer, can indicate how regulators view the token.
- Assess buyback or staking programs: If the program is tied to a functional, decentralized system, it may fall outside the Howey definition, but each case is fact‑specific.
- Consult legal advice: When in doubt, especially for larger investments, seek counsel familiar with securities law.
FAQ
Is every token that can be staked automatically a security?
No. Staking alone does not make a token a security. The SEC’s 2026 guidance notes that staking receipt tokens are not always securities; the key is whether investors rely on the issuer’s efforts for profit.
Can I earn passive income from a token that the SEC classifies as a security?
Yes, but the issuer must comply with securities regulations, which may limit where the token can be traded and impose reporting requirements. Your participation could be subject to additional compliance steps.
What happens if a token is re‑classified as a security after I’ve bought it?
The issuer would need to register the token or qualify for an exemption. Existing holders might face restrictions on resale or be required to meet accreditation standards, depending on the exemption used.
Do other countries use the Howey test?
Many jurisdictions have similar “investment contract” tests, but the specifics vary. Some adopt the Howey criteria directly, while others use their own definitions of securities for digital assets.
This article references reporting from cointelegraph.com.
