Crypto and the Howey Test in 2025: What You Need to Know About Securities Regulation

Some cryptocurrencies meet the Howey test criteria, classifying them as "investment contracts" under U.S. securities law.

The Howey test originated from the landmark 1946 U.S. Supreme Court case SEC v. W.J. Howey Co., setting the legal standard to determine if a transaction is an investment contract subject to securities regulation. Assets that fulfill the test's four factors—including certain cryptocurrencies—fall under the SEC's scrutiny.

The decentralized and global nature of cryptocurrencies challenges traditional legal definitions, raising critical questions: Do all crypto assets pass the Howey test? Or do we need new legal frameworks tailored for the digital age?

These questions affect not only the rapidly growing crypto market but also regulators adapting to innovative financial instruments. Understanding these legal boundaries is vital for investors, developers, and policymakers.

Essential Insights

• The Howey test is a key legal tool used by the U.S. Supreme Court to identify investment contracts and securities.
• It comprises four criteria: investment of money, expectation of profits, common enterprise, and reliance on others' efforts.
• Applying the test to cryptocurrencies sparks debate due to the sector's diversity and complexity.
• Each crypto asset is evaluated individually to determine its compliance with securities laws.

Understanding the Howey Test

The Howey test's four-part framework determines whether an asset qualifies as a security, requiring regulation. Meeting all four elements signals an investment contract; missing any suggests otherwise.

• Investment of money: There must be a monetary investment or equivalent exchange.
  Example: Buying corporate bonds qualifies.
  Non-example: Contributing only time without money to a startup does not.
• Expectation of profits: Investors anticipate gains from the venture.
  Example: Real estate investors expect property appreciation.
  Non-example: Purchasing a personal residence with no profit intent.
• Common enterprise: Investors’ fortunes are tied to the success of the collective venture.
  Example: Investors pooling funds in a managed mutual fund.
  Non-example: Stand-alone agreements like a lease contract.
• Reliance on others' efforts: Returns depend on the work of someone other than the investor.
  Example: Profits from a startup’s management team.
  Non-example: Art appreciation unrelated to others’ efforts.

Variations in Judicial Interpretation

Courts have differed in how they apply the Howey test, interpreting core concepts like "common enterprise" and "expectation of profits" through diverse lenses such as horizontal and vertical commonality. This results in nuanced applications depending on jurisdiction and case specifics.

Classic Examples of Passing or Failing the Howey Test

• Passes: Common stock shares, real estate partnerships, and certain multilevel marketing schemes.
• Does not pass: Condominium sales, whiskey warehouse receipts, and merchandise accounts lacking profit expectations from others’ efforts.

How the Howey Test Applies to Cryptocurrencies in 2024

The test’s application to crypto assets remains complex. Decentralized cryptocurrencies like Bitcoin often don’t meet the "common enterprise" or "reliance on others’ efforts" criteria, while centralized tokens and certain stablecoins or NFTs may qualify as securities.

Bitcoin

• Investment of money: Yes, bought with fiat or other crypto.
• Expectation of profits: Many investors expect value appreciation.
• Common enterprise: Typically no, as Bitcoin is decentralized.
• Reliance on others’ efforts: No central authority controls Bitcoin’s value.

Bitcoin likely does not meet the full Howey test.

USD Tether (USDT)

• Investment of money: Yes, purchased with fiat or crypto.
• Expectation of profits: No, designed as a stablecoin pegged to USD.
• Common enterprise: Possibly, due to backing by Tether Ltd.
• Reliance on others’ efforts: Yes, issuer maintains peg and stability.

USDT may more plausibly meet Howey criteria due to centralized control.

Non-Fungible Tokens (NFTs)

• Investment of money: Yes, bought with cryptocurrency.
• Expectation of profits: Often yes, buyers hope to resell at higher value.
• Common enterprise: Usually no, but some NFTs are linked through syndicates.
• Reliance on others’ efforts: Variable depending on creator/promoter involvement.

Some NFTs might pass the Howey test when associated with collective enterprises.

Key Reminder

Even if an asset technically passes the Howey test, the SEC conducts a thorough substance-over-form analysis considering intent and context before labeling it a security.

Recent Regulatory Moves and Industry Impact

The SEC and CFTC remain active in shaping crypto regulation. The SEC, led by Chairman Gary Gensler, often views many crypto assets as unregistered securities when purchased with profit expectations tied to promoters’ efforts. Landmark cases like the 2023 Ripple Labs lawsuit clarified distinctions between institutional sales and retail purchases of XRP tokens.

The SEC’s digital asset framework guides developers on securities status, emphasizing factors that reduce regulatory risks, such as fully operational networks, immediate token utility, and absence of speculative marketing.

Financial institutions increasingly accept that many crypto tokens fall under securities laws, underscoring the importance of compliance.

Initial Coin Offerings (ICOs) and the Howey Test

Most ICOs are treated as securities offerings by the SEC since they typically fulfill the Howey test criteria.

Implications for Crypto Exchanges

Exchanges listing tokens that qualify as securities may face regulatory scrutiny for facilitating unregistered sales and might need to delist or register accordingly.

Alternatives to the Howey Test?

Industry experts advocate for updated or alternative frameworks that better capture the unique properties of blockchain assets, aiming for more precise legal classification and regulatory clarity.

Conclusion

Since 1946, the Howey test has been central to securities law, yet cryptocurrencies represent a new frontier challenging traditional definitions. Regulatory bodies continue to navigate this evolving landscape, balancing innovation with investor protection.

Ongoing debates highlight the need for legal frameworks that adapt to rapid technological change while providing clarity for the crypto ecosystem.

The insights shared on ZAMONA are for informational purposes only. The author does not hold cryptocurrency as of this writing.

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