SEC's Token Classification Seeks to Harmonize Innovation with Safeguarding Investors

The U.S. Securities and Exchange Commission (SEC) is moving forward with efforts to create a "token taxonomy" based on the Howey Test, with the goal of clarifying which digital assets are considered securities and which are not subject to its oversight. During a speech at the Federal Reserve Bank of Philadelphia's Fintech Conference on November 12, SEC Chairman Paul Atkins introduced a four-level classification system intended to separate securities tokens from non-securities tokens—a development that could significantly impact crypto regulation, as

.

Atkins explained that the taxonomy would sort tokens into several categories: digital commodities or network tokens linked to decentralized platforms, digital collectibles such as art or in-game assets, digital utilities like memberships or event tickets, and tokenized securities that represent financial stakes. Only the last group—tokens that function as investment contracts—would continue to fall under securities laws, while the rest would be exempt, according to a

. This strategy is consistent with the Howey Test, which identifies an investment contract as a monetary investment in a shared venture where returns depend on the actions of others.

An important feature of the plan is the acknowledgment that tokens initially sold as securities might lose that status as projects become more decentralized and the issuer's involvement decreases.

"Once the investment contract is considered to have concluded, the token may still be traded, but those trades are not automatically 'securities transactions' just because of the token's origins," Atkins remarked, as . This perspective echoes ongoing discussions within the crypto community about how tokens should be regulated after decentralization.

The proposed framework also provides exceptions for certain tokens, permitting them to be traded on platforms regulated by the Commodity Futures Trading Commission (CFTC) or by state authorities, rather than limiting them to SEC-supervised exchanges. Atkins maintained that this would encourage technological advancement while still protecting investors. "We shouldn't restrict innovation and investor options by forcing assets to trade only in a single regulatory setting," he stated, according to a

.

This initiative works alongside broader legislative measures in Congress, such as the Digital Asset Market Structure Bill, which aims to clearly define the regulatory responsibilities of the SEC and CFTC. The bill, which is currently under consideration in both the Senate and House, would designate leading cryptocurrencies like

and as digital commodities under the CFTC's authority, and would require crypto exchanges to separate their trading, custody, and brokerage services, as .

Atkins made it clear that the taxonomy does not indicate a relaxation of enforcement. He warned that fraudulent activities and market manipulation would continue to be met with strict consequences, reaffirming the SEC's dedication to "integrity and clarity" in the digital asset sector, as mentioned in a

. The SEC's Project Crypto, which was launched to update the agency's approach to digital assets, will help roll out these new guidelines.

Industry participants have responded positively, viewing the move as progress toward clearer regulations. By introducing a well-defined framework, the SEC seeks to strike a balance between fostering innovation and safeguarding investors—a challenge that has been central to crypto regulation from the start. The adoption of this taxonomy could also set a precedent for international standards, as other countries face similar classification challenges.