Truman-Era Securities Ruling That Governs Crypto Needs an Update

A 1946 US Supreme Court ruling is deciding the fate of today’s digital token networks, and the results are irreconcilable. The test, from SEC v. Howey, treats a deal as a “security” when people invest in a common enterprise with an expectation of profits from others’ efforts.

This rule assumes a static instrument, but digital assets aren’t static. Many tokens function as lifecycle instruments: they may start like fundraising tools and later run as decentralized networks. A rule built for fixed arrangements doesn’t account for how most digital assets evolve.

Digital Asset Lifecycle

In the launch phase, a core team raises funds and promises to build a network. Early purchasers might expect profits tied to the team’s efforts, making a token launch resemble a securities offering, especially when promoters emphasize that its value will appreciate like an investment.

Not all launch-phase purchases are investment driven. Some buyers seek discounted future utility (such as Kickstarter backers pre-purchasing a product) or simply want to support a project they believe in (such as GoFundMe donors).

In the transition phase, control and governance diffuse as the network decentralizes. Reliance on any single promoter diminishes. In the mature phase, demand is utility-driven, and the network operates with minimal reliance on a promoter. Thousands of independent participants may secure and use the chain.

Not all digital assets have lifecycle phases that resemble securities. Some distributions (airdrops or rewards) involve no monetary investment. Some cryptocurrencies (stablecoins) lack a profit expectation by design. And assets launched on already-decentralized networks may not depend on any team’s efforts. Such tokens fail the Howey test.

But that static test struggles to keep up with tokens that evolve through a securities-like phase.

Why Lifecycle Matters

Traditional securities, such as a 1946 IBM share, are static. But digital assets can, and do, change. That’s why judges in New York, Washington, DC, and California—even judges sitting in the same courthouse—have reached opposite outcomes on materially similar transactions involving dynamic tokens.

In SEC v. Ripple, Judge Analisa Torres in the US District Court for the Southern District of New York held that programmatic exchange sales weren’t investment contracts because buyers couldn’t reasonably tie profits to the issuer’s efforts. Months later, in SEC v. Terraform Labs, SDNY Judge Jed Rakoff rejected that reasoning and treated all token sales as investment contracts, leading to a multibillion-dollar settlement.

Six months later, DC Judge Amy Berman Jackson in SEC v. Binance dismissed some government claims while allowing others to proceed, emphasizing that Howey analyzes transactions—not tokens as objects. And six months after that, in SEC v. Coinbase, SDNY Judge Katherine Polk Failla certified the core question for appeal, acknowledging “substantial ground for difference of opinion.”

The SEC oscillates, too. In 2017, Chair Jay Clayton stated that, by and large, most token sales are securities offerings. Then, in 2018, then-Director William Hinman stated that Ethereum’s network had become decentralized enough that Ether wasn’t a security. Under Biden-appointed Chair Gary Gensler, the SEC largely rejected temporal distinctions, claiming the vast majority of tokens are securities.

Following Gensler’s resignation and the Trump administration’s appointment of Commissioner Mark Uyeda as acting chair, the SEC dismissed several enforcement actions and announced a comprehensive policy review. On Aug. 19, now-Chair Paul Atkins declared “very few tokens are securities“—and that the SEC “regretted any confusion.”

This confusion has produced inconsistent precedent and caused lasting damage. Defendants face criminal exposure and billion-dollar remedies under standards that vary by courthouse. This isn’t just a litigation issue; it’s a day-to-day compliance problem for issuers, exchanges, and trading venues.

Nascent industries need regulations that don’t change with each administration. Lower courts can limit Howey at the margins, but only the Supreme Court or Congress can provide a durable rule for assets that can change character through decentralization.

Compounding Pain Points

Howey evaluates transactions, so the same token can flit in and out of the SEC’s regulatory ambit over its lifecycle, producing confusing precedent.

Confusing laws present constitutional due-process problems, especially when there are criminal consequences. When tokens evolve, yet doctrine supplies no criteria for whether a token is “sufficiently decentralized,” constitutionally required fair notice becomes precarious.

The Supreme Court’s 2024 decision in Loper Bright v. Raimondo further strains outdated rules. Loper Bright overruled Chevron deference given to federal agencies and requires courts to independently judge statutory questions. Agencies no longer can legislate through strained interpretations of ambiguous statutes.

Federal judges have shown they can’t agree on whether the Securities Act applies, which is precisely when clarity from the Supreme Court or Congress becomes essential.

Looking Ahead

The Supreme Court could clarify Howey by crystallizing that “efforts of others” means ongoing efforts by identifiable others, confirming that a “sufficiently decentralized” network is not a “common enterprise,” and codifying that transactions and not tokens are the subject of the Howey test. Then, common law can work out how much decentralization is enough.

Alternatively, Congress can require agencies to establish decentralization metrics. For example, the Nakamoto coefficient could quantify network decentralization for securities regulations, much like the Herfindahl-Hirschman Index measures market concentration for antitrust regulation purposes. Congress also could create a safe harbor for early-stage transactions in tokens that haven’t yet reached some threshold.

Congress already recognizes a lifecycle framework. The GENIUS Act excludes permitted payment stablecoins from security and commodity definitions. The CLARITY Act would define when a digital asset is a digital commodity, and not a security, as part of a functional and decentralized system.

As a stopgap, lower courts can read Howey narrowly by applying it only when there’s a clear promoter who’s making promises about ongoing management. That narrowing aligns judicial doctrine with Congress’s emerging architecture without overruling Howey itself.

Rather than forcing 1946 logic onto networks that can transform through decentralization, courts should narrow Howey to arrangements that fit its static-instrument premise, clearing the way for Congress to build a modern legal framework that matches how digital-asset technology actually works.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Seth Oranburg is a professor at the University of New Hampshire Franklin Pierce School of Law and director of the Program on Organizations, Business, and Markets at NYU Law’s Classical Liberal Institute.

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