Yesterday, the SEC announced the issuance of an Interpretive Release clarifying the application of the securities laws to digital assets.  The CFTC joined in the issuance of the Release.  Here’s the 68-page Release and here’s the three-page fact sheet.

The SEC’s press release says that the interpretation provides a coherent token taxonomy for a wide range of digital assets, addresses how digital assets that aren’t securities may be deemed to become subject to an investment contract under Howey (and when that status may terminate), and clarifies how the securities laws apply to “airdrops, protocol mining, protocol staking, and the wrapping of a non-security crypto asset.”

The Fact Sheet gets into some of the specifics. Here’s what it has to say about what digital assets are, and are not, securities under the interpretation:

– Digital Commodities – NOT Securities – Crypto assets that are intrinsically linked to and derive their value from the programmatic operation of a crypto system that is “functional,” as well as supply and demand dynamics, rather than from the expectation of profits from the essential managerial efforts of others.

– Digital Collectibles – NOT Securities – Crypto assets that are designed to be collected and/or used and may represent or convey rights to artwork, music, videos, trading cards, in-game items, or digital representations or references to internet memes, characters, current events, or trends, among other things.

– Digital Tools – NOT Securities – Crypto assets that perform a practical function, such as a membership, ticket, credential, title instrument, or identity badge.

– Stablecoins – GENIUS Act Stablecoins NOT Securities – Defined in the GENIUS Act as “payment stablecoin issued by a permitted payment stablecoin issuer.”

– Digital Securities (or “tokenized securities”) – Securities – Financial instruments enumerated in the definition of “security” that is formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks.

The interpretation clarifies that when a non-security digital asset is sold with representations of managerial efforts that create a reasonable expectation of profit, it becomes an investment contract under the Howey test. It also discusses the kinds of representations that can give rise to this characterization and when the investment contract may be deemed to end because of the fulfillment or failure of those representations.

The interpretation also says that “protocol mining,” “protocol staking,” and “wrapping” of non-security crypto assets don’t involve the offer and sale of a security, and that dissemination of digital assets via “airdrops” don’t involve an “investment of money” under Howey.

– John Jenkins