Bankless: In-depth analysis of the SEC's new framework for token classification

Author: Jack Inabinet, Senior Analyst, Bankless; Translation: @JinseFinancexz

Last week, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) jointly released a landmark guidance document, providing a long-awaited joint guidance document that details how and when federal securities laws apply to crypto assets.

While the cryptocurrency industry has long operated in a legal gray area, this new framework attempts to replace some of the uncertainty through a token classification system to help distinguish under what circumstances digital assets qualify as securities.

Today, we will analyze this joint guidance document and speculate on how it might ultimately classify mainstream digital assets.

1. Digital Commodities

According to the SEC's interpretative guidance document, the "digital commodities" category covers crypto assets whose value derives from their "functional" role in the cryptocurrency ecosystem and supply and demand dynamics.

This broad definition has a clear intention to encompass utility tokens from numerous mature blockchain networks.

The U.S. Securities and Exchange Commission (SEC) has listed 16 crypto assets that fall into this category, as follows: Aptos (APT), Avalanche (AVAX), Bitcoin (BTC), Bitcoin Cash (BCH), Cardano (ADA), Chainlink (LINK), Dogecoin (DOGE), Ether (ETH), Hedera (HBAR), Litecoin (LTC), Polkadot (DOT), Shiba Inu (SHIB), Solana (SOL), Stellar (XLM), Tezos (XTZ), and XRP (XRP). While the SEC's guidance does not provide individual explanations for why these specific cryptocurrencies are classified as non-security digital commodities, it emphasizes that because they do not meet the legal definition of "security," they are not automatically considered securities. The U.S. Securities and Exchange Commission (SEC) claims that its use of the term "digital commodity" is strictly based on an economic meaning to describe the typical characteristics of a class of non-security digital assets. However, the guidance document also states that any crypto asset (excluding stablecoins compliant with the GENIUS Act) may be classified as a genuine "commodity" under the Commodity Exchange Act, subjecting it to independent oversight and regulation by the Commodity Futures Trading Commission (CFTC). Other popular crypto tokens not mentioned by the U.S. Securities and Exchange Commission (SEC) but potentially qualifying as "digital commodities" include: BONK: A meme coin on the Solana network, which has evolved to integrate diverse token governance and utility functions since its inception; CC: The native utility token of the Canton blockchain, used for trading, settling transactions, synchronizing data, and transferring assets; EIGEN: A utility token based on a restaking mechanism within the EigenLayer ecosystem, used to provide economic security; ETC: A proof-of-work version of Ethereum, designated by the SEC as a non-security digital commodity; HYPE: Hyperliquid, the native fuel and staking token of the Hyperliquid network, used to pay transaction fees and ensure network security; STX: Stacks, the native fuel and staking reward token of the Stacks Bitcoin Layer 2 network, used to pay transaction fees and ensure network security; SUI: Sui Sui The network's native fuel and staking tokens are used to pay transaction fees and ensure the network's secure operation; TAO: Bittensor, the native token of the Bittensor network, used to incentivize and reward machine learning contributions in the decentralized artificial intelligence market; TRX: Tron, the native fuel and staking token of the Tron network, used to pay transaction fees and ensure the network's secure operation; XMR: Monero, the native token of the privacy-focused Monero network, used to pay transaction fees and ensure the network's secure operation.

 2、Digital Collectibles

Former Chairman of the U.S. Securities and Exchange Commission, Gary Gensler, failed to clearly state at a congressional hearing whether tokenized Pokémon cards would be considered securities under federal law, stating that more information was needed to make a final judgment. Now, the cryptocurrency industry seems to have finally received the long-awaited answer.

A newly proposed guidance document from the U.S. Securities and Exchange Commission (SEC) indicates that tokenized Pokémon trading cards may be classified as "digital collectibles," but further information is required before their non-security status can be confirmed. This classification applies to crypto assets intended for collection, including those that "represent or grant" rights to artwork, music, videos, trading cards, in-game items, and previously defined meme-related rights. Similar to physical collectibles, digital collectibles do not grant holders any type of business ownership, even if they possess the right to commercially develop the underlying intellectual property. Therefore, they are naturally considered non-security. The SEC asserts that CryptoPunks, Chromie Squiggles, fan tokens, WIF, and VCOIN can all be classified as digital collectibles. While the SEC classifies memes as digital collectibles, it also states that such tokens could potentially become digital goods once they acquire "functionality" within the associated crypto ecosystem. Furthermore, the U.S. Securities and Exchange Commission has explicitly stated (as with physical collectibles) that most fragmented collectibles are likely to constitute securities because the buyer relies on the governing efforts of a third party. Perhaps the very necessity of physical custody of the Pokémon cards supporting the tokenized version constitutes a governing effort, thus triggering registration requirements under federal securities laws? Other popular crypto projects not mentioned by the U.S. Securities and Exchange Commission but currently potentially qualifying as "digital collectibles" include: Beeple's The First 5000 Days: The highest-priced NFT ever sold, its value stemming from cultural significance, artist reputation, and historical standing in the NFT market; PEPE: A meme coin inspired by internet culture, its value derived from social sentiment and virality; Pudgy Penguins: A community-centric NFT and token brand built around a penguin-themed IP, its value driven by cultural relevance; Quantum Cats: On-chain digital collectibles in the Bitcoin Ordinals series, their value based on scarcity and their position within the Bitcoin ecosystem; Saga Monkes: A limited-edition NFT series tied to the launch of the Solana Saga phone, possessing digital collectible value due to scarcity, early adopter status, and ecosystem relevance.

3. Digital Instruments

Digital instruments are cryptographic assets designed to perform specific functions. While digital instruments may possess intrinsic functional value, many are also “soul-bound,” meaning they cannot be sold and are permanently owned by a single user.

Importantly, the U.S. Securities and Exchange Commission states that digital instruments must not possess “inherent economic attributes or rights, such as generating passive income or granting claims on future income, profits, or assets of a business, other entity, promisor, or debtor.”

The U.S. Securities and Exchange Commission (SEC) has listed a range of use cases for digital instruments, including memberships, tickets, credentials, ownership certificates, and identity tokens. Its guidance document classifies Ethereum domain name service domains and CoinDesk's "Microcosms" NFT consensus conference tickets as digital instruments. Other digital assets that may qualify as "digital instruments" include: FanDome NFT: A collection of NFTs inspired by comic books, distributed free to participants of the DC Comics FanDome virtual conference in 2021; POAP: Digital badges generated in NFT form, minted via blockchain to prove participation in online or offline events; Propy NFT: Digital certificates representing legal ownership of physical real estate, stored on the blockchain; VeeFriends: An NFT series created by Gary Vinerchuk, allowing holders to participate in exclusive events, including the VCON conference; World ID: A soul-bound "proof of identity" certificate issued by Sam Altman's World Coin project.

4. Stablecoins

The U.S. Securities and Exchange Commission's interpretative guidance on non-security stablecoins intentionally maintains a concise and direct style, clearly stating that after it takes effect in January next year, it will treat payment-type stablecoins that conform to the description of the GENIUS Act as non-security.

Therefore, the U.S. Securities and Exchange Commission itself will not impose registration requirements on payment-type stablecoins that conform to the GENIUS Act during the issuance and redemption process (although these stablecoins themselves will still be subject to extensive supervision by other agencies within the U.S. regulatory system).

However, the guidance document clarifies that prior to the enactment of the GENIUS Act, previously defined "covered stablecoins" were still considered non-securities outside the agency's jurisdiction. For a stablecoin to meet this definition, its holders must not have the right to "receive any interest, profits, or other returns," and its reserves must consist entirely of "US dollars and/or other assets considered low-risk and readily liquid." While the U.S. Securities and Exchange Commission (SEC) does not specifically designate which stablecoins are considered non-securities, instruments pegged to the U.S. dollar that appear to fit its definition of "covered stablecoins" include: PYUSD: A stablecoin issued by Paxos Trust Company, a federally registered national trust bank, for PayPal; USAT: Tether's latest stablecoin pegged to the U.S. dollar, designed to comply with the GENIUS Act; USDC: A stablecoin issued by Circle, over-collateralized 1:1 with U.S. dollars and risk-free U.S. dollar investments; KlarnaUSD: A stablecoin sponsored by Klarna, a buy-now-pay-later giant, and issued by Stripe's Bridge.

5. Digital Securities

It can be said that the most influential guidance document from the U.S. Securities and Exchange Commission (SEC) is precisely its most ambiguous part.

The regulator maintains that any digital asset that fails the Howe test is considered a security, a determination that has historically involved difficult legal disputes.

The SEC also recognizes that encapsulated versions of financial instruments that are explicitly defined as securities under federal law (such as tokenized money market funds, stocks, and other types of structured investment products) are digital securities.

However, this does not mean that all "encapsulated" tokens are securities.

The guidance document explains that protocol mining, protocol staking, and the "packaging" of non-security crypto assets do not constitute the issuance or sale of securities. The document further clarifies that "certain" airdrops do not constitute "fund investment" under the Howe Test. However, the agency cannot provide a definitive answer as to when a digital asset becomes a digital security. In each case, determining whether an investment contract (i.e., a security) has been issued or sold must be based on the specific facts and circumstances of how the issuer marketed and promoted its asset. If a non-security crypto asset is issued through an investment contract that meets the Howe Test criteria, it will become a security. Furthermore, the initial issuance of a non-security crypto asset through an investment contract does not imply that it is permanently a security; once the original investment contract is fulfilled, or the issuer fails to fulfill its committed operational efforts, the crypto asset can become a non-security. While the SEC refuses to list examples of assets it deems securities, it is noteworthy that its guidance document classifies XRP as a non-security "digital commodity," although courts ultimately ruled that certain sales of the token constituted investment contracts that violated federal securities laws. While this is a step towards regulatory clarity, this aspect of the SEC guidance ultimately reinforces rather than resolves ambiguity. It merely extends existing federal securities laws to the digital asset space, while reigniting market concerns about projects that promise unfinished work or future functionality. Digital goods, digital collectibles, digital instruments, and stablecoins may be non-securities in nature, but they can still be issued or sold through investment contracts, which would subject issuers to federal securities laws.