Are Cryptocurrencies Securities? Bitcoin, Ethereum, XRP

Whether cryptocurrencies are securities depends on how a specific token was sold and what buyers were led to expect from it. Federal law defines “security” broadly enough to include an “investment contract,” and the Securities and Exchange Commission uses a 1946 Supreme Court test to decide which digital assets fit that category.¹ Under current U.S. treatment, Bitcoin is a commodity, Ethereum is treated as a commodity in practice, payment stablecoins have their own statutory regime, and many other tokens fall somewhere on a spectrum that depends on the facts around their sale.

The Legal Test Behind the Question

The classification comes from SEC v. W.J. Howey Co., a case about Florida citrus groves. Buyers bought strips of land and signed a service contract letting the seller tend the trees and share the profits. The Supreme Court held this was an investment contract, and therefore a security, because four conditions were met: an investment of money, in a common enterprise, with an expectation of profits, derived from the efforts of others.²

The Court wrote the test to look at economic reality rather than labels. It doesn’t matter whether you pay with dollars or with another token, and it doesn’t matter whether the seller calls the asset a “utility token,” a “governance token,” or a “coin.” What matters is whether the arrangement functions like an investment.

In the digital asset context, each prong looks like this:

Investment of money: you exchange something of value — cash, bitcoin, another token — for the new asset.
Common enterprise: your financial outcome is tied to other buyers or to the promoters, either because funds are pooled or because everyone’s return rises and falls with the promoter’s efforts.³
Expectation of profits: you buy hoping the price will rise, not because you plan to use the token for a specific purpose.
Efforts of others: you’re relying on a development team, foundation, or promoter to build the network and drive demand.

If all four apply, the token is a security regardless of what its creators call it.

How the SEC Reads the Facts

The SEC published a framework translating Howey into factors specific to crypto. It doesn’t change the standard; it maps the four prongs onto how tokens are actually launched and traded.³

The “efforts of others” prong does most of the work. The agency looks for an “Active Participant” — a founding team, foundation, or lead developer — whose work is essential to the token’s value. Several features push toward security status:

The network isn’t yet functional and buyers are counting on the team to build it.
The team controls supply or price through buybacks, burns, or artificial scarcity.
Governance is centralized, with a core group deciding code updates and treasury spending.
Marketing highlights potential price appreciation rather than how the token gets used.

The opposite features push away from security status: tokens priced to reflect actual use in a working network, amounts that match expected consumption, and value that degrades over time rather than functioning as a speculative asset.³

Why Decentralization Can Change the Answer

A token that begins as a security can stop being one. In a 2018 speech, then-SEC Director William Hinman explained that when a network becomes “sufficiently decentralized,” buyers can no longer reasonably expect a specific person or group to drive the token’s value. Once that happens, the efforts-of-others prong falls away and the token no longer fits the investment contract definition.⁴

Signs that a network hasn’t reached that point include a sponsor whose ongoing efforts still shape the token’s value, a large promoter stake creating a financial incentive to push the price up, more capital raised than the network needs, information gaps between insiders and the public, and few actors outside the founding team with real governance influence. Signs pointing the other way include independent price discovery, supply matched to user needs, wide distribution, and a functioning application that no longer depends on the founding team.⁴

The shift isn’t automatic and can’t be self-declared. It requires the founding team to actually give up control over governance, development, and treasury management.

How Major Cryptocurrencies Are Classified

Bitcoin

Bitcoin is treated as a commodity by both the SEC and the CFTC. It was never sold through a fundraising event, has no central development team controlling the protocol, and the network has operated independently since 2009. The SEC reinforced this treatment by approving exchange-traded products holding spot digital assets under commodity-based trust share listing standards.⁵

Ethereum

Ethereum’s classification has been debated, but the practical trajectory points to commodity treatment. Hinman used Ethereum in his 2018 speech as an example of a network that had reached sufficient decentralization.⁴ The SEC later approved spot Ethereum exchange-traded products under the same commodity-based framework it uses for Bitcoin, and no enforcement action has treated ether as a security.

XRP

The SEC sued Ripple Labs in December 2020 over XRP token sales. The district court split the analysis: direct sales to institutional buyers were unregistered investment contracts because those buyers knew they were funding Ripple’s business and expected to profit from its efforts, while secondary sales on public exchanges were not, because retail buyers typically didn’t know whether their purchase price went to Ripple or to another trader.⁶

The case settled in 2025. The original judgment included a $125 million civil penalty and an injunction against future violations. Under the settlement, the penalty was reduced to $50 million, the injunction was dissolved, and both sides dropped their appeals.⁷ The ruling still matters because it established that the same token can be a security in one type of sale and not in another, depending on how the transaction was structured.

Stablecoins

Congress addressed stablecoins directly through the GENIUS Act, signed into law on July 18, 2025. The law creates a regulatory framework for “payment stablecoins” — tokens designed to hold a stable value and function as a medium of exchange. Bank-issued payment stablecoins fall under the Office of the Comptroller of the Currency, and non-bank issuers answer to a federal supervisor within the Treasury Department.⁸

Yield-bearing stablecoins are a different story. If an issuer pools buyer funds, invests them, and passes returns to token holders, the arrangement resembles a traditional investment contract and is more likely to be treated as a security.

Yield Accounts Are a Separate Trap

Platforms that accept crypto deposits and pay interest can be selling securities even if the underlying token isn’t one. The SEC uses the Reves “family resemblance” test for these products, which presumes a note is a security unless it looks like categories courts have excluded, such as ordinary consumer loans.

Applying that test to BlockFi’s interest-bearing accounts, the SEC found the product was a security: BlockFi accepted crypto deposits, lent them out and invested them, promised returns, and sold the product to hundreds of thousands of people as an investment. Any platform paying yield on deposits should expect the same analysis, which turns on whether funds are pooled and invested, whether returns are promised, and whether the product is marketed as an investment.

Why the Classification Matters to You

Where the Token Can Trade

If a token is a security, the platform listing it is running a securities exchange under federal law and has to register with the SEC or operate under an exemption such as an Alternative Trading System.⁹ That’s why some tokens are quietly delisted from U.S. venues after enforcement actions or lawsuits: the venue can’t legally match trades in an unregistered security.

How Your Taxes Get Reported

Starting with sales in 2026, brokers must file Form 1099-DA for digital asset transactions. Every broker reports gross proceeds, but whether cost basis gets reported depends on whether the token is a “covered security” — which turns on whether it’s treated as a security under federal law.¹⁰

For covered securities, brokers report the acquisition date, cost basis, and gain or loss, the same as for stock sales. For noncovered tokens, brokers report only gross proceeds and you track your own basis.¹⁰

Security classification also affects the wash sale rule. Sell a covered security at a loss and buy a substantially identical asset within 30 days, and the loss is disallowed and added to the basis of the replacement.¹¹ For tokens that aren’t securities, the wash sale rule has not historically applied, though policymakers have recommended extending it to all digital assets.

What Issuers Face

Selling a token that qualifies as a security without registering it or using an exemption violates Section 5 of the Securities Act of 1933. The SEC can seek disgorgement of profits, a permanent injunction, and monetary penalties. Investors can also demand rescission and get their money back with interest. Criminal exposure is separate: securities and commodities fraud carries up to 25 years in federal prison, though those charges typically require intentional deception rather than a good-faith registration failure.¹²

Where the Rules Are Heading

The SEC has established a Crypto Task Force, led by Commissioner Hester Peirce, to draw clearer lines between securities and non-securities and to develop registration paths tailored to crypto.¹³

Congress is also weighing in. The Digital Asset Market Clarity (CLARITY) Act passed the House in July 2025 and is pending in the Senate. It would give the CFTC exclusive jurisdiction over spot markets for “digital commodities” while keeping SEC authority over tokens that function as securities. If it becomes law, projects would have a statutory test rather than a case-by-case enforcement analysis.

Until then, the answer for any specific token still comes from the Howey Test, the SEC’s framework, and the facts around how the token was created, marketed, and sold. Projects that raised money to fund development, promised returns, or kept centralized control face the highest risk of being treated as securities. Tokens with working networks, wide user bases, and no reliance on a founding team’s ongoing efforts sit on the strongest footing on the other side of the line.

1
Office of the Law Revision Counsel. 15 U.S. Code 77b – Definitions
2
Justia U.S. Supreme Court Center. SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
3
U.S. Securities and Exchange Commission. Framework for Investment Contract Analysis of Digital Assets
4
U.S. Securities and Exchange Commission. Digital Asset Transactions: When Howey Met Gary (Plastic)
5
U.S. Securities and Exchange Commission. SEC Approves Generic Listing Standards for Commodity-Based Trust Shares
6
U.S. Securities and Exchange Commission. Statement on the Agency’s Settlement with Ripple Labs, Inc.
7
U.S. Securities and Exchange Commission. Litigation Release No. 26306
8
Office of the Comptroller of the Currency. GENIUS Act Regulations: Notice of Proposed Rulemaking
9
U.S. Securities and Exchange Commission. Statement on Potentially Unlawful Online Platforms for Trading Digital Assets
10
IRS.gov. 2026 Instructions for Form 1099-DA Digital Asset Proceeds From Broker Transactions
11
Internal Revenue Service. Instructions for Form 1099-B (2026)
12
Office of the Law Revision Counsel. 18 USC 1348 – Securities and Commodities Fraud
13
U.S. Securities and Exchange Commission. Crypto Task Force