Bankless: In-Depth Analysis of the SEC's New Token Classification Framework

Author: Jack Inabinet, Senior Analyst at Bankless; Translator: @金色财经xz

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

Despite the cryptocurrency industry operating for a long time in a legal gray area, this new framework attempts to replace some of the uncertainty with a token classification system to help distinguish under what circumstances digital assets meet the definition of a security.

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

1. Digital Commodities

According to the interpretative guidance from the SEC, the category of “digital commodities” encompasses crypto assets whose value derives from their “functional” roles within the cryptocurrency ecosystem and supply-demand dynamics.

This broad definition is intended to explicitly cover utility tokens from numerous established blockchain networks. The SEC listed 16 crypto assets that fall into this category, as follows:

Aptos Aptos (APT), Avalanche Avalanche (AVAX), Bitcoin Bitcoin (BTC), Bitcoin Cash (BCH), Cardano Cardano (ADA), Chainlink Chainlink (LINK), Dogecoin Dogecoin (DOGE), Ether (ETH), Hedera (HBAR), Litecoin (LTC), Polkadot Polkadot (DOT), Shiba Inu (SHIB), Solana Solana (SOL), Stellar Stellar (XLM), Tezos (XTZ), and XRP (XRP).

Although the SEC’s guidance did not provide individual explanations for why these specific cryptocurrencies are classified as non-security digital commodities, it emphasized that they are not automatically considered securities because they do not meet the legal definition of “securities.”

The SEC claims that its use of the term “digital commodities” is strictly based on economic meaning to describe the typical characteristics of a class of non-security digital assets.

However, the guidance also states that any crypto asset (excluding stablecoins that meet the GENIUS Act criteria) may be identified as a true “commodity” under the Commodity Exchange Act, which would subject it to the independent oversight and regulation of the CFTC.

Other popular crypto tokens not mentioned by the SEC, but which may also meet the definition of “digital commodities,” include:

BONK: A meme coin on the Solana network that has gradually developed a diverse integration of token governance and utility functions since its creation;

CC: The native utility token of the Canton blockchain, used for transactions, settlement, data synchronization, and asset transfer;

EIGEN: A utility token based on a re-staking mechanism within the EigenLayer ecosystem, used to provide economic security guarantees;

ETC: The proof-of-work version of Ethereum, designated by the SEC as a non-security digital commodity;

HYPE: The native fuel and staking token of the Hyperliquid network, used to pay transaction fees and ensure network security;

STX: The native fuel and staking reward token of the Stacks Bitcoin layer-two network, used to pay transaction fees and ensure network security;

SUI: The native fuel and staking token of the Sui network, used to pay transaction fees and ensure network security;

TAO: The native token of the Bittensor network, used to incentivize and reward machine learning contributions in a decentralized AI marketplace;

TRX: The native fuel and staking token of the Tron network, used to pay transaction fees and ensure network security;

XMR: The native token of the privacy-focused Monero network, used to pay transaction fees and ensure network security.

2. Digital Collectibles

Former SEC Chairman Gary Gensler failed to clarify during a congressional hearing whether tokenized Pokémon cards would be considered securities under federal law and stated that more information would be needed to make a final determination. Now, the cryptocurrency industry seems to have finally received the long-awaited answer.

The newly proposed SEC guidance indicates that tokenized Pokémon cards may be classified as “digital collectibles,” but further information is required to confirm their non-security status.

This classification applies to crypto assets intended for collection, including those that “represent or confer” rights related to artworks, music, videos, trading cards, in-game items, and previously defined meme coins.

Similar to physical collectibles, digital collectibles do not confer any form of corporate ownership to the holder, even if the holder has the right to commercially develop the underlying intellectual property. Therefore, they are naturally viewed as non-securities.

The SEC asserts that CryptoPunks, Chromie Squiggles, fan tokens, WIF, and VCOIN can all be classified as digital collectibles.

Although the SEC classifies meme coins as digital collectibles, the agency simultaneously states that such tokens, once endowed with “functionality” within their associated crypto ecosystems, may transition into digital commodities in the future.

Additionally, the SEC explicitly states (as is the case with physical collectibles) that most fragmented collectibles are likely to constitute securities because purchasers rely on the managerial efforts of others. Perhaps the necessity of physically custodizing tokenized Pokémon cards constitutes managerial efforts in itself, triggering registration requirements under federal securities law?

Other popular crypto projects not mentioned by the SEC but currently possibly fitting the definition of “digital collectibles” include:

Beeple’s The First 5000 Days: The highest-selling NFT of all time, whose value derives from cultural significance, the artist’s reputation, and historical status in the NFT market;

PEPE: A meme coin inspired by internet culture, whose value derives from social sentiment and virality;

Pudgy Penguins and PENGU: A community-driven NFT and token brand built around penguin-themed IP, with value driven by cultural relevance;

Quantum Cats: On-chain digital collectibles in the Bitcoin Ordinals series, whose value is based on scarcity and status within the Bitcoin ecosystem;

Saga Monkes: A limited NFT series tied to the release of the Solana Saga phone, possessing digital collectible value due to scarcity, early adopter status, and ecological relevance.

3. Digital Tools

Digital tools are crypto assets designed to perform specific functions. While digital tools may have inherent functional value, many exist in a “soulbound” form, meaning they cannot be sold and permanently belong to a single user.

Importantly, the SEC states that digital tools must not possess “intrinsic economic attributes or rights, such as generating passive income or granting claims to future income, profits, or assets of enterprises, other entities, obligors, or debtors.”

The SEC lists a series of applications for digital tools, including memberships, tickets, vouchers, ownership certificates, and identity verification, classifying Ethereum domain service names and CoinDesk’s “Microcosms” NFT consensus conference tickets as digital tools.

Other digital assets that may meet the “digital tools” criteria include:

FanDome NFT: An NFT collection inspired by comic books, distributed for free to participants of the DC FanDome virtual event in 2021;

POAP: Digital badges generated in NFT form, minted via blockchain to prove participation in online or offline events;

Propy NFT: A digital certificate representing legal ownership of real property, stored on the blockchain;

VeeFriends: An NFT series created by Gary Vaynerchuk, allowing holders to participate in exclusive events, including the VCON conference;

World ID: A soulbound “proof of personality” certificate issued by Sam Altman’s Worldcoin project.

4. Stablecoins

The SEC’s interpretative guidance document regarding non-security stablecoins intentionally maintains a straightforward and direct style, clearly stating that upon its effective date in January next year, it will regard payment stablecoins that meet the GENIUS Act description as non-securities.

As a result, the SEC itself will not impose registration requirements on payment stablecoins that meet the GENIUS Act during their issuance and redemption processes (although these stablecoins will still be broadly supervised by other agencies within the U.S. regulatory framework).

However, the guidance clarifies that prior to the effective date of the GENIUS Act, previously defined “covered stablecoins” remain classified as non-securities outside the agency’s jurisdiction. For a stablecoin to meet this definition, its holders must not possess the right to “receive any interest, profits, or other returns,” and its reserves must consist entirely of “dollars and/or other assets deemed low-risk and easily liquidated.”

Although the SEC does not specifically indicate which stablecoins are regarded as non-securities, tools pegged to the dollar that seem to fit its “covered stablecoins” definition include:

PYUSD: A stablecoin issued by Paxos Trust Company, a federally chartered national trust bank, for PayPal;

USAT: The latest stablecoin launched by Tether, pegged to the dollar and designed to comply with the GENIUS Act;

USDC: A stablecoin issued by Circle, over-collateralized 1:1 with dollars and risk-free dollar investments;

KlarnaUSD: A stablecoin sponsored by buy now, pay later giant Klarna and issued by Stripe’s Bridge.

5. Digital Securities

Arguably, the SEC’s most influential guidance document is precisely the part that is most ambiguous in its expression.

The regulatory body maintains that any digital asset that does not pass the Howey test is considered a security, and this determination has historically often involved arduous legal disputes.

The SEC also asserts that encapsulated versions of financial instruments that are clearly classified as securities under federal law (such as tokenized money market funds, stocks, and other types of structured investment products) fall under the category of digital securities.

However, this does not mean that all “encapsulated” tokens are securities. The guidance document explains that activities such as protocol mining, protocol staking, and “encapsulating” non-security crypto assets do not involve the issuance and sale of securities. The document further clarifies that “certain” airdrop actions do not constitute “investment of money” under the Howey test.

Nonetheless, the agency still cannot provide a clear answer on when digital assets transition into digital securities. 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 markets and promotes its assets.

If a non-security crypto asset is issued through an investment contract that meets the Howey test conditions, it will transition into a security.

Moreover, just because a non-security crypto asset was initially issued through an investment contract does not mean it permanently belongs to the category of securities; once the original investment contract is fulfilled or the issuer fails to perform its promised operational efforts, the crypto asset may convert into a non-security.

Although the SEC refuses to enumerate examples of assets it deems securities, it is noteworthy that its guidance document classifies XRP as a non-security “digital commodity,” despite a court ruling that certain sales of the token constitute investment contracts that violate federal securities laws.

While this is a step toward regulatory clarity, this aspect of the SEC’s guidance ultimately reinforces rather than resolves ambiguity. It merely extends existing federal securities law into the realm of digital assets, while reigniting market concerns about projects that make promises regarding unfinished work or future functionalities.

Digital commodities, digital collectibles, digital tools, and stablecoins may inherently belong to the category of non-securities, but they may still be issued or sold through investment contracts, which would bind the issuers to federal securities laws.