[Federal Register Volume 91, Number 55 (Monday, March 23, 2026)]
[Rules and Regulations]
[Pages 13714-13733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-05635]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AF67
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 231 and 241
[Release Nos. 33-11412; 34-105020; File No. S7-2026-09]li
RIN 3235-AN56
Application of the Federal Securities Laws to Certain Types of
Crypto Assets and Certain Transactions Involving Crypto Assets
AGENCY: Securities and Exchange Commission; Commodity Futures Trading
Commission
ACTION: Final rule; interpretation; guidance
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') issues herein an interpretation regarding the application of
the Federal securities laws to certain types of crypto assets and
certain transactions involving crypto assets. The references in this
release to ``we'' and ``our'' are to the Commission. The Commodity
Futures Trading Commission (``CFTC'') provides herein guidance relating
to that interpretation.
DATES: Effective Date: March 23, 2026.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/comments/s7-2026-09/application-federal-securities-laws-certain-types-crypto-assets-certain-transactions-involving); or
Send an email to [email protected]. Please include
File Number S7-2026-09 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-2026-09. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/comments/s7-2026-09/application-federal-securities-laws-certain-types-crypto-assets-certain-transactions-involving). Do not include personally
identifiable information in submissions; you should submit only
information that you wish to make available publicly. The Commission
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection.
FOR FURTHER INFORMATION CONTACT: SEC: Andrew Schoeffler, Office of
Chief Counsel, at (202) 551-3500, Division of Corporation Finance,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549; CFTC: Mark Fajfar, Senior Assistant General Counsel, Office of
the General Counsel, at (202) 418-6636, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Definition of ``Security''
III. Classification of Crypto Assets
A. Digital Commodities
B. Digital Collectibles
C. Digital Tools
D. Stablecoins
E. Digital Securities
IV. Crypto Assets That Are Subject to an Investment Contract
A. How Crypto Assets Become Subject to an Investment Contract
B. Separation of a Non-Security Crypto Asset From the Issuer's
Representations or Promises
1. Fulfillment of the Issuer's Representations or Promises
2. Failure To Satisfy Issuer's Representations or Promises
3. Application of the Interpretation
V. Federal Securities Laws Status of the Crypto Asset Activities
Known as ``Protocol Mining'' and ``Protocol Staking''
A. Protocol Mining
1. Protocol Mining Activities Generally
2. Covered Protocol Mining Activities
3. Interpretation Regarding Protocol Mining Activities
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B. Protocol Staking
1. Protocol Staking Activities Generally
2. Covered Protocol Staking Activities
3. Interpretation Regarding Protocol Staking Activities
4. Interpretation Regarding Staking Receipt Tokens
VI. Federal Securities Laws Status of the Crypto Asset Activity
Known as ``Wrapping''
VII. Application of the Howey Test to Certain Crypto Asset
Disseminations Known as ``Airdrops''
A. Airdrops Generally
B. Covered Airdrops
C. Interpretation Regarding Airdrops
VIII. Other Matters
IX. Commission Economic Considerations
I. Introduction
The Commission has engaged with crypto assets \1\ for more than a
decade.\2\ In 2017, the Commission issued a report pursuant to section
21(a) of the Securities Exchange Act of 1934 (the ``Exchange Act'') \3\
regarding offers and sales of crypto assets by an unincorporated
organization named ``The DAO.'' \4\ The Commission, in The DAO Report,
determined, among other things, that crypto assets issued by The DAO
were offered and sold as investment contracts and, therefore,
securities under section 2(a)(1) of the Securities Act of 1933 (the
``Securities Act'') \5\ and section 3(a)(10) of the Exchange Act.\6\ In
making this determination, the Commission applied the ``Howey test,''
which the U.S. Supreme Court (the ``Supreme Court'') has used to
determine whether a contract, transaction, or scheme is an investment
contract and therefore a security.\7\ In the years following
publication of The DAO Report, the Commission applied the Howey test,
mostly in the context of enforcement actions, to determine whether
crypto assets were offered and sold as investment contracts and
therefore as securities. Some Commissioners and other commentators
expressed concerns about the Commission's approach to crypto assets
during this period. Some described that approach as ``regulation by
enforcement,'' stating that the Commission pursued enforcement actions
against crypto asset issuers for alleged violations of the Federal
securities laws rather than developing a tailored regulatory framework
that accommodates crypto asset innovation and entrepreneurship.\8\
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\1\ For purposes of this release: a ``crypto asset'' is any
digital representation of value that is recorded on a
cryptographically secured distributed ledger; a ``crypto network''
is a blockchain or similar distributed ledger technology network;
and a ``crypto application'' is a software application running on a
crypto network. We refer to crypto networks and crypto applications
together in this release as ``crypto systems.'' Further, for
purposes of this release, ``onchain'' refers to transactions or data
that are processed and recorded directly on a crypto network and
``offchain'' refers to transactions or data that are processed and
recorded outside of a crypto network. The foregoing definition of
``crypto asset'' is identical to the definition of ``Digital Asset''
in section 2(6) of the Guiding and Establishing National Innovation
for U.S. Stablecoins Act, Public Law 119-27, 139 Stat. 419 (2025)
(``GENIUS Act'').
\2\ For example, the first registration statement for the offer
and sale of a crypto asset exchange-traded product was filed with
the Commission in 2013. See Form S-1 Registration Statement filed
with the Commission on July 1, 2013, available at https://www.sec.gov/Archives/edgar/data/1579346/000119312513279830/d562329ds1.htm.
\3\ 15 U.S.C. 78a et seq.
\4\ See Report of Investigation Pursuant to Section 21(a) of the
Securities Exchange Act of 1934: The DAO, Release No. 34-81207 (July
25, 2017) (``The DAO Report'').
\5\ 15 U.S.C. 77a et seq.
\6\ See The DAO Report at 11-15.
\7\ See SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (``Howey'').
The Howey test defines an investment contract as a contract,
transaction, or scheme involving (1) an investment of money, (2) in
a common enterprise, (3) with an expectation of profits derived from
the efforts of others. Courts have concluded that the ``Howey test
has three elements,'' including ``a common enterprise.'' SEC v.
Barry, 146 F.4th 1242, 1251 (9th Cir. 2025); accord SEC v. Scoville,
913 F.3d 1204, 1220 (10th Cir. 2019) (the Howey test has been broken
down into ``three requirements,'' including a ``common
enterprise''). To the extent the Commission's opinion in In re
Barkate, Release No. 34-49542, 2004 WL 762434, at *3 n.13 (Apr. 8,
2004), or other such prior statements by the Commission or its staff
indicate that the Commission does not view commonality as a
requirement for an ``investment contract'' under Howey, the
Commission concludes and clarifies that, based on courts' post-
Barkate decisions, the common enterprise element must be satisfied.
\8\ See, e.g., Commissioner Hester M. Peirce, Outdated: Remarks
before the Digital Assets at Duke Conference (Jan. 20, 2023),
available at https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-duke-conference-012023#_ftn35; Commissioner Mark T.
Uyeda, Remarks at the ``SEC Speaks'' Conference 2022, available at
https://www.sec.gov/newsroom/speeches-statements/uyeda-speech-sec-speaks-090922; Commissioner Mark T. Uyeda, Remarks at the ``SEC
Speaks'' Conference 2025, available at https://www.sec.gov/newsroom/speeches-statements/uyeda-remarks-sec-speaks-051925.
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Applying the Howey test to crypto assets and transactions involving
crypto assets can be challenging because of the varying degrees of
control that persons or groups may have over crypto systems, the
diversity of the types of crypto assets with varying characteristics,
uses, and functionality, and the evolving nature of crypto assets and
crypto systems. These unique attributes of crypto assets have prompted
divergent views among market participants, financial regulators, and
the courts over the application of the Howey test to crypto assets and
transactions involving crypto assets, particularly with respect to
secondary market transactions involving crypto assets. Accordingly,
market participants have requested guidance from the Commission
regarding the circumstances under which the Commission will
characterize crypto assets as securities and transactions involving
crypto assets as securities transactions.\9\
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\9\ See, e.g., Coinbase, Petition for Rulemaking--Digital Asset
Securities Regulation (July 21, 2022), available at https://www.sec.gov/rules/petitions/2022/petn4-789.pdf; Letter from
Robinhood Markets, Inc. (Mar. 13, 2025), available at https://www.sec.gov/files/ctf-input-robinhood-2025-03-13.pdf; Letter from
Andreessen Horowitz (Mar. 13, 2025), available at https://api.a16zcrypto.com/wp-content/uploads/2025/03/a16z-Crypto-SEC-RFI-Questions-1-through-6-March-13-2025.pdf; Letter from Coinbase
Global, Inc. (Mar. 19, 2025), available at https://www.sec.gov/files/ctf-input-grewal-2025-3-19.pdf; Letter from SIFMA and SIFMA
AMG (May 9, 2025), available at https://www.sifma.org/wp-content/uploads/2025/05/SIFMA-SEC-Crypto-RFI-Initial-Response-May-2025.pdf.
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On January 21, 2025, Acting Chairman Mark T. Uyeda established the
Crypto Task Force to help provide greater clarity on the application of
the Federal securities laws to the crypto asset markets.\10\ The Crypto
Task Force's focus is to support, among other things, the Commission's
efforts to draw clear regulatory lines, appropriately distinguish
securities from non-securities, craft tailored disclosure frameworks,
provide realistic paths to registration for crypto asset offerings and
intermediaries subject to the Federal securities laws, and ensure that
investors have the information necessary to make informed investment
decisions.\11\ To this end, the Crypto Task Force has hosted a series
of roundtables, including a March 21, 2025 roundtable on security
status titled, ``How We Got Here and How We Get Out--Defining Security
Status.'' \12\ The Crypto Task Force also has requested and received
written input from,\13\ and held meetings with, members of the
public.\14\ To date, the Crypto Task Force has received over 300
written submissions from issuers, investors (both individual and
institutional), law firms and legal professionals, audit and accounting
professionals and firms, academics, professional and investor
associations and organizations, investment companies and advisors,
[[Page 13716]]
market intermediaries, service providers, network foundations, foreign
entities, other crypto asset market participants, and other members of
the public.\15\
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\10\ See U.S. Securities and Exchange Commission, Crypto Task
Force, available at https://www.sec.gov/about/crypto-task-force.
\11\ Id.
\12\ See U.S. Securities and Exchange Commission, Crypto Task
Force Roundtables, available at https://www.sec.gov/about/crypto-task-force/crypto-task-force-roundtables.
\13\ See U.S. Securities and Exchange Commission, Crypto Task
Force Written Input, available at https://www.sec.gov/about/crypto-task-force/crypto-task-force-written-input.
\14\ See U.S. Securities and Exchange Commission, Crypto Task
Force Meetings, available at https://www.sec.gov/about/crypto-task-force/crypto-task-force-meetings.
\15\ See supra note 13.
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In July 2025, the President's Working Group on Digital Asset
Markets released a report titled, ``Strengthening American Leadership
in Digital Financial Technology'' that, among other things, addresses
the need for a taxonomy for crypto assets and sets forth a number of
recommended regulatory reforms relating to the crypto asset
markets.\16\ In particular, the report recommended that the ``SEC and
CFTC should use their existing authorities to provide fulsome
regulatory clarity that best keeps blockchain-based innovation within
the United States.'' \17\ In connection with the release of the report,
Chairman Paul S. Atkins launched ``Project Crypto,'' a Commission-wide
initiative to modernize rules and regulations under the Federal
securities laws in accordance with the President's Working Group's
recommendations to enable America's financial markets to move
onchain.\18\ Among other things, Chairman Atkins directed the staff to
``work to develop clear guidelines that market participants can use to
determine whether a crypto asset is a security or subject to an
investment contract.'' \19\ On January 29, 2026, Chairman Atkins and
CFTC Chairman Michael S. Selig announced that Project Crypto--
previously an SEC-led initiative--will proceed as a joint effort
between the SEC and the CFTC to harmonize federal oversight of crypto
asset markets.\20\
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\16\ See Strengthening American Leadership in Digital Financial
Technology (July 30, 2025) (``PWG Report''), available at https://www.whitehouse.gov/wp-content/uploads/2025/07/Digital-Assets-Report-EO14178.pdf.
\17\ Id. at 54.
\18\ See Chairman Paul S. Atkins, American Leadership in the
Digital Finance Revolution (July 31, 2025), available at https://www.sec.gov/newsroom/speeches-statements/atkins-digital-finance-revolution-073125.
\19\ Id.
\20\ See Chairman Paul S. Atkins, Opening Remarks at Joint SEC-
CFTC Harmonization Event--Project Crypto (Jan. 29, 2026), available
at https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-joint-sec-cftc-harmonization-event-project-crypto-012926; Chairman
Michael S. Selig, The Next Phase of Project Crypto: Unleashing
Innovation for the New Frontier of Finance (Jan. 29, 2026),
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opaselig1.
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In light of the concerns raised about the Commission's approach to
crypto assets before 2025, the regulatory developments beginning in
2025, and the public input provided to the Crypto Task Force, the
Commission has determined to issue herein an interpretation of the
definition of ``security'' as applied to crypto assets and transactions
involving crypto assets as part of its efforts to provide greater
clarity regarding the Commission's treatment of crypto assets under the
Federal securities laws. We first discuss the definition of
``security'' under the Federal securities laws, including the term
``investment contract.'' We then classify crypto assets into categories
based on their characteristics, uses, and functions, and analyze each
category under the definition of ``security.'' We also address how a
``non-security crypto asset''--which is a crypto asset that itself is
not a security--may become subject to, and how it may cease to be
subject to, an investment contract. Further, we discuss the Federal
securities laws status of the crypto asset activities known as
``protocol mining,'' ``protocol staking,'' and ``wrapping.'' Finally,
we discuss the application of the Howey test to certain crypto asset
disseminations known as ``airdrops.''
The interpretation in this release does not supersede or replace
the Howey test, which is binding legal precedent. Rather, the
interpretation conveys the Commission's views, informed by the
extensive feedback the Commission and its staff have received to date
on these topics (including from the Crypto Task Force's roundtables,
written input, and meetings), regarding how certain aspects of the
Howey test apply to crypto assets and transactions involving crypto
assets.\21\ The Commission and its staff will administer the Federal
securities laws consistent with the interpretation, including with
respect to enforcement actions. The interpretation is the Commission's
first step toward developing a clearer regulatory framework for the
treatment of crypto assets under the Federal securities laws.\22\
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\21\ The interpretation supersedes the Commission staff's
Framework for ``Investment Contract'' Analysis of Digital Assets
(Apr. 3, 2019), available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
\22\ See, e.g., U.S. Securities and Exchange Commission, Spring
2025 Unified Agenda of Regulatory and Deregulatory Actions,
available at https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tPub=true&agencyCode=&showStage=active&agencyCd=3235.
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Further, the CFTC provides herein guidance that the CFTC and its
staff will administer the Commodity Exchange Act \23\ consistent with
the interpretation,\24\ and that certain non-security crypto assets
could meet the definition of ``commodity'' under the Commodity Exchange
Act.\25\
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\23\ 7 U.S.C. 1 et seq.
\24\ Nothing in this release should be construed as altering the
respective statutory authorities of the SEC or CFTC.
\25\ See infra note 48.
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The interpretation in this release is based on the Commission's
current understanding of the crypto asset markets, including the
typical transactional and structural features of these markets and the
typical characteristics, uses, and functions of crypto assets. To help
inform the Commission's ongoing consideration of the topics addressed
in this release, we are soliciting public comment on the views set
forth in the interpretation, including the descriptions of the crypto
assets and crypto asset transactions contained herein. Based on the
feedback received, the Commission may refine, revise, or expand upon
the interpretation in order to provide further clarity regarding the
Commission's treatment of crypto assets under the Federal securities
laws.
II. Definition of ``Security''
In delineating the scope of the Federal securities laws, Congress
``enacted a broad definition of `security,' sufficient to encompass
virtually any instrument that might be sold as an investment.'' \26\
While the definition of ``security'' includes an enumerated list of
``the commonly known documents traded for speculation or investment,''
including ``stock,'' ``bond,'' and ``note,'' it also includes
instruments ``of a more variable character,'' such as ``investment
contract,'' ``certificate of interest or participation in a profit-
sharing agreement,'' and ``any interest or instrument commonly known as
a security.'' \27\ In addition, the definition of ``security'' includes
any ``receipt for, guarantee of, or warrant or right to subscribe to or
purchase'' any of the financial instruments enumerated in the
definition of ``security.'' \28\
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\26\ SEC v. Edwards, 540 U.S. 389, 393 (2004). The definition of
``security'' is ``essentially identical in meaning'' under section
2(a)(1) of the Securities Act (15 U.S.C. 77b(a)(1)) and section
3(a)(10) of the Exchange Act (15 U.S.C. 78c(a)(10)). Id. (citing
Reves v. Ernst & Young, 494 U.S. 56, 61 n.1 (1990)).
\27\ Howey, 328 U.S. at 297.
\28\ 15 U.S.C. 77b(a)(1).
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The Supreme Court has said that ``[b]ecause securities transactions
are economic in character Congress intended the application of these
statutes to turn on the economic realities underlying a transaction,
and not the name appended thereto.'' \29\ The Supreme Court has
reasoned that ``in searching for the meaning and scope of the word
`security' . . . , form should be disregarded for substance and the
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emphasis should be on economic reality.'' \30\ Nonetheless, the
definition of ``security'' is not boundless: ``Congress, in enacting
the securities laws, did not intend to provide a broad federal remedy
for all fraud.'' \31\ While the securities laws cover ``those
instruments ordinarily and commonly considered to be securities in the
commercial world,'' not every instrument is ``the type of instrument
that comes to mind when the term `security' is used,'' and not every
instrument falls within ``the ordinary concept of a security.'' \32\
Importantly, the Federal securities laws generally do not apply to
items that are purchased for use or consumption,\33\ whether they are
physical or digital.
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\29\ United Housing Foundation, Inc. v. Forman, 421 U.S. 837,
849 (1975).
\30\ Id.
\31\ Marine Bank v. Weaver, 455 U.S. 551, 556 (1982).
\32\ Id. at 559.
\33\ Forman, 421 U.S. at 852-53 (``[W]hen a purchaser is
motivated by a desire to use or consume the item purchased--`to
occupy the land or to develop it themselves,' as the Howey court put
it, ibid.--the securities laws do not apply.'' (quoting Howey, 328
U.S. at 300)).
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There is no universal test to determine whether an instrument is a
security.\34\ Instead, it must be analyzed to determine if it
constitutes one of the financial instruments enumerated in the
definition of ``security.'' The financial instruments enumerated in the
definition of ``security'' generally are not defined in statute or
Commission rules,\35\ but the Supreme Court and other Federal courts
have interpreted many of them based on economic reality. For example,
the Supreme Court has established tests for determining whether an
instrument that is designated as a ``note'' \36\ or ``stock'' \37\ is a
security for purposes of the Federal securities laws.
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\34\ Louis Loss (late), Joel Seligman & Troy Paredes, Securities
Regulation 3.A.1 (6th and 7th eds., 2025 Cum. Supp. 2018-2023)
(``Each type of financial instrument included in the statutory
definition of security is susceptible to a separate analysis,
employing separate analytical concepts. There is no universal or
generic test of the term.'').
\35\ Certain financial instruments enumerated in the definition
of ``security'' are defined in statute and Commission rules and
regulations, such as ``security future'' and ``security-based
swap.'' See, e.g., 15 U.S.C. 78c(a)(55) and (68).
\36\ See Reves, 494 U.S. at 60-61 (holding that all notes are
presumptively securities, with that presumption rebuttable where
Reves's four-factor analysis indicates that the note was delivered
in a commercial or consumer context and not in an investment
context).
\37\ See Landreth Timber Co. v. Landreth, 471 U.S. 681, 686
(1985) (holding that the characteristics typical of ``stock'' are
``(i) the right to receive dividends contingent upon an
apportionment of profits; (ii) negotiability; (iii) the ability to
be pledged or hypothecated; (iv) the conferring of voting rights in
proportion to the number of shares owned; and (v) the capacity to
appreciate in value'').
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The definition of ``security'' is not limited to ``obvious and
commonplace'' instruments.\38\ In cases involving a ``[n]ovel,
uncommon, or irregular device,'' courts often evaluate whether the
instrument is an ``investment contract,'' a term that is not defined in
statute or Commission rules.\39\ The Commission and Federal courts
typically have evaluated the security status of crypto assets and
crypto asset transactions under an investment contract analysis.\40\
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\38\ SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943).
\39\ Id.
\40\ See, e.g., The DAO Report; SEC v. Telegram Grp. Inc., 448
F. Supp. 3d 352 (S.D.N.Y. 2020).
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In Howey, the Supreme Court defined the term ``investment
contract'' in a way that it intended to be ``capable of adaptation to
meet the countless and variable schemes devised by those who seek the
use of the money of others on the promise of profits.'' \41\ Under
Howey, the term ``investment contract'' means any contract,
transaction, or scheme whereby a person invests money in a common
enterprise and reasonably expects profits to be derived from the
efforts of others.\42\ This definition, known as the ``Howey test,''
\43\ is intended to afford ``the SEC and the courts sufficient
flexibility to ensure that those who market investment contracts are
not able to escape the coverage of the Federal securities laws by
creating new instruments that would not be covered by a more
determinate definition.'' \44\ Since the Supreme Court decided Howey in
1946, Federal courts have applied the Howey test to a broad range of
contracts, transactions, and schemes.\45\
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\41\ Howey, 328 U.S. at 299.
\42\ Id. at 298-99. The Howey test's ``efforts of others''
requirement is satisfied when ``the efforts made by those other than
the investor are the undeniably significant ones, those essential
managerial efforts which affect the failure or success of the
enterprise.'' See, e.g., SEC v. v. Glenn W. Turner Enterprises,
Inc., 474 F.2d 476, 482 (9th Cir. 1973). Federal courts also have
stated that administrative and ministerial activities are not
managerial efforts that satisfy Howey's ``efforts of others''
requirement. See, e.g., First Fin. Fed. Sav. & Loan v. E.F. Hutton
Mortgage, 834 F.2d 685 (8th Cir. 1987) (activities performed were
merely administrative and ministerial in nature and therefore did
not constitute the managerial efforts of others); Union Planters
National Bank of Memphis v. Commercial Credit Business Loans, Inc.,
651 F.2d 1174 (6th Cir. 1981) (stating that administrative tasks and
services are not managerial under Howey); see also Donovan v. GMO-Z.com Tr. Co., Inc., 779 F. Supp. 3d 372, 388 (S.D.N.Y. 2025)
(``Ministerial, technical, and clerical tasks often are `necessary'
for an investment scheme to operate and thereby generate a profit,
but courts have long found such efforts to be insufficient under
Howey's third prong.''). In this release, we refer to managerial
efforts that meet the Howey test's ``efforts of others'' requirement
as ``essential managerial efforts.''
\43\ See supra note 7.
\44\ Reves, 494 U.S. at 63 n.2.
\45\ As noted above, the definition of ``security'' also
includes a ``certificate of interest or participation in any profit-
sharing agreement.'' The term ``certificate of interest or
participation in any profit-sharing agreement'' does not have a
meaning broader than that of ``investment contract.'' See Int'l
Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 558 n.11 (1979)
(stating that a ``certificate of interest . . . in any profit-
sharing agreement'' does not have ``any broader meaning under the
Securities Acts than an `investment contract'''). Accordingly, a
financial instrument that is not an investment contract cannot be a
certificate of interest or participation in any profit-sharing
agreement. It is possible, but not necessarily the case, that an
instrument that is an ``investment contract'' could also be a
``certificate of interest or participation in any profit-sharing
agreement.'' See, e.g., Tcherepnin v. Knight, 389 U.S. 332, 336
(1967).
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III. Classification of Crypto Assets
Virtually any type of security, good, service, right, or interest
can be represented in a digital format as a crypto asset. The developer
of a crypto asset can determine the quantity of units of a crypto asset
that will be generated, the parameters for distribution of the crypto
asset, and the functionality (or lack thereof) of the crypto asset,
among other things. The developer can generate crypto assets as
fungible units or as non-fungible units (commonly known as ``non-
fungible tokens'' or ``NFTs'').\46\ As such, crypto assets encompass a
broad range of instruments with varying characteristics, uses, and
functions. For purposes of this release, we classify crypto assets into
five categories based on their characteristics, uses, and functions:
(i) digital commodities; (ii) digital collectibles; (iii) digital
tools; (iv) stablecoins; and (v) digital securities.
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\46\ An NFT is a non-interchangeable crypto asset with a unique
digital identifier. Because NFTs constitute unique crypto assets,
they cannot be replicated. In contrast, fungible crypto assets are
interchangeable, which means that they are identical and of equal
value and substitutable for one another.
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Digital commodities, digital collectibles, and digital tools, each
as further described below, are not themselves securities. However, as
with any asset that is not a security, a non-security crypto asset can
be offered and sold subject to an investment contract, which is a
security.\47\ Stablecoins, as further described below, are a broad
category of crypto assets that may or may not be securities depending
on their characteristics. Digital securities, as further described
below, are securities. Given the variations in crypto assets and the
constantly evolving
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nature of the crypto asset markets, including the underlying
technology, there may be crypto assets that do not fall within any of
these five categories, as well as crypto assets with hybrid
characteristics that may fall within more than one category.
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\47\ See infra section IV. The fact that a non-security crypto
asset is subject to an investment contract does not transform the
non-security crypto asset itself into a security.
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A. Digital Commodities \48\
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\48\ For purposes of this release, we are using the term
``commodity'' in an economic and commercial sense (i.e., assets that
are fungible, have utility, and whose value is determined by supply
and demand). However, any non-security crypto asset, other than a
``payment stablecoin issued by a permitted payment stablecoin
issuer,'' as such terms are defined in section 2 of the GENIUS Act,
could meet the definition of ``commodity'' under the Commodity
Exchange Act. See 7 U.S.C. 1a(9).
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A digital commodity is a crypto asset that is intrinsically linked
to and derives its value from the programmatic operation of a crypto
system that is ``functional,\49\ as well as supply and demand dynamics,
rather than from the expectation of profits from the essential
managerial efforts of others.\50\ A digital commodity does not have
intrinsic economic properties or rights, such as generating a passive
yield or conveying rights to future income, profits, or assets of a
business enterprise or other entity, promisor, or obligor, but may have
certain other rights (as discussed below). Examples of digital
commodities include 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).\51\
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\49\ For purposes of this release, a crypto system is
``functional'' if the system's native crypto asset can be used on
the system in accordance with the programmatic utility of the
system. The term ``native'' in the context of a crypto asset refers
to a crypto asset generated for use on a particular crypto system.
\50\ A digital commodity may be native to a crypto system that
is decentralized. For purposes of this release, a crypto system is
``decentralized'' if the crypto system functions and operates
autonomously with no person, entity, or group of persons or entities
having operational, economic, or voting control of the crypto
system.
\51\ Based on our understanding of their characteristics, terms,
and functions as of the date of this release, the Commission
concludes that each of these crypto assets is a digital commodity
because they 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. As of
the date of this release, each of these digital commodities
underlies a futures contract that has been made available to trade
on a designated contract market operating under the regulatory
oversight of the CFTC. To be clear, it is not necessary that a
crypto asset underlie such a futures contract to be a digital
commodity; rather, the fact that these digital commodities underlie
such a futures contract explains their selection as examples for
this release. For example, based on their characteristics, terms,
and functions as of the date of this release, Algorand (ALGO) and
LBRY Credits (LBC), neither of which underlies such a futures
contract, are digital commodities because they 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.
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A digital commodity is necessary to participate in or use certain
aspects of an associated functional crypto system. The programmed
purpose of a digital commodity is to facilitate and incentivize the
validation, ordering, and confirmation of transactions on the
associated functional crypto system, serve as a mechanism to maintain
the functioning and/or security of the associated functional crypto
system, and foster network effects.\52\ Accordingly, a digital
commodity is integral to the operation of the associated functional
crypto system. For example, a digital commodity typically conveys to
holders certain technical rights with respect to the associated
functional crypto system, such as enabling holders to participate in
the system's consensus mechanism by staking (or locking up) the
system's native digital commodity.\53\ A digital commodity also may
convey to holders certain governance rights with respect to the
associated functional crypto system. Such a ``governance token''
typically allows holders to vote on certain technical or governance
matters, such as software upgrades and treasury expenditures. Further,
a functional crypto system may require users to pay transaction (or
``gas'') fees in the system's native digital commodity. These gas
fees--in addition to units of the digital commodity newly generated by
the protocol--typically are used as an incentive mechanism to reward
participation in and use of the associated functional crypto system.
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\52\ For purposes of this release, ``network effects'' refers to
the phenomenon where the value, use, and security of a crypto system
increase as more users participate and interact with the crypto
system.
\53\ See infra section V for a more detailed explanation of
``staking'' and ``consensus mechanism.''
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A digital commodity itself, as described in this release, is not a
security because it does not have the economic characteristics of a
security. A digital commodity does not constitute any of the financial
instruments enumerated in the definition of ``security'' because, among
other things, it does not represent a digitized form of any such
instruments, including an investment contract. Like commodities
generally, a digital commodity has intrinsic value derived from the
value of the goods and services that may be produced or accessed using
that commodity, as well as from supply and demand dynamics. Users of a
functional crypto system use the system's native digital commodity to
interact with the system's features and functionalities. A functional
crypto system incorporates economic mechanisms that reward voluntary
cooperation and coordination among the system's users. Users are
encouraged to participate in a functional crypto system based on its
economic mechanism design, and developers are incentivized to build
crypto applications for functional crypto systems that successfully
attract users. A functional crypto system does not have a central party
\54\ that oversees participation or distributes rewards to users. As a
result, the value of a digital commodity is intrinsically linked to the
programmatic functioning of the associated functional crypto system.
Therefore, given that a digital commodity is associated with a
functional crypto system, a purchaser would not reasonably expect to
profit based on the essential managerial efforts of others.
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\54\ For purposes of this release, a ``central party'' is a
person, entity, or group of persons or entities having operational,
economic, or voting control of a crypto system.
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B. Digital Collectibles
A digital collectible is a crypto asset that is 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. A digital collectible does not have intrinsic
economic properties or rights, such as generating a passive yield or
conveying rights to future income, profits, or assets of a business
enterprise or other entity, promisor, or obligor. Examples of digital
collectibles available in the markets today, based on our understanding
of their characteristics, terms, and functions as of the date of this
release, include CryptoPunks,\55\ Chromie Squiggles,\56\ Fan
Tokens,\57\ WIF,\58\ and VCOIN.\59\
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\55\ See https://cryptopunks.app.
\56\ See https://chromie-squiggles.com.
\57\ See https://www.socios.com/fan-tokens. Fan Tokens have
hybrid characteristics and could be classified as digital tools.
\58\ See https://dogwifhat.us.
\59\ See https://vcoin.imvu.com.
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Like physical collectibles, digital collectibles do not provide
holders with any legal rights or interest in or with respect to a
business enterprise or other entity, promisor, or obligor associated
with the creator of the digital collectible
[[Page 13719]]
or otherwise.\60\ Digital collectibles may provide holders with a
limited license or other intellectual property rights, often pursuant
to an end user agreement. For example, creators of unique artwork
digital collectibles often provide holders with the right to display
and commercialize the acquired artwork.\61\ Social media platforms,
video games, and other consumer applications sometimes incorporate
digital collectibles to enhance the user experience and facilitate
network effects. The developers of these applications often reward
early users with digital collectibles or allow active users to earn
digital collectibles by engaging with the application. These digital
collectibles include badges, video game ``skins,'' and rewards points.
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\60\ Digital collectibles may be programmed to transmit
automatically a portion of the sale price of the collectible to the
creator as a royalty each time that it is resold or otherwise
transferred. These royalties may provide the creator of the digital
collectible with a long-term payment stream from the creator's work,
even after the initial sale (i.e., when subsequent sales or
transfers of the digital collectible are solely between third
parties). Royalties typically are based on a percentage of the
transaction value each time a digital collectible is resold. The
creator sets the percentage at the time the digital collectible is
created, and the ongoing payments are automated. As such, whenever
the digital collectible is resold, the amount of the royalties is
automatically calculated and transferred to the creator. The digital
collectible holder does not receive any share of the creator
royalty, and the digital collectible holder has no rights or
interest in or with respect to a business enterprise or other
entity, promisor, or obligor associated with the creator.
Accordingly, the existence of a creator royalty does not change a
digital collectible into a security.
\61\ Digital collectibles sometimes are issued as part of a
digital collection (i.e., a group of digital collectibles that share
a common theme, style, or project). A digital collection typically
follows a particular aesthetic theme and includes a wide variety of
unique traits, which allows the creator of the digital collection to
incorporate slight variations with varying degrees of rarity or
scarcity throughout the collection. A digital collection is
analogous to a series of artworks based on a single theme, such as
Andy Warhol's ``Campbell's Soup Cans'' series containing 32
different paintings. The inclusion of a digital collectible in a
digital collection does not change the digital collectible into a
security.
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Some digital collectibles have limited or no functionality. For
example, a ``meme coin'' is a type of crypto asset inspired by internet
memes, characters, current events, or trends for which the creator
seeks to attract an enthusiastic online community to purchase the meme
coin and engage in its trading.\62\ Meme coins typically are acquired
for artistic, entertainment, social, and cultural purposes, and their
value is driven by supply and demand, rather than any essential
managerial efforts of others. Nonetheless, meme coin holders may create
uses for meme coins, such as by limiting access to a chatroom to meme
coin holders or whitelisting meme coin holders for an airdrop.\63\
Further, a crypto asset may be offered and sold initially as a meme
coin that has no functionality within an associated functional crypto
system (and no related representations or promises to create such
functionality or crypto system) and that derives its value from the
asset's artistic, entertainment, social, or cultural significance, but
later become a digital commodity because it becomes functional within
an associated functional crypto system.
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\62\ The Division of Corporation Finance (``Corporation
Finance'') issued a statement addressing the characterization of
meme coins under the definition of ``security.'' See U.S. Securities
and Exchange Commission, Division of Corporation Finance, Staff
Statement on Meme Coins (Feb. 27, 2025), available at https://www.sec.gov/newsroom/speeches-statements/staff-statement-meme-coins.
That statement and any other staff statement referenced in this
release is not a rule, regulation, guidance, or statement of the
Commission, and the Commission has neither approved nor disapproved
its content. Staff statements have no legal force or effect: they do
not alter or amend applicable law, and they create no new or
additional obligations for any person. For the avoidance of doubt,
the views expressed by the Commission in this release supersede any
prior statements by the Commission or its staff on these topics.
\63\ For purposes of this release, ``whitelisting'' is the
practice of explicitly allowing only pre-approved applications,
users, email addresses, or IP addresses to access a crypto system or
service. For a description of ``airdrops,'' see infra section VII.
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A digital collectible itself, as described in this release, is not
a security because it does not have the economic characteristics of a
security.\64\ A digital collectible does not constitute any of the
financial instruments enumerated in the definition of ``security''
because, among other things, it does not represent a digitized form of
any such instruments, including an investment contract. Digital
collectibles generally have artistic, entertainment, social, or
cultural value or utility. The purchase of a digital collectible is not
an investment in any business enterprise or other entity, promisor, or
obligor associated with the creator of the digital collectible.
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\64\ Digital collectibles are onchain analogues to physical
collectibles, which generally have not been regulated as securities.
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Like a physical collectible, a digital collectible's value is not
based on the expectation of profits from any essential managerial
efforts of its creator following creation but rather on supply and
demand, which in many cases depends on the subject matter, popularity,
or scarcity of the digital collectible, as is the case with physical
collectibles. For example, buying a digital collectible with the hope
that its subject matter, popularity, or scarcity will increase its
price is like buying a piece of art with the hope that market forces
will create demand for the art and increase its price. While the value
of a digital collectible may be impacted directly or indirectly by the
activities or reputation of the creator--as may occur with respect to a
physical collectible--the creator of a digital collectible typically
does not make representations or promises to undertake essential
managerial efforts from which a purchaser would reasonably expect to
derive profits.\65\
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\65\ If the creator of a digital collectible facilitates network
effects, including through the use of a digital collectible, such
activities do not constitute essential managerial efforts. See infra
section IV.A.
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However, as can be the case with physical collectibles,\66\ the
offer and sale of a digital collectible that either is fractionalized
or otherwise enables individuals to acquire a fractional ownership
interest of a single digital collectible, could constitute the offer or
sale of a security because it may involve essential managerial efforts
from which a purchaser would reasonably expect to derive profits and,
therefore, may be offered and sold as an investment contract.\67\
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\66\ For example, fractionalized interests in artwork may in
some circumstances be deemed securities even though the underlying
artwork itself is not a security because interests in the fractional
pool may constitute investment contracts.
\67\ In Howey, the Supreme Court held that offers and sales of
individual parcels of a citrus grove, when paired with service
contracts giving the offeror/seller exclusive rights to access and
manage the land, and providing purchasers a share of the profits,
were offers and sales of investment contracts, rather than just
offers and sales of real estate. While selling the whole citrus
grove to a single, active owner might have been a real estate sale,
the subdivision of the citrus grove combined with centralized
management of the parcels meant that purchasers depended on the
seller's essential managerial efforts for profits.
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C. Digital Tools
A digital tool is a crypto asset that performs a practical
function, such as a membership, ticket, credential, title instrument,
or identity badge. Digital tools are commonly issued for use in
connection with crypto systems and are designed to perform practical
functions within such systems. Digital tools often are non-
transferrable or ``soul-bound,'' \68\ and their value is derived from
their practical functionality. Digital tools may be issued by a central
party or autonomously in accordance with the programmatic functioning
of a crypto system. A digital tool does not have intrinsic economic
properties or rights, such as generating a passive yield
[[Page 13720]]
or conveying rights to future income, profits, or assets of a business
enterprise or other entity, promisor, or obligor. Examples of digital
tools available in the markets today, based on our understanding of
their characteristics, terms, and functions as of the date of this
release, include Ethereum Name Service domain names \69\ and CoinDesk's
`Microcosms' NFT Consensus Ticket.\70\
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\68\ Soul-bound digital tools are designed for permanent
association with a specific digital identity and are intended to
represent aspects of an individual's or entity's identity that
typically are not transferable, such as academic degrees,
professional certifications, memberships, or verifiable work
history.
\69\ See https://ens.domains.
\70\ See https://www.coindesk.com/business/2024/01/31/coindesk-brings-back-microcosms-nft-consensus-ticket.
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A digital tool itself, as described in this release, is not a
security because it does not have the economic characteristics of a
security.\71\ A digital tool does not constitute any of the financial
instruments enumerated in the definition of ``security'' because, among
other things, it does not represent a digitized form of such
instruments, including an investment contract. Persons acquire digital
tools for their functional utility and do not have any rights or
interest in or with respect to a business enterprise or other entity,
promisor, or obligor just as persons acquiring a museum membership do
not expect to realize a profit from the essential managerial efforts of
the museum's operators. The price at which the digital tool may be
resold, if it may be resold at all, is based upon its functional
utility rather than any expectation of profits from any essential
managerial efforts of its developer. While the value of a digital tool
may be impacted directly or indirectly by the activities of the
developer, the creator of a digital tool typically does not make
representations or promises to undertake any essential managerial
efforts from which a purchaser would reasonably expect to derive
profits.\72\
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\71\ Digital tools are onchain analogues to physical utilities,
which generally have not been regulated as securities.
\72\ If the creator of a digital tool facilitates network
effects, including through the use of a digital tool, such
activities do not constitute essential managerial efforts. See infra
section IV.A.
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D. Stablecoins
A stablecoin is a crypto asset that is designed to maintain a
stable value relative to a reference asset like the U.S. dollar.\73\ In
July 2025, Congress enacted the GENIUS Act, which creates a
comprehensive regulatory framework for a specific type of stablecoin
called a ``payment stablecoin.'' \74\ The GENIUS Act excludes from the
definition of ``security'' any ``payment stablecoin issued by a
permitted payment stablecoin issuer,'' as such terms are defined in
section 2 of the GENIUS Act.\75\ A ``payment stablecoin'' is defined as
a digital asset that is, or is designed to be, used as a means of
payment or settlement, and the issuer of which generally is obligated
to convert, redeem, or repurchase the digital asset for a fixed amount
of monetary value, and represents that it will maintain, or create the
reasonable expectation that it will maintain, a stable value relative
to the value of a fixed amount of monetary value.\76\
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\73\ See PWG Report.
\74\ See supra note 1.
\75\ See section 17 of the GENIUS Act.
\76\ See section 2(22) of the GENIUS Act.
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A ``permitted payment stablecoin issuer'' is defined as a person
formed in the United States that is: (1) a subsidiary of an insured
depository institution that has been approved to issue payment
stablecoins under section 5 of the GENIUS Act; (2) a Federal qualified
payment stablecoin issuer; or (3) a State qualified payment stablecoin
issuer.\77\ A permitted payment stablecoin issuer is prohibited under
the GENIUS Act from paying any form of interest or yield to the
permitted stablecoin holders (whether in cash, tokens, or other
consideration) solely in connection with the holding, use, or retention
of the payment stablecoin.\78\ These crypto assets categorically will
not be securities by operation of statute after the effective date of
the GENIUS Act. Stablecoins other than payment stablecoins issued by a
permitted payment stablecoin issuer may meet the definition of
``security'' depending on the facts and circumstances.
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\77\ See section 2(23) of the GENIUS Act.
\78\ See section 4(a)(11) of the GENIUS Act.
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Prior to the enactment of the GENIUS Act, Corporation Finance
issued a statement addressing the characterization of certain
stablecoins--referred to therein as ``Covered Stablecoins''--under the
definition of ``security.'' \79\ Given that the GENIUS Act is not yet
effective,\80\ and to clarify the Commission's views on the application
of the Howey test to stablecoins, the Commission interprets that, for
the reasons set forth in the Staff Stablecoin Statement, the offer and
sale of Covered Stablecoins does not involve the offer and sale of
securities within the meaning of section 2(a)(1) of the Securities Act
or section 3(a)(10) of the Exchange Act.\81\ Accordingly, persons
involved in the process of issuing and redeeming Covered Stablecoins do
not need to register those transactions with the Commission under the
Securities Act or fall within one of the Securities Act's exemptions
from registration. The foregoing interpretation does not address
stablecoins other than Covered Stablecoins as described in the Staff
Stablecoin Statement.
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\79\ See U.S. Securities and Exchange Commission, Division of
Corporation Finance, Staff Statement on Stablecoins (Apr. 4, 2025),
available at https://www.sec.gov/newsroom/speeches-statements/statement-stablecoins-040425 (the ``Staff Stablecoin Statement'').
The Staff Stablecoin Statement and any other staff statement
referenced in this release is not a rule, regulation, guidance, or
statement of the Commission, and the Commission has neither approved
nor disapproved its content. Staff statements have no legal force or
effect: they do not alter or amend applicable law, and they create
no new or additional obligations for any person. For the avoidance
of doubt, the views expressed by the Commission in this release
supersede any prior statements by the Commission or its staff on
these topics.
\80\ The GENIUS Act will become effective on the earlier of 18
months after its date of enactment (July 18, 2025) or the date that
is 120 days after the date on which the primary Federal payment
stablecoin regulators issue any final regulations implementing the
GENIUS Act.
\81\ Although not included in the statutory exclusion from the
definition of ``security'' in section 17 of the GENIUS Act, payment
stablecoins issued by a ``foreign permitted stablecoin issuer'' (as
the term is defined in the GENIUS Act) registered with the
Comptroller of the Currency will generally not meet the definition
of ``security,'' as such payment stablecoins will generally be
considered ``Covered Stablecoins.'' See section 18 of the GENIUS
Act; Staff Stablecoin Statement.
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E. Digital Securities
A digital security (commonly known as a ``tokenized'' security) is
a financial instrument enumerated in the definition ``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.\82\ There are a variety of models used to tokenize
securities, but they may vary in terms of structure and the rights
afforded to holders. As such, the rights of a holder of the crypto
asset may be materially different from the rights of a holder of the
underlying security, including economic and voting rights. Tokenized
securities generally fall into two categories: (1) securities tokenized
by or on behalf of the issuers of such securities; and (2) securities
tokenized by third parties unaffiliated with the issuers of such
securities, which may involve the third party issuing a separate
security that derives its value from or is otherwise linked to the
subject security.
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\82\ Tokenization is the process of creating a digital
representation of a tangible or intangible asset using blockchain or
similar distributed ledger technology. See PWG Report. A non-
security crypto asset that is subject to an investment contract is
not a tokenized security. See supra note 47. Further, a stablecoin
that meets the definition of ``security'' based on its particular
facts and circumstances is a tokenized security. See supra section
III.D.
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A security is a security regardless of whether it is issued, or
otherwise represented, offchain or onchain. All devices and instruments
that have the
[[Page 13721]]
economic characteristics of a security are securities regardless of
format or label. Many digital securities convey the same legal rights
with respect to a business enterprise or other entity, promisor, or
obligor as offchain securities. Some digital securities do not convey
the same legal rights as offchain securities but instead entitle the
holder to receive economic distributions from a central party that
manages a business enterprise or other entity, promisor, or obligor on
behalf of digital security holders. Purchasers of this latter type of
digital security invest in a business enterprise or other entity,
promisor, or obligor operated by a central party and look to the
central party to earn such distributions. Further, digital securities
may provide non-financial benefits to holders, similar to a digital
commodity, digital collectible, or digital tool. A digital security
does not fall outside of the definition of ``security'' merely because
it provides such non-financial benefits.
IV. Crypto Assets That Are Subject to an Investment Contract
A. How Crypto Assets Become Subject to an Investment Contract
How an issuer \83\ markets and promotes a contract, transaction, or
scheme is relevant to assessing whether the issuer is offering or
selling an investment contract.\84\ A non-security crypto asset becomes
subject to an investment contract when an issuer offers it by inducing
an investment of money in a common enterprise with representations or
promises to undertake essential managerial efforts from which a
purchaser would reasonably expect to derive profits.\85\ A purchaser's
reasonable profit expectations depend on the issuer's representations
or promises to engage in such essential managerial efforts.\86\ Absent
such representations or promises being conveyed to purchasers,\87\ it
would not be reasonable for a purchaser to expect profits from the
contract, transaction, or scheme.
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\83\ For purposes of this release, references to an ``issuer''
include affiliates and agents of the issuer or a promoter.
\84\ For example, in finding that certain instruments issued by
a housing cooperative were not ``securities,'' the Supreme Court in
Forman specifically noted that: ``Nowhere does the [co-operative's
Information] Bulletin seek to attract investors by the prospect of
profits resulting from the efforts of the promoters or third
parties. On the contrary, the Bulletin repeatedly emphasizes the
`nonprofit' nature of the endeavor.'' 421 U.S. at 854; see also
Joiner, 320 U.S. at 352-53.
\85\ Courts have similarly determined that other types of non-
securities, such as real estate, have been offered and sold subject
to investment contracts. See, e.g., Howey, 328 U.S. 293 (real
estate); Continental Marketing Corporation v. SEC, 387 F.2d 466
(10th Cir. 1967), cert. denied, 391 U.S. 905 (1968) (beavers);
Miller v. Central Chinchilla Group, Inc., 494 F.2d 414 (8th Cir.
1974) (chinchillas); Glen-Arden Commodities v. Costantino, 493 F.2d
1027 (2nd Cir. 1974) (Scotch whisky warehouse receipts). The
Commission expects that contracts for the purchase and delivery of a
``payment stablecoin issued by a permitted payment stablecoin
issuer'' (as defined in the GENIUS Act) that do not involve a
reasonable expectation of profit to be derived from the essential
managerial efforts of others generally would not be considered to be
offered and sold as investment contracts, regardless of when
delivery occurs.
\86\ As the Supreme Court stated in Howey with respect to citrus
groves subject to an investment contract, purchasers ``have no
desire to occupy the land or develop it themselves; they are
attracted solely by the prospects of a return on their investment.''
Howey, 328 U.S. at 300. The purchasers' motivations were
demonstrated by their granting the issuer exclusive rights to occupy
and develop the land in exchange for a share in the profits
resulting from that development.
\87\ For purposes of this release, references to a ``purchaser''
include prospective purchasers.
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Whether it would be reasonable for a purchaser to expect profits
based on representations or promises to engage in essential managerial
efforts depends on the specific facts and circumstances, taken as a
whole, under which those representations and promises are made.\88\ For
example, the source of the representations or promises is relevant to a
purchaser's reasonable expectations. Because the issuer establishes the
essential managerial efforts that it intends to undertake, it would be
reasonable for a purchaser to expect profits based on the explicit
representations or promises to engage in essential managerial efforts
made by or on behalf of the issuer and conveyed to purchasers. In
contrast, it would not be reasonable for a purchaser to expect profits
based on representations or promises made by third parties,\89\ such as
unaffiliated proponents of the relevant crypto system or holders of the
relevant crypto asset, unless the representations or promises are
authorized by the issuer and conveyed to purchasers.\90\ Moreover, the
timing of the representations or promises is relevant to a purchaser's
reasonable expectations.\91\ Of necessity, in order to shape a
purchaser's expectations, the representations or promises must be
conveyed to the purchaser prior to or contemporaneously with the
issuer's offer or sale to the purchaser. As such, the issuer's post-
sale representations or promises would not convert the prior sale into
an offer or sale of an investment contract.
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\88\ This release addresses the scope of representations or
promises relevant to a reasonable expectation of profits under
Howey, and is distinct from and does not delineate the scope of
other provisions of the Federal securities laws, including the
antifraud provisions (e.g., 15 U.S.C. 77q, 78j), and disclosure
obligations applicable to registration statements and periodic
reports by reporting companies (e.g., 15 U.S.C. 77g, 77aa, 78m).
\89\ However, where the third party and the issuer collude to
convey representations or promises, it would be reasonable for a
purchaser to expect profits based on those explicit representations
or promises.
\90\ See, e.g., the definition of a ``person acting on behalf of
an issuer'' in section 101(c) of Regulation FD (17 CFR 243.101(c)).
\91\ For additional discussion of the timing of representations
or promises, see infra section IV.B.2.
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Similarly, the manner in which the representations or promises are
made is relevant to a purchaser's reasonable expectations. It is
reasonable for a purchaser to expect profits based on representations
or promises conveyed to purchasers in written or oral agreements,
public communications through which the issuer has established a
regular pattern of communicating (such as the issuer's website or
official social media accounts), direct private communications between
the issuer and purchasers, regulatory filings publicly available to
purchasers, or documents clearly attributable to the issuer (such as a
whitepaper).\92\ Outside of such channels, the reasonableness of a
purchaser's expectations of profit depends on whether the
representations or promises are widely disseminated, the specific means
by which the representations or promises are conveyed, and the issuer's
established communication practices.
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\92\ For purposes of this release, ``whitepaper'' refers to a
document that describes the technical aspects of a crypto asset
project (i.e., a crypto asset and the associated crypto system)
along with other relevant details.
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Further, representations or promises are more likely to create
reasonable expectations of profit when they are explicit and
unambiguous as to the essential managerial efforts to be undertaken by
the issuer, contain sufficient details demonstrating the issuer's
ability to implement the proposed project, and explain how the issuer's
efforts will produce the profits that purchasers reasonably expect.
Representations or promises by an issuer conveyed to purchasers to
develop and achieve functionality for a non-security crypto asset and/
or develop an associated crypto system together with a business plan
containing detailed milestones, a timeline, information about
personnel, sources of funding and other resources needed to meet those
milestones, and an explanation of how holders of the non-security
crypto asset will profit from those efforts, likely would reasonably
create an expectation of profit because
[[Page 13722]]
they speak directly to those essential managerial efforts that affect
the failure or success of the project.\93\ In contrast, representations
or promises that are vague or contain no semblance of an actionable
business plan, such as those lacking milestones, funding, or other
plans for needed resources, likely would not create reasonable
expectations of profit.
---------------------------------------------------------------------------
\93\ This discussion addresses one example, and the presence or
absence of any single activity may not be outcome determinative when
determining whether any particular contract, transaction, or scheme
constitutes an investment contract.
---------------------------------------------------------------------------
The issuer's representations or promises to engage in essential
managerial efforts from which a purchaser would reasonably expect to
derive profits, when combined with an investment of money in a common
enterprise, creates an investment contract under the Howey test. As is
the case with other non-security assets,\94\ the fact that a non-
security crypto asset is subject to an investment contract does not
transform the non-security crypto asset itself into a security. For
this reason, a non-security crypto asset that has been subject to an
investment contract does not remain subject to the associated
investment contract in secondary market transactions where purchasers
would not reasonably expect such representations or promises to remain
connected to the non-security crypto asset. If, on the other hand,
purchasers would reasonably expect such representations or promises to
remain connected to the non-security crypto asset, the non-security
crypto asset would continue to be subject to the associated investment
contract in secondary market transactions. Under such circumstances,
secondary market offers and sales of such a non-security crypto asset
would constitute securities transactions that must be registered under
the Securities Act or conducted pursuant to an available exemption from
registration. The associated investment contract will continue to be
transferred to subsequent purchasers of the non-security crypto asset
in secondary market transactions until the non-security crypto asset
separates from the issuer's representations or promises, as discussed
below.
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\94\ See supra note 85.
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B. Separation of a Non-Security Crypto Asset From the Issuer's
Representations or Promises
A non-security crypto asset that was offered and sold subject to an
investment contract does not necessarily remain subject to the
associated investment contract in perpetuity. A non-security crypto
asset remains subject to the associated investment contract if
purchasers continue to have a reasonable expectation of profits to be
derived from the issuer's essential managerial efforts. For that to be
so, purchasers must continue to reasonably expect the issuer's
representations or promises to engage in essential managerial efforts
to remain connected to the non-security crypto asset.
When a purchaser of a non-security crypto asset that has been
subject to an investment contract could no longer reasonably expect the
issuer's representations or promises to engage in essential managerial
efforts to remain connected to the non-security crypto asset, the non-
security crypto asset separates from such representations or promises,
and thereafter the non-security crypto asset is not subject to the
Federal securities laws. This separation of the non-security crypto
asset from the issuer's representations or promises to engage in
essential managerial efforts may occur at any time after the offer of
the associated investment contract, such as immediately upon delivery
of the non-security crypto asset to purchasers or at a future date. As
discussed below, we would not expect a non-security crypto asset to be
subject to an investment contract when any of the following non-
exclusive indicia of separation is present.
1. Fulfillment of the Issuer's Representations or Promises
A non-security crypto asset that was offered and sold subject to an
investment contract is no longer subject to the associated investment
contract once the issuer has fulfilled its representations or promises
to engage in essential managerial efforts, even if the issuer continues
to provide efforts that are not essential managerial efforts with
respect to the non-security crypto asset or an associated crypto system
or other software project.\95\ Because the issuer has fulfilled the
essential managerial efforts it represented or promised it would
undertake, purchasers no longer have any reasonable expectations of
profits to be derived from those efforts. Such representations or
promises to engage in essential managerial efforts could, for example,
relate to developing certain functionalities or features for the non-
security crypto asset or the associated crypto system or other software
project, achieving certain software development milestones on a
roadmap, or open-sourcing related computer code.\96\ Upon the issuer's
fulfillment of such representations or promises, the issuer is no
longer offering or selling an investment contract and the investment
contract itself ceases to exist. Accordingly, the issuer's subsequent
offers or sales of the non-security crypto asset would not constitute
securities transactions unless the issuer creates a new investment
contract to which the non-security crypto asset is subject.
---------------------------------------------------------------------------
\95\ For examples of activities that the Commission does not
view as ongoing essential managerial efforts, see supra section
IV.A.
\96\ Whether an issuer fulfills its representations or promises
to engage in essential managerial efforts depends on how the issuer
defines or otherwise describes such efforts in marketing and
promoting the investment contract. For example, if the issuer
represents or promises to achieve decentralization of an associated
crypto system, whether the issuer has achieved decentralization
would be based on how the issuer defined or otherwise described
decentralization, not a general market conception of what
constitutes decentralization. Similarly, if the issuer represents or
promises to achieve certain functionality for a crypto asset and its
associated crypto network, whether the issuer has achieved
functionality would be based on how the issuer defined or otherwise
described functionality, not a general market conception of what
constitutes functionality.
---------------------------------------------------------------------------
To illustrate, a non-security crypto asset may be offered and sold
subject to an investment contract in a primary offering for immediate
delivery or delayed delivery. In an offering involving immediate
delivery, such as through an ``initial coin offering,'' the issuer
agrees to deliver newly generated non-security crypto assets
immediately to investors in exchange for their investment. In an
offering involving delayed delivery, such as through a ``simple
agreement for future tokens,'' the issuer agrees to deliver non-
security crypto assets that have not yet been generated to investors at
a later date in exchange for their investment today. In either case,
the sale of the non-security crypto assets occurs at the time of entry
into the agreement with the investors (with settlement occurring either
immediately or at a future date),\97\ at which time the non-security
crypto assets become subject to an investment contract regardless of
when they are delivered.
---------------------------------------------------------------------------
\97\ See Securities Offering Reform, Release No. 33-8591 (July
19, 2005) [70 FR 44721, 44765 n.391 (Aug. 3, 2005)].
---------------------------------------------------------------------------
Upon delivery, where a purchaser would not reasonably expect profit
from the efforts of the issuer (such as where the issuer has publicly
disclosed that it completed the essential managerial efforts it
represented or promised it would undertake), the non-security crypto
assets are no longer subject to the associated investment contract
because a necessary element of an investment contract no longer exists.
In contrast, upon delivery, where a purchaser would reasonably expect
profits from the
[[Page 13723]]
efforts of the issuer (such as where the issuer has continued providing
essential managerial efforts in accordance with its representations or
promises or has not publicly disclosed that it completed the essential
managerial efforts it represented or promised it would undertake), the
non-security crypto assets would continue to be subject to the
associated investment contract.
2. Failure To Satisfy Issuer's Representations or Promises
A non-security crypto asset that was offered and sold subject to an
investment contract is no longer subject to an investment contract if a
purchaser would not reasonably expect the issuer to be able to fulfill
or to continue to engage in the essential managerial efforts it
represented or promised it would undertake. There are several reasons
why this could occur. For example, a sufficiently long period of time
may have passed since the issuer's offer and sale of the investment
contract and, during this time period, it has become clear to investors
that the issuer has neither conducted the essential managerial efforts
it represented or promised it would undertake nor indicated that it
still intends to conduct such efforts. Similarly, the issuer may
publicly announce that it will no longer perform the essential
managerial efforts it represented or promised it would undertake (e.g.,
where the issuer effectively ``abandons'' the development of a crypto
system).\98\
---------------------------------------------------------------------------
\98\ A public announcement of non-performance should be widely
disseminated to market participants and unambiguous in order for
investors to no longer reasonably expect the issuer to perform the
essential managerial efforts.
---------------------------------------------------------------------------
Under these circumstances, a purchaser of the non-security crypto
asset would not reasonably expect an issuer's past representations or
promises to engage in essential managerial efforts to continue to
remain connected to the non-security crypto asset. Accordingly, such
purchaser would not reasonably expect the non-security crypto asset to
be subject to the associated investment contract. An issuer that fails
to perform or otherwise complete the essential managerial efforts it
represented or promised it would undertake may face liabilities under
the Federal securities laws for these failures, including under the
anti-fraud provisions of the Federal securities laws.
To illustrate, a non-security crypto asset is offered and sold
subject to an investment contract comprising the issuer's
representations or promises to undertake certain essential managerial
efforts in connection with the development of a crypto system. The
offer and sale of that investment contract must be registered under the
Securities Act or conducted pursuant to an exemption from registration.
As the issuer endeavors to develop the crypto system, the issuer
experiences difficulties that affect its ability to fulfill the
essential managerial efforts it represented or promised to undertake,
such as insufficient funding or other resources, poor system
architecture, technical issues (e.g., scalability problems, smart
contract flaws, or security vulnerabilities), competition, poor
management, and market conditions. Based on these difficulties, the
issuer decides that it is unable or unwilling to fulfill the essential
managerial efforts it promised to undertake and abandons the
development of the crypto system.
In such case, if the issuer publicly announces through a widely
disseminated communication that it is abandoning the development of the
crypto asset and will no longer perform the essential managerial
efforts it represented or promised it would undertake when the
investment contract was created, it would not be reasonable to expect
the issuer's representations or promises to engage in such essential
managerial efforts to remain connected to the non-security crypto
asset. Accordingly, the non-security crypto asset would no longer be
subject to the associated investment contract, and the associated
investment contract would cease to exist. Nevertheless, the issuer
would continue to be potentially liable for material misstatements or
omissions in connection with its failure to perform or otherwise
complete the essential managerial efforts that it represented or
promised that it would undertake.
3. Application of the Interpretation
The interpretation above assumes that an investment contract has
been created and does not address or otherwise affect the analysis
regarding its creation under the Howey test. The interpretation only
addresses certain circumstances under which a non-security crypto asset
that is subject to an existing investment contract may separate from
that investment contract and no longer be subject to that investment
contract. Consequently, the interpretation only applies after an
investment contract is created, even if the investment contract later
ceases to exist because the issuer is unable or unwilling to complete
the essential managerial efforts it represented or promised to
undertake when the investment contract was created.
Similarly, the fact that a non-security crypto asset may separate
from the associated investment contract at some time following its
creation does not affect the application of the Federal securities laws
with respect to that investment contract. For example, the offer and
sale of a non-security crypto asset that is subject to an investment
contract must be registered under the Securities Act or conducted
pursuant to an available exemption. If the issuer fails to register the
offering of that investment contract or conduct it pursuant to an
available exemption, the issuer will violate the Securities Act and
investors will have certain rights against the issuer under the Federal
securities laws for this failure to register or use an applicable
exemption, even if the non-security crypto asset subsequently separates
from the associated investment contract and that investment contract
ceases to exist. Moreover, if the issuer makes material misstatements
or omissions in connection with the creation of the associated
investment contract or at any time during the existence of that
investment contract, the issuer may be subject to liability under the
anti-fraud provisions of the Federal securities laws for such conduct,
even if the non-security crypto asset subsequently separates from the
associated investment contract and that investment contract ceases to
exist.
The interpretation in this section IV is intended to underscore the
Commission's view that how an issuer markets and promotes a contract,
transaction, or scheme impacts whether the issuer is offering or
selling an investment contract. To the extent issuers make
representations or promises about essential managerial efforts they
plan to undertake, we encourage issuers to clearly and in sufficient
detail outline those efforts, provide a timeline and milestones for
completing those efforts, explain the resources needed to complete
those efforts, and publicly disclose the completion of those efforts.
V. Federal Securities Laws Status of The Crypto Asset Activities Known
as ``Protocol Mining'' and ``Protocol Staking''
Crypto networks rely on cryptography and economic mechanism design
to eliminate the need for designated trusted intermediaries to verify
crypto network transactions and provide settlement assurances to users.
The operation of each crypto network is governed by an underlying
software protocol, consisting of computer code, which programmatically
enforces certain rules, technical requirements, and reward
distributions. Each protocol incorporates a ``consensus mechanism,''
[[Page 13724]]
which is a method for enabling the distributed network of unrelated
computers (known as ``nodes'') that maintain the peer-to-peer network
to agree on the ``state'' (or authoritative record of network address
ownership balances, transactions, smart contract code, and other data)
of the network. Public, permissionless crypto networks allow anyone to
participate in the crypto network's operation, including the validation
of new transactions to the crypto network in accordance with the crypto
network's consensus mechanism.
In the following discussion, we provide an interpretation regarding
the application of the Federal securities laws to: (1) certain digital
commodity activities known as ``mining'' on public, permissionless
crypto networks that use proof-of-work (``PoW'') as a consensus
mechanism (``PoW Networks''); and (2) certain digital commodity
activities known as ``staking'' on public, permissionless crypto
networks that use proof-of-stake (``PoS'') as a consensus mechanism
(``PoS Networks''). In this release, we refer to mining digital
commodities on PoW Networks as ``Protocol Mining'' \99\ and staking
digital commodities on PoS Networks as ``Protocol Staking.'' \100\
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\99\ Corporation Finance previously issued a statement
addressing Protocol Mining. See U.S. Securities and Exchange
Commission, Division of Corporation Finance, Staff Statement on
Certain Proof-of-Work Mining Activities (Mar. 20, 2025), available
at https://www.sec.gov/newsroom/speeches-statements/statement-certain-proof-work-mining-activities-032025. That statement and any
other staff statement referenced in this release is not a rule,
regulation, guidance, or statement of the Commission, and the
Commission has neither approved nor disapproved its content. Staff
statements have no legal force or effect: they do not alter or amend
applicable law, and they create no new or additional obligations for
any person. For the avoidance of doubt, the views expressed by the
Commission in this release supersede any prior statements by the
Commission or its staff on these topics.
\100\ Corporation Finance previously issued two statements
addressing Protocol Staking. See U.S. Securities and Exchange
Commission, Division of Corporation Finance, Staff Statement on
Certain Protocol Staking Activities (May 29, 2025), available at
https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925, and Staff Statement on Certain
Liquid Staking Activities (Aug. 5, 2025), available at https://www.sec.gov/newsroom/speeches-statements/corpfin-certain-liquid-staking-activities-080525. That statement and any other staff
statement referenced in this release is not a rule, regulation,
guidance, or statement of the Commission, and the Commission has
neither approved nor disapproved its content. Staff statements have
no legal force or effect: they do not alter or amend applicable law,
and they create no new or additional obligations for any person. For
the avoidance of doubt, the views expressed by the Commission in
this release supersede any prior statements by the Commission or its
staff on these topics.
---------------------------------------------------------------------------
A. Protocol Mining
1. Protocol Mining Activities Generally
PoW is a consensus mechanism that incentivizes transaction
validation by rewarding participants, called ``miners,'' who operate
nodes adding computational resources to the PoW Network. PoW involves
validating transactions on a PoW Network and adding them in blocks to
the distributed ledger. The ``work'' in PoW is the computational
resources that miners contribute to validate transactions and add new
blocks to the PoW Network. Miners do not have to own the PoW Network's
digital commodity to validate transactions.
Miners use computers to solve complex mathematical equations in the
form of cryptographic puzzles. Miners compete with their peers to solve
these puzzles, and the first miner to solve a puzzle is charged with
accepting batches of transactions from other nodes and validating (or
proposing) new blocks of transactions to the PoW Network. In exchange
for providing validation services, miners earn rewards in the form of
newly generated digital commodities that are delivered under the terms
of the PoW Network's software protocol.\101\ In this way, PoW provides
an incentive for miners to invest the resources necessary to add valid
blocks to the PoW Network.
---------------------------------------------------------------------------
\101\ The protocol establishes rules on rewards. Miners cannot
change the rewards they receive as the reward structure is
predetermined by the protocol.
---------------------------------------------------------------------------
A miner providing validation services receives the reward only
after the other nodes on the PoW Network verify, through the software
protocol, that the solution is correct and valid. To this end, once a
miner finds the correct solution, it broadcasts this information to
other miners who can verify whether the miner properly solved the
puzzle to receive the reward. Once verified, all miners then add the
new block to their own copies of the PoW Network. PoW is designed to
secure the PoW Network by requiring miners to spend considerable time
and computational resources to authenticate transactions. When the
validation process functions in this way, it not only makes it less
likely that someone would seek to undermine a PoW Network but also
makes it less likely that miners could include altered transactions,
such as those enabling the ``double spending'' of digital
commodities.\102\
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\102\ Double spending involves the same crypto assets being sent
to two recipients and can occur when ledger entries are altered.
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In addition to self (or solo) mining, miners can join ``mining
pools,'' which allow miners to combine their computational resources to
increase their chances of successfully validating transactions and
mining new blocks on the PoW Network. There are several types of mining
pools, each with differing methods of operation and reward
distribution.\103\ A pool operator typically is responsible for
coordinating the miners' computational resources, maintaining the
pool's mining hardware and software, overseeing the pool's security
measures to protect against theft and cyberattacks, and ensuring that
the miners are paid their rewards. In return, the pool operator charges
a fee that is deducted from the rewards earned by the mining pool.
Reward payouts vary among pools, although rewards often are distributed
across the mining pool in proportion to the amount of computational
resources that each miner contributes to the pool. Miners generally
have no obligation to stay in a pool and can choose to leave a pool at
any time.
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\103\ For example, in a ``pay-per-share'' model, miners receive
a payment for each valid share or block they contribute to the
mining pool, regardless of whether the pool successfully mines a
block; in a ``peer-to-peer'' model, the pool operator's role is
decentralized among pool members; and in a ``proportional'' model,
miners receive rewards proportional to the amount of work they
contribute to successfully mine a block. There also may be hybrid
pools that offer a combination of different operational and payout
methods.
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2. Covered Protocol Mining Activities
The interpretation below pertains to the following Protocol Mining
activities when such activities conform to the descriptions in this
release (``Protocol Mining Activities'' and each a ``Protocol Mining
Activity''): (1) mining digital commodities on a PoW Network; and (2)
the roles of mining pools and pool operators involved in the Protocol
Mining process, including their roles in connection with the earning
and distribution of rewards. Only Protocol Mining Activities undertaken
in connection with the following types of Protocol Mining are addressed
in this release:
Self (or Solo) Mining, which involves a miner mining digital
commodities using its own computational resources. The miner may work
alone or together with others to operate a node and mine digital
commodities.
Mining Pool, which involves miners combining their computational
resources with other miners to increase their chances of successfully
validating transactions and mining new blocks on the PoW Network.
Reward payments may flow from the PoW Network directly to the miners or
indirectly to them through the pool operator.
[[Page 13725]]
3. Interpretation Regarding Protocol Mining Activities
Protocol Mining Activities, in the manner and under the
circumstances described in this release, do not involve the offer and
sale of a security within the meaning of section 2(a)(1) of the
Securities Act and section 3(a)(10) of the Exchange Act. Accordingly,
participants in Protocol Mining Activities do not need to register
transactions with the Commission under the Securities Act or fall
within an available exemption from registration in connection with
these Protocol Mining Activities.
As noted above,\104\ a digital commodity itself does not constitute
any of the financial instruments enumerated in the definition of
``security.'' Accordingly, we conduct our analysis of certain
transactions involving digital commodities in the context of Protocol
Mining under the Howey test.
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\104\ See supra section III.A.
---------------------------------------------------------------------------
Self (or Solo) Mining. A miner's self (or solo) mining is not
undertaken with a reasonable expectation of profits to be derived from
the essential managerial efforts of others. Rather, a miner contributes
its own computational resources, which secure the PoW Network and
enable the miner to earn rewards issued by the PoW Network in
accordance with its software protocol. To earn rewards, the miner's
activities must comply with the rules of the PoW Network's software
protocol. By adding its computational resources to the PoW Network, the
miner merely is engaging in an administrative or ministerial activity
to secure the PoW Network, validate transactions and add new blocks,
and receive rewards. A miner's expectation to receive rewards is not
derived from any third party's essential managerial efforts upon which
the PoW Network's success depends. Instead, the expected financial
incentive from the PoW Network's software protocol is derived from the
administrative or ministerial act of Protocol Mining performed by the
miner. As such, rewards are payments to the miner in exchange for
services it provides to the PoW Network rather than profits derived
from the essential managerial efforts of others.
Mining Pool. Likewise, when a miner combines its computational
resources with other miners to increase their chances of successfully
mining new blocks on the PoW Network, the miner has no expectation of
profit derived from the essential managerial efforts of others. By
adding its own computational resources to a mining pool, the miner
merely is engaging in an administrative or ministerial activity to
secure the PoW Network, validate transactions and add new blocks, and
receive rewards. In addition, any expectation of profits that the
miners have is not derived from the efforts of a third party, such as a
pool operator. Even when participating in a mining pool, individual
miners still perform the actual mining activity by contributing their
computational power to solve the cryptographic puzzles for validation
of new blocks.\105\ Moreover, whether a miner self (or solo) mines or
mines as a member of a mining pool does not alter the nature of
Protocol Mining for purposes of the Howey test. In either case,
Protocol Mining, as described in this release, remains an
administrative or ministerial activity. Further, a pool operator's
activities in operating the mining pool using the combined
computational resources of participating miners are administrative or
ministerial in nature. While some of the pool operator's activities may
benefit the group of miners, any such efforts are not sufficient to
constitute essential managerial efforts because miners are expecting
the computational resources that they provide in conjunction with other
members to the mining pool to earn profits.\106\ To this end, a miner
does not join a mining pool based on the ability to earn profits
passively from the activities of the pool operator.
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\105\ This assumes miners receive a pro rata share of the
rewards from the pool based on their contribution of computational
power, rather than where non-miners can purchase interests in the
pool, or miners can pay to receive greater than a pro rata share of
the rewards from the pool based on their contribution of
computational power.
\106\ In contrast, where miners passively rely on the pool
operator to provide the computational resources, the pool operator's
activities constitute essential managerial efforts.
---------------------------------------------------------------------------
B. Protocol Staking
1. Protocol Staking Activities Generally
PoS is a consensus mechanism used to prove that operators of nodes
(``Node Operators'') participating in the PoS Network have contributed
value to the PoS Network that, in some cases, can be forfeited if they
act dishonestly.\107\ In a PoS Network, a Node Operator must stake the
PoS Network's digital commodity to be selected programmatically by the
PoS Network's software protocol to validate new blocks of data to, and
update the state of, the PoS Network.\108\ When selected, the Node
Operator serves as a ``Validator.'' In exchange for providing
validation services, Validators earn rewards of two types: (1) newly
generated digital commodities that are programmatically distributed to
the Validator by the PoS Network in accordance with its software
protocol; and (2) a percentage of the transaction fees, paid in digital
commodities, by parties who are seeking to add their transactions to
the PoS Network.\109\
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\107\ This release does not address ``restaking,'' which is a
process that allows digital commodities staked on their associated
crypto network to be used on additional crypto systems. The specific
staking activities covered by this release are discussed below in
``Covered Protocol Staking Activities.''
\108\ Validation is the process by which the Node Operator
checks and confirms transactions effected on the crypto network.
\109\ While the protocol establishes rules on rewards, Node
Operators generally are free to share rewards or impose fees for
their services in ways that differ from those of the protocol. Some
protocols permit a Node Operator to propose and receive a reward
that differs from the protocol's standard reward.
---------------------------------------------------------------------------
In PoS Networks, Node Operators must commit or ``stake'' digital
commodities to be eligible to validate and earn rewards, which
typically is effected using a smart contract. When initially staked,
digital commodities are subject to a ``bonding period,'' which is a
length of time set by the terms of the applicable PoS Network's
software protocol after which the staked digital commodities become
eligible to earn rewards. While staked, the digital commodities are
locked up and cannot be transferred.\110\ The Validator does not take
possession or control of the staked digital commodities, which means
that ownership and control of the staked digital commodities do not
change.
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\110\ The minimum staking or lock-up period varies among PoS
networks. Further, staked digital commodities typically are subject
to an ``unbonding period,'' which is a length of time set by the
terms of the applicable PoS Network's software protocol after which
digital commodities that are unstaked are unlocked and can be
transferred.
---------------------------------------------------------------------------
Each PoS Network's software protocol contains the rules for
operating and maintaining the PoS Network, including the method of
selecting Validators among Node Operators. Some software protocols
provide for random selection of Validators while others employ specific
criteria for selecting Validators, such as the number of digital
commodities staked by the Node Operators. Protocols also may contain
rules intended to deter activities that are detrimental to the PoS
Network's security and integrity, such as validating invalid blocks or
double signing (which occurs when a Validator attempts to add the same
transaction to the PoS Network multiple times, effectively spending the
same crypto assets more than once).\111\
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\111\ A Node Operator or Validator may have its staked digital
commodities forfeited or ``slashed'' if it engages in such
detrimental activities or fails to adhere to the PoS Network's
technical requirements.
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[[Page 13726]]
Rewards from Protocol Staking provide an economic incentive for
participants to use their digital commodities to secure the PoS Network
and ensure its continued operation. An increase in the amount of staked
digital commodities can increase the security of PoS Networks and
mitigate the risk of a hostile party gaining control of a majority of
the total staked digital commodities, which would allow the party to
manipulate the PoS Network by influencing the validation of
transactions and potentially altering the PoS Network's transaction
history.
Digital commodity owners (``Owners'') can earn rewards by serving
as a Node Operator and staking their own digital commodities. When self
(or solo) staking, the Owner maintains ownership and control of its
digital commodities and cryptographic private ``keys'' at all times.
Alternatively, Owners can participate in the PoS Network validation
process without running their own nodes by using self-custodial staking
directly with a third party. Owners grant their validation rights to a
third-party Node Operator.\112\ When using a third-party Node Operator,
the Owner receives a portion of the rewards, with the Node Operator
also earning a portion of the rewards for its services in validating
transactions. When self-custodial staking directly with a third party,
the Owner retains ownership and control of its digital commodities and
its private keys.
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\112\ On certain PoS Networks, Owners can stake their digital
commodities and receive validation rights that they can grant to a
third party, thereby allowing the third party to use the staked
digital commodities to verify transactions on the PoS Network on
behalf of the Owners. For example, some PoS Networks may facilitate
this by allowing an Owner to ``delegate'' its validation rights to a
Node Operator. In this case, the Node Operator acts as a
``Delegate'' in the staking process. Other PoS Networks may use
``Nominators'' to whom an Owner may grant its validation rights to
act on the Owner's behalf in selecting Validators.
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In addition to self (or solo) staking and self-custodial staking
directly with a third party, a third form of Protocol Staking is
``custodial'' staking, in which a third party (a ``Custodian'') takes
custody of an Owner's digital commodities and facilitates staking them
on behalf of the Owner. When Owners (in this context, ``Depositors'')
deposit their digital commodities with a Custodian, the Custodian holds
the deposited digital commodities in a cryptographic wallet that the
Custodian controls. The Custodian stakes the digital commodities on the
Depositor's behalf for an agreed-upon portion of any rewards, either
using a node the Custodian operates or through a third-party Node
Operator the Custodian selects. At all times during the staking
process, the deposited digital commodities remain in the control of the
Custodian, and the Depositor is intended to retain ownership of the
digital commodities held by the Custodian.\113\ Further, the deposited
digital commodities: (1) are not used by the Custodian for operational
or general business purposes; (2) are not lent, pledged, or
rehypothecated for any reason; and (3) are held in a manner designed
not to subject them to claims by third parties. To this end, the
Custodian may not use the deposited digital commodities to engage in
leverage, trading, speculation, or discretionary activities.
---------------------------------------------------------------------------
\113\ The Custodian typically enters into an agreement with the
Depositor, such as a user agreement or terms of service, providing
that the Depositor retains ownership of the digital commodities.
---------------------------------------------------------------------------
A fourth type of Protocol Staking is ``Liquid Staking,'' whereby
Depositors receive newly generated crypto assets (``Staking Receipt
Tokens'') that evidence Depositors' ownership of the deposited digital
commodities and any rewards that accrue to the deposited digital
commodities.\114\ As part of Liquid Staking, Staking Receipt Tokens are
issued to Depositors on a one-for-one basis to the amount of the
deposited digital commodities.\115\ Staking Receipt Tokens enable their
holders to maintain liquidity without having to withdraw the deposited
digital commodities from staking. For example, holders can use Staking
Receipt Tokens as collateral or to participate in crypto applications,
including those that can provide a return to the holder, although any
such transactions are separate and independent of the Protocol Staking
activities. Staking Receipt Tokens do not change any of the rights or
obligations of the deposited digital commodities and are characterized
as receipts for the deposited digital commodities. Depositors can
redeem the Staking Receipt Tokens for the deposited digital commodities
and any rewards that accrue to the deposited digital commodities,\116\
subject to any applicable unbonding period.\117\
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\114\ As discussed below, slashing losses are deducted from the
staked digital commodities.
\115\ While issued on a one-for-one basis, the Staking Receipt
Token that is issued may not be a whole unit because at the time of
deposit one whole unit of the deposited digital commodity may
represent a fraction of one whole unit of the Staking Receipt Token.
\116\ When redeemed, the Staking Receipt Tokens are ``burned,''
which is a process through which the Staking Receipt Tokens are
permanently removed from circulation.
\117\ See supra note 110 for an explanation of ``unbonding
period.''
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Persons can participate in Liquid Staking through protocol-based or
third-party service providers (both referred to in this release as
``Liquid Staking Providers''). The Liquid Staking Provider facilitates
the staking of the deposited digital commodities on behalf of the
Depositor. The Liquid Staking Provider holds the deposited digital
commodities either in a cryptographic wallet that the Liquid Staking
Provider controls or in a smart contract. The Liquid Staking Provider
stakes the deposited digital commodities on behalf of the Depositor for
an agreed-upon fee that reduces the amount of rewards that would
otherwise accrue to the deposited digital commodities, either using a
node the Liquid Staking Provider operates or through a third-party Node
Operator the Liquid Staking Provider selects.\118\ In the latter case,
this selection is the Liquid Staking Provider's only decision in the
staking process, and that decision may be automated. At all times
during this Liquid Staking arrangement, the deposited digital
commodities remain in the control of the Liquid Staking Provider and
the Depositor (or any subsequent transferee of the Depositor's Staking
Receipt Tokens) is intended to retain ownership of the deposited
digital commodities.\119\
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\118\ The amount of rewards that otherwise would accrue to the
deposited digital commodities also would be reduced by any fees owed
to a third-party Node Operator.
\119\ The Liquid Staking Provider typically enters into an
agreement with the Depositor, such as a user agreement or terms of
service, providing that the Depositor retains ownership of the
digital commodities.
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When using a protocol-based Liquid Staking Provider, Depositors
deposit their digital commodities into a software protocol that holds
the deposited digital commodities in a smart contract on behalf of the
Depositors, stakes the deposited digital commodities on behalf of the
Depositors, and issues Staking Receipt Tokens to the Depositors, all in
a programmatic manner through self-executing computer code. The
generating, issuing, and redeeming of the Staking Receipt Tokens is
performed without the need for or reliance on a third-party
intermediary.
When using a third-party Liquid Staking Provider, such as a
Custodian, Depositors deposit their digital commodities with the third-
party Liquid Staking Provider, who holds the
[[Page 13727]]
deposited digital commodities in a cryptographic wallet on behalf of
the Depositors, stakes the deposited digital commodities on behalf of
the Depositors, and issues Staking Receipt Tokens to the Depositors.
The generating, issuing, and redeeming of the Staking Receipt Tokens is
performed by the third-party Liquid Staking Provider.
In a Liquid Staking arrangement, rewards accrue to, and slashing
\120\ losses are deducted from, the staked digital commodities. Rewards
are deposited with the Liquid Staking Provider, and staked digital
commodities are forfeited if there are slashing losses, in either case
in a programmatic manner through self-executing computer code. There
are two methods through which Staking Receipt Tokens reflect rewards
and/or slashing losses. In the first method, the Staking Receipt Token
itself evidences ownership of more digital commodities as and when
rewards accrue and fewer digital commodities as and when slashing
losses occur. This means that the ratio of one Staking Receipt Token to
one digital commodity changes as rewards accrue and/or slashing losses
occur. For example, as rewards accrue the ratio changes from one-to-one
to one-to-more-than-one, with one Staking Receipt Token representing
more than one digital commodity. In the second method, Staking Receipt
Token holders receive additional Staking Receipt Tokens as and when
rewards accrue and lose Staking Receipt Tokens as and when slashing
losses occur. This means that the ratio of Staking Receipt Tokens to
digital commodities always remains one-to-one. In either case, the
Staking Receipt Tokens can be redeemed with the Liquid Staking Provider
at any time for the deposited digital commodities, subject to any
applicable unbonding period.
---------------------------------------------------------------------------
\120\ See supra note 111 for an explanation of ``slashing.''
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2. Covered Protocol Staking Activities
The interpretation below pertains to the following Protocol Staking
activities when such activities conform to the descriptions in this
release (``Protocol Staking Activities'' and each a ``Protocol Staking
Activity''): (1) staking digital commodities on a PoS Network; (2) the
activities undertaken by third parties involved in the Protocol Staking
process--including, but not limited to, third-party Node Operators,
Validators, Custodians, Delegates, Nominators, and Liquid Staking
Providers (collectively, ``Service Providers'')--including their roles
in connection with the earning and distribution of rewards; (3) the
activities undertaken by Liquid Staking Providers in connection with
generating, issuing, and redeeming Staking Receipt Tokens; and (4)
providing Ancillary Services (as defined below). Only Protocol Staking
Activities undertaken in connection with the following types of
Protocol Staking are addressed in this release:
Self (or Solo) Staking, which involves a Node Operator staking
digital commodities it owns and controls using its own resources. The
Node Operator may include one or more persons acting together to
operate a node and stake their digital commodities.
Self-Custodial Staking Directly with a Third Party, which involves
a Node Operator, under the terms of the PoS Network's protocol, being
granted Owners' validation rights. Reward payments may flow from the
PoS Network directly to the Owners or indirectly to them through the
Node Operator.
Custodial Arrangement, which involves a Custodian staking on behalf
of Depositors. For example, a crypto asset trading platform holding
deposited digital commodities may stake such digital commodities on
behalf of Depositors on a PoS Network that permits delegation on behalf
of and with the consent of the Depositors. The Custodian will stake the
deposited digital commodities using its own node or select a third-
party Node Operator. In the latter case, this selection is the
Custodian's only decision in the staking process.
Liquid Staking, which involves a Liquid Staking Provider staking on
behalf of Depositors who receive a Staking Receipt Token that evidences
their ownership of the deposited digital commodities and any rewards
that accrue to the deposited digital commodities. The Liquid Staking
Provider will stake the deposited digital commodities using its own
node or select a third-party Node Operator. In the latter case, this
selection is the Liquid Staking Provider's only decision in the Liquid
Staking process.
3. Interpretation Regarding Protocol Staking Activities
Protocol Staking Activities, in the manner and under the
circumstances described in this release, do not involve the offer and
sale of a security within the meaning of section 2(a)(1) of the
Securities Act or section 3(a)(10) of the Exchange Act. Accordingly,
participants in Protocol Staking Activities do not need to register
transactions with the Commission under the Securities Act or fall
within an exemption from registration in connection with these Protocol
Staking Activities.
As noted above,\121\ a digital commodity itself does not constitute
any of the financial instruments enumerated in the definition of
``security.'' Accordingly, we conduct our analysis of certain
transactions involving digital commodities in the context of Protocol
Staking under the Howey test.\122\
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\121\ See supra section III.A.
\122\ Protocol Staking generally and the ``Protocol Staking
Activities'' defined in this release and upon which we express our
view in this release do not involve notes or other evidences of
indebtedness because at all times during the staking process the
Owner or Depositor retains ownership of its digital commodities
(either directly or through a Custodian or Liquid Staking Provider).
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Self (or Solo) Staking. A Node Operator's self (or solo) staking is
not undertaken with a reasonable expectation of profits to be derived
from the essential managerial efforts of others. Rather, Node Operators
contribute their own resources and stake their own digital commodities,
thereby helping to secure the PoS Network and facilitating the PoS
Network's operation through the validation of new blocks, which enables
them to qualify for rewards issued by the PoS Network in accordance
with its underlying software protocol. To earn rewards, the Node
Operator's activities must comply with the rules of the PoS Network's
software protocol. By staking its own digital commodities and engaging
in Protocol Staking, the Node Operator is merely engaging in an
administrative or ministerial activity to secure the PoS Network and
facilitate its operation. A Node Operator's expectation to receive
rewards is not derived from any third party's essential managerial
efforts upon which the PoS Network's success depends. Instead, the
expected financial incentive from the PoS Network's software protocol
is derived solely from the administrative or ministerial act of
Protocol Staking. As such, rewards are payments to the Node Operator in
exchange for the services it provides to the PoS Network rather than
profits derived from the essential managerial efforts of others.
Self-Custodial Staking Directly with a Third Party. Likewise, where
an Owner grants its validation rights to a Node Operator, the Owner has
no expectation of profit derived from the essential managerial efforts
of others. The Node Operator's service to the Owner is administrative
or ministerial in nature and does not constitute essential managerial
efforts for the reasons discussed above with respect to self (or solo)
staking. Whether a Node Operator
[[Page 13728]]
stakes its own digital commodities or is granted validation rights from
Owners does not alter the nature of Protocol Staking for purposes of
the Howey test. In either case, Protocol Staking remains an
administrative or ministerial activity, and the expected financial
incentive is derived solely from such activity and not the success of
the PoS Network or some other third party. Further, the Node Operator
does not guarantee or otherwise set or fix the amount of the rewards
owed to Owners, although the Node Operator may subtract from such
amount its fees (whether fixed or a percentage of such amount).
Custodial Arrangement. In a custodial arrangement, the Custodian
(whether a Node Operator or not) does not provide essential managerial
efforts to Depositors for whom it provides this service. These
arrangements are like those discussed above where an Owner grants its
validation rights to a third party but, in this instance, they also
involve the Owner granting custody of its deposited digital
commodities. The Custodian does not decide whether, when, or how much
of a Depositor's digital commodities to stake. The Custodian acts as an
agent in connection with staking the deposited digital commodities on
behalf of the Depositor.\123\ In addition, the Custodian's taking
custody of the deposited digital commodities and in some cases
selecting a Node Operator do not constitute essential managerial
efforts because these activities are administrative or ministerial in
nature. Further, the Custodian does not guarantee or otherwise set or
fix the amount of the rewards owed to Depositors, although the
Custodian may subtract from such amount its fees (whether fixed or a
percentage of such amount).\124\
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\123\ If a Custodian does select whether, when, or how much of a
Depositor's digital commodities to stake, its activities are outside
the scope of this release.
\124\ If a Custodian does guarantee or otherwise set the amount
of rewards owed to the Depositors, its activities are outside the
scope of this release.
---------------------------------------------------------------------------
Liquid Staking. In Liquid Staking, the Liquid Staking Provider
(whether a Node Operator or not) does not provide essential managerial
efforts to Depositors for whom it provides this service. These
arrangements are like those discussed above with respect to a
``Custodial Arrangement.'' The Liquid Staking Provider does not decide
whether, when, or how much of a Depositor's digital commodities to
stake and is acting as an agent in connection with staking the digital
commodities on behalf of the Depositor.\125\ In addition, the Liquid
Staking Provider's taking custody of the deposited digital commodities
and in some cases selecting a Node Operator does not constitute
essential managerial efforts because these activities are
administrative or ministerial in nature. Further, the Liquid Staking
Provider does not guarantee or otherwise set the amount of the rewards
owed to Depositors, although the Liquid Staking Provider may subtract
from such amount its fees (whether fixed or a percentage of such
amount).\126\
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\125\ If a Liquid Staking Provider does select whether, when, or
how much of a Depositor's digital commodities to stake, its
activities are outside the scope of this release.
\126\ If a Liquid Staking Provider does guarantee or otherwise
set the amount of rewards owed to the Depositors, its activities are
outside the scope of this release.
---------------------------------------------------------------------------
Ancillary Services. Service Providers may provide the services
described below (``Ancillary Services'') to Owners and Depositors in
connection with Protocol Staking. Each of these Ancillary Services is
merely administrative or ministerial in nature and does not involve
essential managerial efforts. They are facets of a general activity--
Protocol Staking--that itself does not constitute essential managerial
efforts. Whether offered separately or as a group of services, the
Service Provider does not provide essential managerial efforts if it
provides any or all of these services.\127\
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\127\ To the extent that Service Providers provide services not
discussed below, their activities are outside the scope of this
release.
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Slashing Coverage, where the Service Provider reimburses or
indemnifies a staking customer against loss resulting from slashing.
This protection is similar to that offered by service providers in many
types of traditional commercial transactions.
Early Unbonding, where a Service Provider allows digital
commodities to be returned to an Owner or Depositor before the end of
the applicable unbonding period of a PoS Network's software protocol.
This service merely shortens the applicable unbonding period as a
convenience to the Owner or Depositor by reducing the burden of the
unbonding period.
Alternate Rewards Payment Schedules and Amounts, where the Service
Provider delivers earned rewards at a cadence and in an amount that
differs from the set schedule of a PoS Network's software protocol and/
or where the rewards are paid earlier or less frequently than a PoS
Network's software protocol distributes them, provided the reward
amounts are not fixed, guaranteed, or greater than those awarded by the
PoS Network's software protocol. Similar to early unbonding, this is
merely an optional convenience afforded to Owners and Depositors in
connection with the administration of rewards allocation and delivery.
Aggregation of Digital Commodities, where the Service Provider
offers the ability for Owners or Depositors to aggregate their digital
commodities to meet any applicable staking minimum of a PoS Network's
software protocol. This service is part of the validation process,
which itself is administrative or ministerial in nature. Without more,
aggregating the digital commodities of Owners or Depositors to help
enable staking is similarly administrative or ministerial in nature.
4. Interpretation Regarding Staking Receipt Tokens
The offer and sale of a Staking Receipt Token that is a receipt for
a non-security crypto asset that is not subject to an investment
contract, in the manner and under the circumstances described in this
release, does not involve the offer and sale of a security within the
meaning of section 2(a)(1) of the Securities Act or section 3(a)(10) of
the Exchange Act. Accordingly, persons involved in the process of
generating, issuing, and redeeming a Staking Receipt Token that is a
receipt for a non-security crypto asset that is not subject to an
investment contract, in the manner and under the circumstances
described in this release, as well as persons involved in secondary
market offers and sales of such Staking Receipt Tokens, do not need to
register those transactions with the Commission under the Securities
Act or fall within an exemption from registration. In contrast, the
offer or sale of a Staking Receipt Token that is a receipt for a
digital security or a non-security crypto asset that is subject to an
investment contract is an offer or sale of a security within the
meaning of section 2(a)(1) of the Securities Act or section 3(a)(10) of
the Exchange Act.
A Staking Receipt Token that is a receipt for a non-security crypto
asset that is not subject to an investment contract does not constitute
any of the common financial instruments enumerated in the definition of
``security'' because, among other things, it does not have the economic
characteristics of a security. While Depositors are entitled to rewards
accruing with respect to their deposited digital commodity, such a
Staking Receipt Token itself does not generate rewards. Rather, rewards
are generated from the underlying Protocol Staking Activities, which
(as discussed above)
[[Page 13729]]
do not involve securities transactions. Further, such a Staking Receipt
Token does not constitute any of the derivative financial instruments
enumerated in the definition of ``security.'' \128\ Thus, such a
Staking Receipt Token merely evidences the deposited digital commodity
held with the Liquid Staking Provider to which the Depositor is
entitled as the Owner. The definition of ``security'' specifically
includes ``receipt for'' any security.\129\ A Staking Receipt Token is
a receipt, which is an instrument certifying that a stated amount of a
digital commodity has been deposited with the Liquid Staking Provider
issuing the receipt, because it evidences the holder's ownership of the
deposited digital commodity.\130\ Accordingly, a Staking Receipt Token
that is a receipt for a non-security crypto asset that is not subject
to an investment contract is not a receipt for a security. In contrast,
a Staking Receipt Token that is a receipt for a digital security or
non-security crypto asset that is subject to an investment contract is
a security.
---------------------------------------------------------------------------
\128\ Such a Staking Receipt Token does not constitute: (i) a
``put, call, straddle, option, or privilege on any security''
because it does not have a premium (i.e., there is no price paid for
the right to buy or sell an underlying asset), have optionality
(i.e., there is no ability to choose whether or not to purchase or
sell the underlying asset), or transfer risk between the parties;
(ii) a ``security future'' because it is not a contract of sale for
future delivery of an asset; or (iii) a ``security-based swap''
because, among other reasons, it provides the holder with a
beneficial ownership interest in the deposited digital commodity.
\129\ While the financial instruments enumerated in the
definition of ``security'' also include ``certificate of deposit for
a security,'' that term generally has been interpreted to refer to
instruments issued by protective committees during corporate
reorganizations. See Marine Bank, 455 U.S. at 557 n.5.
\130\ See supra note 119.
---------------------------------------------------------------------------
Consideration also must be given to whether a Staking Receipt Token
that is a receipt for a non-security crypto asset that is not subject
to an investment contract itself may be offered and sold subject to an
investment contract. Such a Staking Receipt Token is not offered and
sold subject to an investment contract because the parties involved in
the process of generating, issuing, and redeeming such a Staking
Receipt Token do not provide essential managerial efforts to holders of
such a Staked Receipt Token and any economic benefits realized by
holders of such a Staking Receipt Token are not derived from any such
efforts.\131\ That is, the value of such a Staking Receipt Token is
derived from the value of the deposited digital commodity and not from
the essential managerial efforts of the Liquid Staking Provider or any
other third party involved in the process of generating, issuing, and
redeeming such a Staking Receipt Token. Moreover, any rewards accruing
with respect to the deposited digital commodity are realized from
Protocol Staking Activities that, as discussed above, do not involve
the offer and sale of a security within the meaning of section 2(a)(1)
of the Securities Act or section 3(a)(10) of the Exchange Act.
---------------------------------------------------------------------------
\131\ A holder of such a Staking Receipt Token may be able to
use the Staking Receipt Token to generate additional returns. Where
a Liquid Staking Provider provides the means by which such a Staking
Receipt Token can be used to generate such returns, those activities
are outside the scope of this release.
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VI. Federal Securities Laws Status of the Crypto Asset Activity Known
as ``Wrapping''
In the following discussion, we provide an interpretation regarding
the ``wrapping'' of crypto assets. The ``wrapping'' of crypto assets
refer to the process through which a person deposits a crypto asset
with a Custodian or cross-chain bridge \132\ (the ``Wrapped Token
Provider'') and in return the Wrapped Token Provider generates an
equivalent amount of ``Redeemable Wrapped Tokens'' \133\ on a one-for-
one basis without directly or indirectly offering any return, yield,
profit opportunity, or additional good or service. The Wrapped Token
Provider holds the deposited crypto asset in a manner intended to
ensure that, for the Redeemable Wrapped Tokens in circulation, there is
an equivalent amount of the deposited crypto asset being held.\134\ The
Wrapped Token Provider holds the deposited crypto asset for the benefit
of the Redeemable Wrapped Token holders and the deposited crypto asset
effectively is ``locked up'' and cannot be transferred, lent, pledged,
rehypothecated, or otherwise used for any reason. The holder of a
Redeemable Wrapped Token--whether the original depositor of the crypto
asset or a subsequent transferee--has the right to redeem the
Redeemable Wrapped Token for the deposited crypto asset on a one-for-
one basis. To redeem, the Redeemable Wrapped Token holder reverses the
process described above: the holder sends the Redeemable Wrapped Tokens
back to the Wrapped Token Provider, who burns (or destroys) the
Redeemable Wrapped Tokens and releases the equivalent amount of the
deposited crypto asset back to the holder on a one-for-one basis.
---------------------------------------------------------------------------
\132\ A ``cross-chain bridge'' programmatically generates and
redeems Redeemable Wrapped Tokens (defined below) without the use of
a Custodian. A cross-chain bridge consists of self-executing code
that uses smart contracts to facilitate the interoperability between
different crypto networks and token standards.
\133\ For purposes of this release, a ``Redeemable Wrapped
Token'' is a crypto asset issued on a crypto network that represents
either a crypto asset native to a different crypto network or a
crypto asset based on a different token standard and that both (1)
is backed one-for-one by the deposited crypto asset, and (2) can be
redeemed on a fixed one-for-one basis for the deposited crypto
asset, in which case the Redeemable Wrapped Token is burned (or
destroyed) and thereby permanently removed from circulation.
\134\ A Custodian typically holds the deposited crypto assets in
a cryptographic wallet that the Custodian controls. A cross-chain
bridge holds the deposited crypto assets in a smart contract.
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The offer or sale of a Redeemable Wrapped Token that is a receipt
for a non-security crypto asset that is not subject to an investment
contract, in the manner and under the circumstances described in this
release, does not involve the offer and sale of a security within the
meaning of section 2(a)(1) of the Securities Act or section 3(a)(10) of
the Exchange Act. Accordingly, persons who participate in the offer or
sale of a Redeemable Wrapped Token that is a receipt for a non-security
crypto asset that is not subject to an investment contract, in the
manner and under the circumstances described in this release, do not
need to register their transactions with the Commission under the
Securities Act or fall within an exemption from registration. In
contrast, the offer or sale of a Redeemable Wrapped Token that is a
receipt for a digital security or a non-security crypto asset that is
subject to an investment contract is an offer or sale of a security
within the meaning of section 2(a)(1) of the Securities Act or section
3(a)(10) of the Exchange Act.
A Redeemable Wrapped Token that is a receipt for a non-security
crypto asset that is not subject to an investment contract does not
constitute any of the common financial instruments enumerated in the
definition of ``security'' because, among other things, it does not
have the economic characteristics of a security. Further, such a
Redeemable Wrapped Token does not constitute any of the derivative
financial instruments enumerated in the definition of ``security.''
\135\ Thus, such a Redeemable Wrapped Token merely evidences the
deposited crypto asset held with the Wrapped Token Provider to which
the Redeemable Wrapped Token holder is entitled. The definition
[[Page 13730]]
of ``security'' specifically lists ``receipt for'' any security. A
Redeemable Wrapped Token is a receipt, which is an instrument
certifying that a stated amount of a crypto asset has been deposited
with the Wrapped Token Provider issuing the receipt, because it
evidences the holder's ownership of the deposited crypto asset and does
not change any of the rights, obligations, or benefits of the deposited
crypto asset.\136\ Accordingly, a Redeemable Wrapped Token that is a
receipt for a non-security crypto asset that is not subject to an
investment contract is not a receipt for a security. In contrast, a
Redeemable Wrapped Token that is a receipt for a digital security or
non-security crypto asset that is subject to an investment contract is
a security.
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\135\ Such a Redeemable Wrapped Token does not constitute: (i) a
``put, call, straddle, option, or privilege on any security''
because it does not have a premium (i.e., there is no price paid for
the right to buy or sell an asset), have optionality (i.e., there is
no ability to choose whether or not to purchase or sell an asset),
or transfer risk between the parties; (ii) a ``security future''
because it is not a contract of sale for future delivery of an
asset; or (iii) a ``security-based swap'' because, among other
reasons, it provides the holder with a beneficial ownership interest
in the deposited crypto assets.
\136\ The Wrapped Token Provider typically issues Redeemable
Wrapped Tokens together with a user agreement or terms of service
providing that the holder retains ownership of the deposited crypto
assets.
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Consideration also must be given to whether a Redeemable Wrapped
Token that is a receipt for a non-security crypto asset that is not
subject to an investment contract itself may be offered and sold
subject to an investment contract. The offer and sale of such a
Redeemable Wrapped Token do not involve an investment in an enterprise
and the parties involved in the wrapping process do not provide
essential managerial efforts upon which any return would be derived.
First, holders of such a Redeemable Wrapped Token are not making an
investment in an enterprise. That is, their funds are neither pooled
together to be deployed by promoters or other third parties for
developing any enterprise, nor are their fortunes tied to the efforts
of a promoter or other third party or shared with those of a promoter
or other third party. As noted above, the Wrapped Token Provider holds
the deposited crypto asset for the benefit of holders of such a
Redeemable Wrapped Token, and the deposited crypto asset is locked up
and cannot be transferred or otherwise used. Second, any economic
benefits realized by holders of such a Redeemable Wrapped Token are not
derived from the essential managerial efforts of others. That is, the
value of such a Redeemable Wrapped Token is derived from the value of
the deposited crypto asset and not from the efforts of any third party
involved in the wrapping process. The wrapping process itself is an
administrative or ministerial function typically used to facilitate or
enhance the interoperability between different crypto networks and
different token standards \137\ by allowing a crypto asset to be
represented and used in a crypto system with which it is not otherwise
compatible.\138\ In addition, there is no financial incentive derived
from the wrapping process because a Redeemable Wrapped Token is
redeemable for the deposited crypto asset only on a fixed, one-for-one
basis without any additional financial incentive or benefit. Moreover,
the activities of the parties involved in the wrapping process,
including those of Wrapped Token Providers, are administrative or
ministerial in nature and do not constitute essential managerial
efforts.
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\137\ A token standard comprises the specifications governing
how a crypto asset functions in a crypto system. Such specifications
address a wide range of functions including how the crypto asset is
transferred, how transactions are approved, and how data is
accessed.
\138\ Crypto networks have different protocols and may not be
interoperable, meaning that crypto assets originating from one
crypto network may not be compatible with other crypto networks such
that the crypto assets may not be able to be transferred to or
otherwise used on such other crypto networks. A crypto asset also
may not be able to be used in a crypto application if it is based on
a token standard that is not compatible with the token standard(s)
required for use in the crypto application.
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VII. Application of the Howey Test to Certain Crypto Asset
Disseminations Known as ``Airdrops''
In the following discussion, we provide an interpretation regarding
the investment contract status of certain crypto asset disseminations
known as ``airdrops'' for purposes of Section 2(a)(1) of the Securities
Act. As discussed below, this interpretation addresses only airdrops of
non-security crypto assets by issuers to recipients who do not provide
the issuer with money, goods, services, or other consideration in
exchange for the airdropped non-security crypto assets.
A. Airdrops Generally
An ``airdrop'' is a means for crypto asset issuers to disseminate
their crypto assets in exchange for no or nominal consideration. The
issuer, usually in the early stages of development of a crypto system,
effectuates an airdrop by transferring its crypto asset to specific
cryptographic wallets or other addresses. Issuers use airdrops for a
variety of reasons, such as to generate interest in and expand
ownership and use of their crypto assets, reward early users or loyalty
of users of a crypto system, promote a software application, build a
community, decentralize governance authority with respect to an open-
source crypto system, or award high-scoring players of an associated
video game. An increase in the ownership base of a crypto asset can
help grow and increase participation in the associated crypto system by
more users, support decentralization of the crypto system, and
facilitate network effects.
Issuers choose the recipients and all other terms of their
airdrops. For example, an issuer could airdrop its crypto asset only to
cryptographic wallets holding another specified crypto asset, with or
without minimum ownership thresholds of that other crypto asset, or to
cryptographic wallets of users of a particular trading platform that
facilitates participation in the airdrop. Or an issuer may airdrop its
crypto asset to selected crypto system users who meet specific
criteria, such as holding a minimum amount of the crypto asset or based
on their prior or current level of activity with the associated crypto
system. Further, an issuer may airdrop its crypto asset in exchange for
the recipient providing a service. That service could include, for
example, a task aimed at raising awareness of the issuer's crypto asset
and associated crypto system through various channels, such as
following the issuer on social media, ``retweeting'' (or reposting) a
post sent by the issuer, writing an article about the associated crypto
system, referring another person to the associated crypto system, or
fixing bugs in the associated crypto system's software.
B. Covered Airdrops
The interpretation below pertains to airdrops of non-security
crypto assets to recipients who do not provide the issuer with money,
goods, services, or other consideration in exchange for the airdropped
non-security crypto asset.\139\ The interpretation does not pertain to
any airdrops of non-security crypto assets where the recipient provides
the issuer with money, goods, services, or other consideration in
exchange for the airdropped non-security crypto asset, such as where
the recipient performs a service in exchange for the airdropped non-
security crypto asset. The interpretation does, however, pertain to
airdrops of non-security crypto assets in which the recipients have
provided to the issuer money, goods, services, or other consideration
where the consideration was not provided to the issuer in exchange for
the airdropped non-security crypto assets. In other words, the
recipient must not bargain for or choose to provide such
[[Page 13731]]
consideration in exchange for the airdropped non-security crypto asset
for the interpretation to apply. For example, where such consideration
was provided to the issuer prior to the announcement \140\ of the
airdrop and the recipients are not required to provide any further
consideration to the issuer after such announcement in order to obtain
the airdropped non-security crypto asset, we would not view such
consideration as being provided to the issuer in exchange for the
airdropped non-security crypto asset.\141\
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\139\ The non-security crypto assets disseminated in an airdrop
may or may not be allocated to recipients on a pro rata basis.
\140\ This view does not foreclose general statements regarding
the possibility of an airdrop so long as any such statements do not
provide terms or conditions.
\141\ If recipients would have to fulfill further conditions
subsequent to the announcement of the airdrop, such as buying a
specific crypto asset, buying a good or service (whether or not
related to a crypto asset), or performing a specific task (whether
or not related to a crypto asset), the interpretation would not
pertain to such airdrop.
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C. Interpretation Regarding Airdrops \142\
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\142\ The interpretation does not apply to or otherwise affect
existing Commission or staff positions regarding employee
compensation and benefit arrangements involving the issuance or
award of securities.
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Where an issuer conducts an airdrop of non-security crypto assets
in the manner and under the circumstances described in this release,
the non-security crypto asset does not become subject to an investment
contract because the first element of the Howey test--requiring an
investment of money \143\--is not met.\144\ Recipients of the
airdropped non-security crypto asset are not making an ``investment of
money'' because they provide no money, goods, services, or other
consideration to the issuer in exchange for the airdropped non-security
crypto asset, and the issuer is not offering them the non-security
crypto asset in exchange for any such consideration.\145\ Accordingly,
issuers conducting airdrops of non-security crypto assets in the manner
and under the circumstances described in this release do not need to
register those transactions with the Commission under the Securities
Act or fall within one of the Securities Act's exemptions from
registration.\146\
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\143\ The first element of the Howey test requires recipients to
make an ``investment of money.'' Federal courts have interpreted
``money'' for this purpose to not be limited to cash. See, e.g.,
Uselton v. Comm. Lovelace Motor Freight, Inc., 940 F.2d 564, 574
(10th Cir. 1991) (stating that ``in spite of Howey's reference to an
`investment of money,' it is well established that cash is not the
only form of contribution or investment that will create an
investment contract'' and that ``the `investment' may take the form
of `goods and services,' or some other `exchange of value.' '')
(citations omitted).
\144\ The interpretation in this section of the release only
relates to the ``investment-of-money'' requirement of the Howey
test. See supra note 7. The Howey test is a conjunctive test,
meaning that if any of its three requirements is not met there is no
``investment contract.'' See, e.g., Revak v. SEC Realty Corp., 18
F.3d 81, 87 (2d Cir. 1994) (``The three elements of the Howey test
must all be present for a [ ] contract [, transaction, or scheme] to
constitute a security . . . .'').
\145\ Applicable Federal case law since Howey explains that
there is no investment of money where the recipient does not provide
consideration for the acquired asset. See SEC v. Sg Ltd., 265 F.3d
42, 47 (1st Cir. 2001) (``The determining factor [under the first
prong of the Howey test] is whether an investor `chose to give up a
specific consideration in return for a separable financial interest
with the characteristics of a security.''' (quoting Int'l Bhd. of
Teamsters v. Daniel, 439 U.S. 551, 558 (1979)). ``In every case
[where courts have found an investment contract exists] the
purchaser gave up some tangible and definable consideration in
return for an interest that had substantially the characteristics of
a security.'' Int'l Bhd. of Teamsters v. Daniel at 559.
\146\ Although the non-security crypto asset disseminated in the
airdrop may not be subject to an investment contract, there may be
an investment contract associated with the non-security crypto asset
created in connection with other transactions involving the non-
security crypto asset, whether prior to or after the airdrop. In
such cases, the non-security crypto asset disseminated in the
airdrop may become subject to that investment contract in a
subsequent transaction, which would constitute a securities
transaction, such as where the airdrop recipient sells the non-
security crypto asset in a secondary market transaction. Any such
transaction would have to be registered under the Securities Act or
conducted pursuant to an available exemption from registration, such
as the exemption in section 4(a)(1) of the Securities Act.
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This interpretation would include the following scenarios where
recipients do not provide consideration to the issuer in exchange for
the airdropped non-security crypto asset:
An issuer airdrops its non-security crypto asset to
persons who hold another specified crypto asset in their digital
wallets, and the issuer does not announce the airdrop before the non-
security crypto asset is disseminated.\147\
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\147\ The result here would be the same regardless of whether
the issuer conducting the airdrop itself is the issuer of the other
specified crypto asset and regardless of whether the other specified
crypto asset itself is a security.
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An issuer creates a new crypto system that utilizes a non-
security crypto asset. Prior to deploying the crypto system, the issuer
deploys a testing environment version of the crypto system and
interested users transact using such version during that phase of the
crypto system's development. After the crypto system is fully
functional and operational, the issuer announces that persons who used
the testing environment version during a specific prior period would
receive the non-security crypto asset in an airdrop for that prior
engagement.\148\
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\148\ If, however, the issuer announced the airdrop during the
testing environment version phase to incentivize engagement during
that phase of the crypto system's development and limited the
airdrop to persons who use the testing environment version, then the
interpretation would not pertain to such airdrop.
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An issuer airdrops its non-security crypto asset free of
charge to users of a related software application who satisfy certain
eligibility criteria based upon such users' use of the application.
Airdrop eligibility is solely based on the users' use of the
application prior to the date of the airdrop, and the issuer does not
announce the airdrop before the non-security crypto asset is
disseminated.
This interpretation does not address airdrops of digital
securities. This interpretation also does not address or otherwise
alter our views of what does or does not constitute a ``sale'' under
section 2(a)(3) of the Securities Act, which includes ``every contract
of sale or disposition of a security or interest in a security, for
value,'' or section 3(a)(14) of the Exchange Act. Section 2(a)(3) of
the Securities Act and section 3(a)(14) of the Exchange Act by their
terms do not apply to airdrops of non-security crypto assets that are
not subject to an investment contract.
VIII. Other Matters
Pursuant to the Congressional Review Act,\149\ the Office of
Management and Budget (``OMB'') has designated the interpretation in
this release as a ``major rule,'' as defined by 5 U.S.C. 804(2).
Notwithstanding such designation, the interpretation in this release
may take effect immediately pursuant to 5 U.S.C. 808(2) because it is
an interpretive rule and thus exempt from the Administrative Procedure
Act's notice and comment requirements. The interpretation in this
release is a significant regulatory action under section 3(f) of
Executive Order 12866, as amended, and has been reviewed by OMB. The
interpretation in this release concerns the Federal securities laws and
the guidance included herein concerns the administration of the
Commodity Exchange Act by the CFTC. No interference is intended with
respect to any other legal regime, including the Federal tax laws under
the Internal Revenue Code or the Bank Secrecy Act of 1970 and the Anti-
Money Laundering Act of 2020, which are outside the scope of the
interpretation in this release.
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\149\ 5 U.S.C. 801 et seq.
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IX. Commission Economic Considerations
The interpretation in this release is intended to advise the public
on the Commission's views of the application of the Federal securities
laws to certain types of crypto assets and certain transactions in
crypto assets. The
[[Page 13732]]
interpretation does not itself create any new legal obligations for
issuers of, and investors in, digital securities and crypto asset-
related securities (i.e., when a crypto asset is subject to an
investment contract). Nonetheless, we recognize that, to the extent the
understanding and behavior of issuers and investors are currently not
consistent with the interpretation, the interpretation would have
economic effects. We discuss the potential economic effects of the
interpretation below, including the potential for improvements in
efficiency, capital formation, and competition.
The interpretation may affect issuers of and investors in digital
securities and crypto asset-related securities; creators and acquirers
of non-security crypto assets; users of crypto systems; and financial
intermediaries. The main effect of the interpretation will be to reduce
uncertainty by finally providing clarity about the Commission's views
on the application of the Federal securities laws to certain types of
crypto assets and certain transactions in crypto assets. The impact of
this clarification, however, is limited in certain respects. First,
given the passage of the GENIUS Act, affected parties are already on
notice that payment stablecoins issued by a permitted payment
stablecoin issuer will be excluded from the statutory definition of
``security'' after the effective date of the GENIUS Act. Second, to the
extent that affected parties are already acting consistently with the
interpretation, the interpretation will have minimal economic impact.
By providing more clarity, the interpretation should reduce costs
for issuers of digital securities and crypto asset-related securities,
as well as other market participants and creators of non-security
crypto assets by reducing the cost of legal advice to determine their
obligations consistent with the Commission's views on the application
of the Federal securities laws to crypto assets and transactions
involving crypto assets. A reduction in costs could result in more
issuers issuing, offering, and selling crypto assets securities and
crypto asset-related securities. These effects could spur competition
in the market for these securities and lead to increased
entrepreneurship and innovation in this market, to the benefit of
investors. The added clarity and associated reduction in costs from the
interpretation could also spur more activity in the markets for non-
security crypto assets, thus increasing competition among creators and
among buyers. As a result of these effects, the additional clarity that
the interpretation provides could accelerate growth and innovation in
blockchain or similar distributed ledger technology.
Further, to the extent that confusion about the Commission's views
on the application of the Federal securities laws to certain crypto
assets and certain transactions involving crypto assets has chilled
activity in the crypto asset markets or encouraged crypto asset
activity to shift outside of the United States, added clarity from the
interpretation could reduce the perceived risk of engaging in the
crypto asset markets and encourage more crypto asset activity in the
United States.
It is possible that some issuers of digital securities and crypto
asset-related securities may determine that they must change business
practices as a result of the interpretation. To the extent that their
past understandings and behavior were not consistent with the
interpretation, they may incur costs of changing their practices,
including potentially with respect to registration and exemption from
registration of securities offerings under the Federal securities laws.
Other potential issuers of digital securities or crypto asset-related
securities may choose either to not undertake future issuances or to
alter the form of their crypto asset issuances.
We also expect the interpretation to have some effects on current
and potential investors in digital securities and crypto asset-related
securities and acquirers of non-security crypto assets. Such investors
and acquirers may change their investment behavior if their prior
understanding of the application of the Federal securities laws to
certain types of crypto assets or certain transactions in crypto assets
differs from the interpretation. For instance, some individuals and
entities may prefer to hold digital securities or crypto asset-related
securities. Because the interpretation provides further clarification
about when the Commission believes a crypto asset is itself a security
or is subject to an investment contract, it should help inform these
investors' investment choices. In addition, clarifying the Commission's
views on the application of the Federal securities laws to crypto
assets and transactions involving crypto assets could lessen any
related uncertainty-driven distortions that may have affected prices
for digital securities and crypto asset-related securities, as well as
non-security crypto assets, thereby enhancing pricing efficiency.
In sum, we expect the interpretation to enhance clarity for issuers
and investors regarding the Commission's views on the application of
the Federal securities laws to certain crypto assets and certain crypto
asset transactions. For the reasons discussed above, this could:
enhance pricing efficiency in digital securities, crypto asset-related
securities, and non-security crypto assets; increase capital formation;
and improve competition, which could facilitate innovation and
entrepreneurship in the markets for crypto assets.
Statutory Authority
The interpretation in this release is being adopted pursuant to
sections 2(a)(1) and 19 of the Securities Act and sections 3(a)(10) and
23 of the Exchange Act.
List of Subjects in 17 CFR Parts 231 and 241
Securities.
Text of Amendments
For the reasons set forth above, the Commission is amending title
17, chapter II of the Code of Federal Regulations as set forth below:
PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
1. The authority citation for part 231 continues to read as follows:
Authority: 15 U.S.C. 77a et seq.
0
2. Amend part 231 by adding an entry for Release No. 33-11412 at the
end of the table to read as follows:
[[Page 13733]]
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Subject Release No. Date Fed. Reg. vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Application of the Federal Securities 33-11412 March 17, 2026............ [INSERT Federal Register
Laws to Certain Types of Crypto Assets DOCUMENT CITATION].
and Certain Transactions Involving
Crypto Assets.
----------------------------------------------------------------------------------------------------------------
PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
3. The authority citation for part 241 continues to read as follows:
Authority: 15 U.S.C. 78a et seq.
0
4. Amend part 241 by adding an entry for Release No. 34-105020 at the
end of the table to read as follows:
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Subject Release No. Date Fed. Reg. vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Application of the Federal Securities 34-105020 March 17, 2026............ [INSERT Federal Register
Laws to Certain Types of Crypto Assets DOCUMENT CITATION].
and Certain Transactions Involving
Crypto Assets.
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By the Commissions.
Dated: March 17, 2026.
Vanessa A. Countryman,
Secretary, Securities and Exchange Commission.
Christopher Kirkpatrick,
Secretary, Commodity Futures Trading Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
CFTC Appendix to Application of the Federal Securities Laws to Certain
Types of Crypto Assets and Certain Transactions Involving Crypto
Assets--CFTC Voting Summary
On this matter, Chairman Selig voted in the affirmative. No
Commissioner voted in the negative.
[FR Doc. 2026-05635 Filed 3-20-26; 8:45 am]
BILLING CODE 8011-01-6351-01-P