SEC Howey Test for Cryptocurrency: What It Is and How It Affects Digital Assets
Howey Test Crypto Assessment Tool
This tool helps you assess whether your cryptocurrency project likely meets the SEC's Howey Test criteria for being classified as a security. Answer the questions based on your project's structure and marketing.
1. Investment of Money
2. Common Enterprise
3. Reasonable Expectation of Profits
4. Profits Derived Primarily from Efforts of Others
Click the button to assess your project's compliance with the Howey Test.
Imagine buying a token promising big returns, only to find out the government says it’s not a coin-it’s a security. That’s the reality for many crypto projects today. The SEC’s application of the Howey Test to cryptocurrency has reshaped the entire industry. It’s not about fancy tech or blockchain magic. It’s about whether your token is legally an investment contract. And if it is, you’re bound by 80-year-old securities laws designed for citrus groves in 1946.
What Is the Howey Test?
The Howey Test comes from a 1946 U.S. Supreme Court case: SEC v. W.J. Howey Co. Back then, the Howey Company sold citrus groves to investors and promised to manage them, split profits, and handle all the farming. Buyers thought they were buying land. The SEC said no-they were buying an investment. The Court agreed and laid out four simple questions to determine if something is a security:- Is money being invested?
- Is there a common enterprise?
- Do investors expect profits?
- Are those profits mainly from the efforts of others?
Why Does the SEC Care About Crypto Tokens?
Crypto tokens aren’t just digital collectibles. Many are sold with promises: “Buy our token, and we’ll build a platform that makes it worth 10x.” That’s not a utility. That’s a pitch for profit. The SEC sees this as investor bait. Between 2013 and 2022, the agency recovered $2.8 billion from crypto-related fraud and unregistered sales. That’s not small change. It’s why they’re cracking down. Take Ripple’s XRP. The SEC sued in 2020, claiming XRP was an unregistered security. In 2023, a judge ruled that XRP sales on public exchanges weren’t securities-but sales to institutions were. Why? Because institutional buyers were told directly: “This token will rise in value because we’re developing the network.” That’s classic Howey. Retail buyers on Coinbase? They weren’t given that promise. So context matters.Bitcoin and Ethereum: Why They’re Different
Not all crypto fails the Howey Test. Bitcoin? The SEC has said outright it’s not a security. Why? Because there’s no central team driving its value. No company. No CEO. No roadmap. Bitcoin just runs. Miners and users maintain it. No one’s promising you profits from their efforts. Ethereum is trickier. In 2018, former SEC official William Hinman said Ether wasn’t a security because the network was “sufficiently decentralized.” But that was just a speech-not a rule. The SEC hasn’t officially declared Ethereum a non-security. So projects still worry. If Vitalik Buterin suddenly announced a new token sale to fund Ethereum upgrades, the SEC would likely say: “There’s your promoter. There’s your profit expectation. There’s your security.”
The Four Prongs of the Howey Test Applied to Crypto
Let’s break down how each prong plays out in real crypto cases.1. Investment of Money
This one’s easy. If you paid for a token-whether with USD, ETH, or BTC-you’ve invested money. Even if you earned it through staking or mining, if you later sold it expecting profit, the SEC still sees it as an investment.2. Common Enterprise
This means your financial fate is tied to the project’s success. If you bought a token because the team promised to build an app, and your token’s value depends entirely on that app working, you’re in a common enterprise. The 2023 Balestra v. ATBCOIN LLC case confirmed this: if profits rely on the promoter’s blockchain development, it’s a common enterprise.3. Reasonable Expectation of Profits
This is where most tokens fail. If your marketing says “Buy now, sell later for 5x,” you’re signaling profit expectation. Even if you claim it’s for “access,” if early buyers are told “this will appreciate,” the SEC will ignore the utility claim. The key is intent. Did people buy it to use it? Or to flip it?4. Profits Derived Primarily from the Efforts of Others
This is the killer. If the token’s value depends on a team’s coding, marketing, partnerships, or roadmap updates, you’ve failed this prong. The SEC’s 2019 framework says: “The more centralized the network, the more likely this applies.” Bitcoin? No team. Pass. A startup token with a 10-person dev team actively pushing updates? Fail.What About Decentralized Projects?
This is the biggest gray zone. DAOs like Uniswap are decentralized by design. No CEO. No company. No central team. Yet the SEC sued Uniswap Labs in 2023 anyway. Why? Because they argued the company still controlled the protocol’s treasury and made key decisions. The judge didn’t dismiss the case-he called it a “novel question.” The problem? The Howey Test was never built for networks where no one’s in charge. If a protocol runs on code, and no one can change it, who are the “others” whose efforts matter? The SEC hasn’t answered that. That’s why 73% of crypto projects struggle to prove they’re decentralized enough to pass the test.Real-World Consequences: Costs, Lawsuits, and Exodus
Complying with the Howey Test isn’t cheap. Legal fees for a full analysis? $150,000 to $300,000. That’s out of reach for most indie teams. The result? Startups are leaving the U.S. The number of U.S.-based crypto projects dropped from 32% of global activity in 2021 to 24% in 2023. Switzerland, Singapore, and Dubai are filling the gap. Even big players feel the pressure. Coinbase CEO Brian Armstrong admits some tokens are clearly securities. But he also says the lack of clear rules forces companies into legal limbo. In 2023, U.S. crypto venture funding dropped 37% year-over-year. Why? Investors don’t want to back something the SEC might shut down tomorrow.
Industry vs. Regulator: Who’s Right?
SEC Chairman Gary Gensler says 95% of crypto tokens are securities. He argues the Howey Test protects investors from scams like Terra/Luna, which wiped out $40 billion. That’s a valid point. People lost life savings. But critics say the test is outdated. Harvard Law professor Howell Jackson says it’s still flexible. University of Chicago’s Eric Posner says it’s “fundamentally ill-suited” for decentralized networks. Ripple’s CEO calls it a relic of the 1940s. And he’s not wrong-the test was made for orange groves, not blockchain. The truth? The Howey Test works well for ICOs with whitepapers promising returns. It fails for open-source, community-run protocols. The SEC needs to adapt-or Congress needs to update the law.What Should Crypto Projects Do Now?
If you’re launching a token, here’s what actually works:- Don’t promise price increases. Ever.
- Don’t use marketing language like “investment,” “ROI,” or “growth.”
- Make the network as decentralized as possible before launch.
- Let users control governance-no central team voting on upgrades.
- Use utility: tokens that unlock access, discounts, or features-not speculative bets.
- Consider a phased rollout: start centralized, then hand control to the community.
What’s Next?
The SEC isn’t backing down. Their 2023 strategic plan says the Howey Test will remain central. But pressure is building. The Congressional Research Service says Congress may need to rewrite securities laws for the digital age. The International Organization of Securities Commissions agrees: the framework needs adaptation. For now, the message is clear: if your token looks like a security, the SEC will treat it like one. No exceptions. No loopholes. No excuses.Is Bitcoin a security under the Howey Test?
No. The SEC explicitly stated in its April 3, 2019 framework that Bitcoin is not a security. It lacks a central promoter, has no common enterprise, and its value isn’t driven by the efforts of a specific group. Bitcoin operates as a decentralized network maintained by miners and users worldwide.
Can a token be both a utility and a security?
Yes, but only at different times. A token might start as a security during its sale (if sold with profit expectations) but later become a utility token if the network becomes fully decentralized and the token is used for access, not speculation. The SEC’s stance is that the nature of the transaction matters-what was promised at the time of purchase.
What happens if I sell a token without registering it as a security?
You risk an SEC enforcement action. Penalties can include fines, forced refunds to investors, and bans on future fundraising. The SEC has already collected over $2.8 billion from crypto-related violations since 2013. Cases like Kik Interactive ($27 million settlement) and Telegram ($1.85 billion return to investors) show they don’t hesitate to act.
Why does the SEC target ICOs but not Bitcoin?
ICOs typically involve a team raising money to build a future product, promising returns to early buyers. That fits the Howey Test perfectly. Bitcoin had no initial team promising profits-it launched as a peer-to-peer system. No promoter. No central entity. No profit promise. The SEC’s focus is on cases where people are being sold an investment disguised as a coin.
Are NFTs subject to the Howey Test?
Some are. If an NFT is sold with promises of future profits-like sharing revenue from a movie or game-it can be considered a security. But if it’s just a digital collectible with no profit expectation, it likely isn’t. The SEC has warned that NFTs with royalty structures or investment-like features are under scrutiny.
Nicholas Ethan
December 15, 2025 AT 18:19The Howey Test isn't outdated it's foundational. If you're selling a token with promises of returns you're selling a security. No amount of blockchain buzzwords changes that. The SEC isn't the enemy here the people who lied to retail investors are.
JoAnne Geigner
December 16, 2025 AT 18:10I've been watching this space since 2017... and honestly, the way the SEC applies Howey feels like trying to fit a quantum computer into a typewriter. The test was made for orange groves, sure-but it's also built on trust, transparency, and human intent. Can we adapt those principles to code? Maybe. But we need to stop pretending that a DAO's Discord mod is the same as a 1940s citrus salesman.
Kathleen Sudborough
December 17, 2025 AT 10:49It's wild how the same people who scream 'decentralization!' when it suits them suddenly get quiet when the SEC asks who's responsible for the roadmap. If no one's in charge, then who's promising the 10x returns? That's not decentralization-that's denial. And it's costing real people their savings.
Vidhi Kotak
December 19, 2025 AT 01:28India's quietly building its own framework. No Howey. No SEC. Just clear rules: if it's a utility, it's a utility. If it's a speculative asset, tax it like one. Why are we still arguing about 1946 when we could be innovating?
Scot Sorenson
December 20, 2025 AT 04:53So let me get this straight-the SEC sues a startup for promising returns, but Bitcoin, which was literally sold as a 'peer-to-peer electronic cash system' with zero promises, is fine? Classic. The real crime here isn't crypto-it's regulatory hypocrisy dressed in a suit.
PRECIOUS EGWABOR
December 21, 2025 AT 00:49Oh sweetie, you really think the SEC gives a damn about citrus groves? They care about control. And if you're building something they can't tax, regulate, or sue later? You're a threat. The Howey Test is just their velvet glove over the iron fist.
Kathryn Flanagan
December 21, 2025 AT 22:07Look, I get it. People want to make money. But when you sell a token and say 'we'll build the app and you'll get rich,' that's not tech, that's a Ponzi. And the SEC is just trying to stop the next Terra from wiping out grandma's retirement. You don't have to like it, but you can't ignore it either.
amar zeid
December 22, 2025 AT 17:04Let’s be honest: the entire crypto ecosystem is built on a lie. The whitepaper is the new sales brochure. The token sale is the IPO. The ‘community’ is just the retail sheep. The Howey Test is the only thing keeping this from collapsing into a $2 trillion pyramid scheme.
Alex Warren
December 23, 2025 AT 16:36Bitcoin passes Howey because there is no central actor. Ethereum passes because its network is sufficiently decentralized. Anything else is a security. End of story. Stop overcomplicating it with philosophy.
Claire Zapanta
December 24, 2025 AT 03:17Who owns the SEC? Big Wall Street. They want crypto to fail so they can buy up the assets cheap after the panic. The Howey Test? A weapon. The orange groves? A distraction. They don’t care about investors-they care about control. And they’re using this to crush innovation.
Sue Gallaher
December 25, 2025 AT 14:29Why are we letting a bunch of lawyers in DC decide what tech we can build? We're Americans. We built the internet. We don't need permission to innovate. This is tyranny disguised as regulation.
Jeremy Eugene
December 26, 2025 AT 14:58The legal framework must evolve. But evolution requires structure. Abandoning Howey without a replacement is not freedom-it is chaos. We need clarity, not confrontation.
Kathy Wood
December 27, 2025 AT 07:28They’re coming for your NFTs next. And your Dogecoin. And your meme coins. And your Discord servers. They don’t care if you’re ‘just having fun.’ They see dollar signs-and they want them in their coffers.
Anselmo Buffet
December 28, 2025 AT 10:27Look, I’ve bought and sold crypto since 2015. I’ve lost money. I’ve made money. But I’ve never been promised a return. That’s the difference. If your project’s marketing says ‘buy now, profit later’-you’re already in trouble. The fix isn’t to kill crypto. It’s to stop lying.
Patricia Whitaker
December 29, 2025 AT 19:18Why are we even talking about this? It’s obvious. If it looks like a duck, walks like a duck, and quacks like a duck-it’s a security. Stop pretending your token is a utility when your Discord is full of ‘to the moon’ memes.
Joey Cacace
December 30, 2025 AT 12:47Love this breakdown! 🙌 So many people don’t realize that the SEC’s job isn’t to stop innovation-it’s to stop fraud. If you’re building something real, you don’t need to hide behind ‘utility’ buzzwords. Just be honest. The market rewards honesty.
Taylor Fallon
December 31, 2025 AT 22:41imagine if the internet had to be approved by the fcc before you could make a website in 1995… we’d still be using geocities. the howey test is like that. it’s not about protecting people-it’s about controlling who gets to play. and the people who built this stuff? they’re not the ones in suits. they’re the ones coding at 3am.
Sarah Luttrell
January 2, 2026 AT 16:01Oh honey, the SEC isn’t here to protect you. They’re here to protect the banks. You think they care if your token is decentralized? No. They care if it’s profitable-and if it’s not going to their clients. This isn’t regulation. It’s corporate warfare.
Kim Throne
January 4, 2026 AT 00:04Let’s not forget: the Howey Test requires profits to be derived from the efforts of others. If a token’s value is driven by community adoption, not a team’s roadmap, then the fourth prong fails. That’s the key distinction most overlook. Decentralization isn’t a buzzword-it’s a legal defense.
Caroline Fletcher
January 4, 2026 AT 21:09They’re lying. The SEC knows Bitcoin is decentralized. They know Ethereum is too. But they’re using this to scare people into buying ETFs instead. That’s not regulation-that’s market manipulation.
Heath OBrien
January 6, 2026 AT 07:02They banned crypto in China. Now they’re trying to strangle it here. Same playbook. First fear. Then control. Then ownership. Wake up. This isn’t about investor protection. It’s about power.
Taylor Farano
January 6, 2026 AT 22:18So the SEC sues a startup for promising returns... but lets Coinbase list tokens that are clearly securities? That’s not enforcement. That’s corruption. The agency is captured. And the public is the sucker.
Toni Marucco
January 7, 2026 AT 05:03The beauty of the Howey Test is its simplicity. It doesn’t care about blockchain. It doesn’t care about tokens. It cares about human behavior: Did someone give money expecting profit based on another’s work? If yes, then it’s a security. The test isn’t broken-it’s being misapplied by those who don’t understand it.
Hari Sarasan
January 7, 2026 AT 20:27It is imperative to acknowledge that the Howey framework is fundamentally incompatible with permissionless, trustless architectures. The ontological assumption of a central actor is antithetical to the cryptographic ethos. The SEC's reliance on 1946 jurisprudence represents a catastrophic epistemological misalignment with Web3 paradigms. Regulatory capture via legacy financial intermediaries is the true systemic risk.
Steven Ellis
January 8, 2026 AT 19:06Every comment here misses the point. The SEC isn't trying to kill crypto. They're trying to kill fraud. And the reason they're winning is because 90% of these projects are fraud. If you built something real, you wouldn't be scared of the law-you'd be proud of it. The ones running? They know they're selling dreams. And that's why they're fleeing to Dubai.