Is Crypto a Security? The 2026 Guide to US Digital Asset Law (Part One)

(1) an investment of money

(2) in a common enterprise

(3) with a reasonable expectation of profits

(4) to be derived from the efforts of others.

1. Investment of Money

According to both courts and the SEC, an investment of money includes fiat, other digital assets, or anything else of value. Because time and labor are considered to be of value, this prong is often easily satisfied.

2. Common Enterprise

With respect to a common enterprise, courts have adopted multiple theories. Horizontal commonality focuses on the pooling of funds, and whether each investors’ fortunes rise and fall together, whereas vertical commonality is more closely tied to the efforts of the promoter, focusing on network growth, tokenomics, and treasury-managed development.

3. Expectation of Profits

For a reasonable expectation of profits, this prong focuses on whether a typical purchaser—not a technical user, a speculative trader, or any specific user—was led to reasonably believe that the token could appreciate in value. Importantly, this analysis is objective. Even if some buyers intend to use the token for utility, the inquiry focuses on what the issuer’s conduct would lead a reasonable person to believe.

If promotional materials, such as a whitepaper, pitch deck, or social media campaign highlight price potential, burn mechanisms, future listings, or token scarcity, courts and the SEC view this as evidence of a profit motive. Relatedly, promises of partnerships, roadmap milestones, or integrations that would increase token value are routinely cited in enforcement actions.

4. Efforts of Others

Courts evaluate whether the issuer made statements that the team will build, integrate, or deliver features essential to the token’s success at any point in the future. If the network requires substantial future coding, feature releases, upgrades, or integrations before reaching its intended functionality, courts view purchasers as reliant on the team.

Attempts to build the ecosystem, such as partnerships, listings, user-acquisition strategies, and market-making arrangements are all considered entrepreneurial efforts driving value. Further, retaining authority over treasury funds, token supply changes, validator sets, governance parameters, or upgrade mechanisms is heavily scrutinized.

It is important to note that this prong does not require total or permanent centralization. The inquiry is tied to the moment of the transaction: if purchasers are relying on the issuer’s managerial or technical efforts at that time, the prong is typically satisfied.

Importantly, ecosystems can—and often do—evolve. A network that begins in a centralized state may later decentralize to the point where purchasers are no longer depending on a core team. However, courts have not articulated a clear threshold for what constitutes sufficient decentralization. As a result, even projects that appear meaningfully decentralized may still face scrutiny if early purchasers reasonably relied on identifiable managerial efforts during the network’s formative stages.

The Supreme Court emphasizes that Howey evaluates the entire scheme—the sale, the distribution plan, marketing, tokenomics, lockups, and the issuer’s conduct. The token’s code may be neutral, but the context of its sale is not.

Tokens sold before the network is usable or before meaningful functionality exists often satisfy Howey, because purchasers necessarily rely on the issuer’s future development work. This is where pre-launch SAFTs, early ICOs, and “beta” ecosystems are most vulnerable.

A functional network, however, is not the end of the analysis—ongoing entrepreneurial efforts tend to support Howey’s fourth prong as well. Thus, courts also scrutinize the issuer and founding team’s ongoing actions, including protocol development, incentives, ecosystem partnerships, treasury management, or public claims about future growth.

Relatedly, when a founding entity retains discretion over upgrades, treasury management, validator configuration, emissions schedules, or governance, courts generally find that purchasers depend on those managerial efforts.

The most important doctrinal evolution in the last several years is the recognition—by multiple courts, and, recently, the SEC itself—that a token is not itself a security. Instead, the investment contract may arise from the way the token is offered or sold.

If the token itself is not a security, but certain methods of distribution are, then secondary transactions can be treated differently from primary sales. This means that exchanges may not be offering securities when the issuer’s ecosystem is decentralized or the issuer is no longer the source of value.

Key Takeaways

The Howey test remains the backbone of U.S. token analysis. Courts have adapted it to digital assets by examining context, incentives, and issuer behavior—not labels or technical features. Understanding this framework is essential for navigating issuance, exchange listings, secondary transactions, and risk management as the regulatory environment continues to evolve.