A Supreme Court ruling from 1946 still dictates which crypto tokens the SEC counts as securities. That could finally change.
The Howey Test emerged from a case about Florida orange grove sales. It lays out four conditions: an investment of money, in a common enterprise, with a reasonable expectation of profits, and those profits derived from the efforts of others. The SEC has used this standard to go after everything from initial coin offerings to staking programs. The result has been years of enforcement actions and legal fog for token issuers.
Ripple’s XRP partly escaped the security label when a judge ruled last year that programmatic sales to retail buyers did not meet the fourth prong. But that case showed how fact-dependent the analysis is. Other projects have not been so lucky – Telegram and Kik both settled with the SEC after their token sales were deemed unregistered securities offerings.
Now lawmakers are pushing a legislative fix. The CLARITY Act – short for Clarity for Digital Tokens Act – would scrap the 1946 test and replace it with a framework written specifically for digital assets. The bill introduces a "sufficiently decentralized" threshold. Tokens that pass would be treated as commodities under CFTC oversight, not SEC-registered securities.
Proponents say the change would end the cycle of enforcement-by-lawsuit. Developers would know before launch whether their token needs to register. Critics argue the bill could create loopholes that let bad actors avoid disclosure rules. The SEC has raised concerns about weakening investor protections.
For traders, the stakes are concrete. The current uncertainty around token classification has depressed institutional inflows and kept many projects from listing on U.S. exchanges. A clear rulebook could unlock billions in capital. Until then, the nearly eight-decade-old Howey Test remains the law.
The CLARITY Act is still in committee. Its path to passage is uncertain. Watch for hearings and any SEC statements on the bill – those will be the next catalysts.
Lawmakers seek to replace 1946 test governing digital tokens with new rules
The SEC uses the 1946 Howey Test, created in a Florida orange-grove case, to decide whether digital tokens are securities, bringing lawsuits and uncertainty for token developers. The proposed CLARITY Act would replace it with digital-asset rules, allowing sufficiently decentralized tokens to be treated as commodities under CFTC oversight instead of SEC-registered securities.