Why the United States and other countries treat some tokens one way and others another way can be puzzling. Crypto is never the same as yesterday, but the legal system leans on rules that were written long before this industry appeared. That old toolbox, whether we like it or not, is now shaping how tokens are created, how they are sold, and how teams talk about them.
These rules influence the whole atmosphere around launches, presales, and community expectations. And one name often sits in the middle of this discussion: the Howey Test. When it refers to crypto, we may also call it nobody-wants-their-token-to-be-a-security. Let’s see why.
What Exactly Is the Howey Test?
Howey’s name comes from a 1946 U.S. Supreme Court decision,
In the original dispute, buyers were purchasing citrus groves without any plans to farm them themselves. They relied on the company’s management to run everything, which is why the court concluded that passive profit schemes shouldn’t escape securities rules.
You see, securities rules aren’t exactly friendly or easy. Once something counts as a security, teams fall under the long rulebook from the Securities Act of 1933 (or its equivalent in other countries). That brings forms, disclosures, audits, and long waits, plus huge legal bills that can drain a small project. Most builders want to ship features, not juggle filings or burn cash, so they try to avoid that label as much as possible.
Over time, the Howey test settled into four elements: money invested, common enterprise, profit expectation, and dependence on promoters or third parties. When crypto arrived, regulators didn’t switch to a new standard. They took their time discovering cryptocurrencies, and when they did, they applied some old rules to this new industry.
Why Crypto Keeps Getting Measured with Howey
The DAO case sits at the beginning of this story. This decentralized investment fund by Slock.it launched in 2016 on Ethereum. Buyers sent ETH to receive DAO tokens, which let them vote on different projects. Things grew too fast, then everything collapsed when an attacker exploited a flaw in its smart contract and drained a massive amount of ETH. The event panicked the industry and caught the attention of regulators who had never handled anything like it.
In July 2017, the US Securities and Exchange Commission (SEC) released its
From 2018, another major case added more nuance. The company Ripple had been distributing its native token XRP in different ways, and the SEC sued them —considering that XRP was an unregistered security. In 2023, a U.S. court __ruled __that XRP sold directly to institutions counted as a security, while XRP sold to the public on exchanges or distributed in other ways did not, since holders in those settings could not assume Ripple was using their money for development. This result showed that a token’s legal status can shift depending on how it’s sold or promoted.
Howey Test & CLARITY Act
Laws aren’t as fast as crypto, but they eventually arrive. By 2025, in addition to the Howey Test, other crypto-related regulations were introduced, including the CLARITY Act in the United States. This is a
CLARITY could free many tokens from automatic securities analysis, yet the Howey Test will remain part of the legal landscape. Tokens structured around profit promises, centralized control, or fundraising models that resemble traditional investments would still meet the Howey criteria. Builders need to keep this in mind when shaping token design, marketing language, airdrops, and staking features.
It’s also important to consider that the same crypto network may host varied assets such as utility tokens, governance tokens, yield-bearing products, and fully regulated securities. In
For its part, CLARITY may narrow the number of cases that rely on Howey, but it doesn’t send the test into retirement. When we understand both rules, the whole landscape feels easier to navigate, quirks and all.
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