The End of Regulation by Enforcement? Unpacking the SEC-CFTC Joint Crypto Interpretation

By: Simon Uritsky, Kyle Lawrence, and Moish Peltz

Introduction 

For nearly a decade, the development of substantive cryptocurrency ventures within the United States has been conducted amid considerable regulatory ambiguity. This uncertainty arose not from the inherent complexity of applicable statutes, but rather from the failure of regulatory authorities to provide definitive interpretive guidance. Founders were compelled to structure token offerings based upon conjecture regarding regulatory treatment. Exchanges listed digital assets while operating under substantial uncertainty as to whether the Securities and Exchange Commission would concur with their legal analyses. Legal counsel were frequently confronted with the fundamental question: does this protocol, token, or NFT constitute a security? The prevailing response, in the overwhelming majority of instances, was some variation of “the determination is fact-dependent, and definitive clarity will likely emerge only through enforcement proceedings.” 

While this regulatory environment has not been entirely resolved, a significant development occurred recently. The SEC and CFTC jointly issued several documents, including a Commission Interpretation, representing the agencies’ formal, authoritative construction of how existing federal securities laws apply to crypto assets (simultaneously, the agencies released a Fact Sheet, and an Interpretative Guidance with a request for comment on the Federal Register). The timing of this issuance coincided with the DC Blockchain Summit, at which SEC Chairman Paul Atkins stated, “We are no longer the securities and everything commission.” 

Investment Contracts and Token Offerings 

Among the most consequential aspects of this guidance is the recognition that investment contracts may terminate. Under previous SEC leadership, the operative theory was that securities classification, once established, was permanent. If a project conducted a token offering that exhibited characteristics of an investment contract, the token remained classified as a security in perpetuity. Neither the degree of network decentralization, the withdrawal of the original development team, nor the autonomous operation of the protocol for an extended period altered this classification. The SEC’s position was that the initial securities characterization was irremediable. 

This theory has now been expressly repudiated. The guidance provides that a token ceases to be subject to an investment contract upon termination of such contract, whether through fulfillment of the issuer’s obligations or demonstrable failure thereof. This establishes, for the first time, a cognizable pathway for transition from securities status. For projects that launched during the 2017-2022 period under legally ambiguous circumstances and have subsequently evolved into genuinely decentralized networks, this development is potentially transformative. While the analysis remains inherently fact-specific and complex, the regulatory pathway is now formally available in a manner previously unprecedented. 

Token Taxonomy 

With respect to taxonomic classification, the guidance establishes five categories for the analysis of crypto assets, four of which fall outside the scope of securities regulation. 

• Definition of Digital Commodities. Digital Commodities are defined as assets whose value derives from the operational characteristics of the underlying network-its code, economic mechanisms, and supply-demand dynamics-rather than from representations made by a founding team. The distinction lies between acquiring a token based upon expectations of future development efforts versus acquiring a token for a protocol that is already operational, functional, and self-sustaining. The guidance expressly designated sixteen assets as digital commodities: Bitcoin (BTC), Ethereum (ETH), Solana (SOL), XRP, Cardano (ADA), Chainlink (LINK), Avalanche (AVAX), Polkadot (DOT), Stellar (XLM), Hedera (HBAR), Litecoin (LTC), Dogecoin (DOGE), Shiba Inu (SHIB), Tezos (XTZ), Bitcoin Cash (BCH), Aptos (APT), and Algorand (ALGO). This enumeration encompasses established Layer 1 protocols, infrastructure projects, and meme tokens, indicating that classification is predicated upon network functionality rather than origination circumstances. The CFTC confirmed that assets within this category may qualify as commodities under its regulatory framework, a determination of consequence as it establishes CFTC, rather than SEC, jurisdiction over spot markets for such assets. 

• Digital Collectibles and NFTs. Digital Collectibles, encompassing non-fungible tokens (NFTs), are formally excluded from securities classification for the first time. The SEC had previously initiated enforcement actions against certain NFT projects, creating substantial uncertainty throughout the sector. This uncertainty has been materially diminished, although the guidance does not address fractionalized NFTs or projects wherein holders receive ongoing revenue distributions. 

• Digital Tools. Digital Tools constitute what the industry has historically characterized as utility tokens-assets that function as membership credentials, access rights, tickets, or identity instruments. Characterizing an asset as a utility token in offering documentation provided no protection from enforcement action under the prior regulatory regime. A formally recognized classification now exists that developers may reference, provided the asset satisfies the definitional requirements for “digital tools.” 

• Stablecoins. Stablecoins receive a distinct exemption, specifically tied to the definition of “payment stablecoin” as set forth in the GENIUS Act. Operations conducted within that statutory framework are not subject to securities classification. Algorithmic stablecoins and partially collateralized designs are not encompassed by this exemption. 

• Digital Securities. Digital Securities, the sole category remaining subject to SEC oversight, comprises tokenized representations of traditional financial instruments: tokenized equity securities, tokenized debt instruments, and other securities that happen to exist on blockchain infrastructure. This constitutes a narrow category, apparently by design. 

The guidance also resolves four operational matters that have generated considerable uncertainty in recent years: 

• Protocol Staking. Protocol staking (the locking of tokens to facilitate network validation in exchange for rewards) is determined not to constitute a securities transaction. It should be noted that this determination applies to staking at the protocol layer; whether centralized, custodial staking services offered by exchanges receive equivalent treatment remains an unresolved question.  

• Protocol Mining. Protocol mining receives formal confirmation of its exclusion from securities law, a determination of significance for mining pool operators and parties developing financial products based upon hash rate.  

• Wrapping. Wrapping (the creation of a synthetic representation of one token on an alternative blockchain) is confirmed not to create a new security, provided the underlying asset does not itself constitute a security.  

• Airdrops. Airdrops, wherein tokens are distributed to wallet addresses without consideration, are clarified as not constituting an investment of money under the legal test applied by courts for decades. The absence of monetary exchange precludes classification as an investment contract. Airdrops structured as compensation for prior purchases, or those economically equivalent to a sale, may not receive equivalent treatment; however, the general practice of gratuitous token distribution now has formal regulatory recognition. 

Clarification of SEC/CFTC Jurisdiction 

One of the most problematic features of the prior regulatory environment was the assertion of overlapping jurisdiction by both the SEC and CFTC over identical assets. Both agencies initiated enforcement proceedings, leaving industry participants attempting to comply with two potentially inconsistent regulatory frameworks simultaneously. This guidance, together with a Memorandum of Understanding executed by the two agencies, represents the first substantive joint effort to delineate jurisdictional boundaries. Assets qualifying as digital commodities fall under CFTC oversight; digital securities remain subject to SEC jurisdiction. While this does not resolve every marginal case, it provides a coherent analytical framework that the industry previously lacked. 

Conclusion 

The significance of this guidance warrants careful assessment. It is meaningful, but it does not represent a definitive resolution. Technically, this guidance constitutes a Commission Interpretation rather than a formal rule. It did not proceed through the standard notice-and-comment rulemaking process. Courts are not bound by its conclusions. A subsequent administration could rescind it without any procedural obligation to solicit public comment. The cryptocurrency industry previously celebrated the SEC’s 2019 digital asset framework, only to observe the succeeding administration largely disregard it while pursuing aggressive enforcement across the industry. This precedent merits consideration. 

Nevertheless, the guidance achieves substantial objectives. It effectively repudiates the once-a-security-always-a-security doctrine. It provides market participants with a functional taxonomy that places the majority of crypto assets outside the scope of securities law. It resolves certain questions regarding staking, mining, wrapping, and airdrops. The joint issuance with the CFTC carries particular weight, as achieving interagency consensus between two federal agencies with overlapping mandates presents considerable difficulty, and having such consensus memorialized in writing carries meaningful regulatory significance. 

The unresolved questions are equally significant. The guidance provides an analytical framework for determining whether a token qualifies as a digital commodity; it does not provide definitive classification for any particular asset. The standard for determining whether a network is sufficiently “functional” will likely be subject to litigation. Intermediated staking products remain unaddressed. Comprehensive market structure legislation that would codify these positions permanently continues to progress through the Senate, albeit at a measured pace. 

Chairman Atkins addressed these limitations directly during the DC Summit. He informed reporters that legislation represents the sole mechanism for ensuring the permanence of these regulatory positions, and that formal rulemaking will be forthcoming in the weeks ahead. Such rulemaking warrants close attention, as it will carry greater legal weight than an interpretation and will provide market participants with a more durable framework upon which to structure their activities. 

Falcon Rappaport & Berkman will continue monitoring developments in this evolving regulatory landscape. If your business is preparing to engage with regulators or planning how to build within the framework, contact our Digital Asset Practice Group to help chart a compliant and strategic path through the next chapter of U.S. digital-asset regulation. 

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.