Inside Project Crypto – SEC’s latest token taxonomy

law and ledger is a news corner focused on cryptocurrency legal news. Kelman Law – A law firm focused on digital asset commerce.

The following opinion editorial was written for Kelman.Law by Alex Forehand and Michael Handelsman.

The SEC’s approach to digital assets: key insights from Paul Atkins

In Paul Atkins’ latest talk:The Securities and Exchange Commission’s approach to digital assets: Inside Project CryptoAtkins’ comments signal a shift from the SEC’s old enforcement-driven approach to one that welcomes innovation while ensuring market health and investment.Ester protection remains a forefront concern.

For too long, crypto entrepreneurs and investors alike have struggled to operate within regulation.fogIn particular, those in the field have been attempting to decipher the deep question of when a token constitutes a security, with apparently varying degrees of success. Atkins’ speech is the clearest indication yet that the SEC recognizes the legitimacy of cryptocurrencies in U.S. financial markets and aims to integrate rather than isolate digital assets.

Token taxonomy

Commissioner Atkins outlined a practical taxonomy Rather than applying one-size-fits-all tests to digital assets, classify them into categories that reflect their functionality and purpose.

According to Atkins, “Digital products” and “network tokenIn the case of “”, it is not considered a security.is inherently linked to and derives value from the programmatic operation of a “functional” and “decentralized” cryptosystem, rather than from the expectation of profit arising from the inherent control efforts of others.”

He pointed out:digital goods“Tokens associated with art, music, video, or in-game items are not securities because the purchaser does not rely on management efforts to derive a profit from them. These tokens are designed for use or enjoyment rather than investment, and they represent creative or cultural value rather than financial gain.”

Similarly, ‘digital tools“An asset is not a security if it serves a primary purpose, such as serving as a membership, ticket, credential, or ID badge. These assets provide access or verification rather than speculation.”

But Atkins made it clear:tokenized securities“” remains a security under current law. These are cryptoassets that directly represent ownership of traditional financial instruments such as stocks, debt, and derivatives that are simply recorded on the blockchain. For more information about tokenized securities, see our article. Are tokenized securities still securities?.

Atkins’ framework moves the conversation toward a more nuanced understanding of digital assets. Rather than confuse innovation and investment contracts, it distinguishes them.

When does a token cease to be a security?

One of the most promising parts of Atkins’ speech revolves around the idea that crypto tokens can evolve over time. Secretary Hester Pearce’s speech “New Paradigm: Remarks at the SEC SpeechAtkins said that while selling tokens may come with some initial challenges,Even if it is based on a rights contract, its conditions “do not last forever.” He explained:

“The network has matured. Code is shipped and management is decentralized. The role of the issuer diminishes or disappears. At some point, buyers are no longer dependent on the issuer’s requisite management efforts, and most tokens are now traded without any reasonable expectation that any particular team is still in control.”

This view reflects widespread internal acceptance. The SEC that uses the token, and the network that the token powers, is dynamic. A token may begin its life as part of an investment contract, but eventually becomes a non-security once the issuer’s commitments are fulfilled and the network operates independently.

Commissioner Atkins revisited its origins. howie test Through a vivid analogy from Florida. He reminded listeners that the land underlying the original Howie Citrus Orchard was never a security, but only became part of an investment agreement through a specific business arrangement, and ceased to be the land when that arrangement ended.

A century later, homes, golf courses, and resorts were built on that same land. This is a transformation that emphasizes his point. The underlying asset itself did not change, but the company built around it did. Applying this to cryptocurrencies, Atkins argued that digital tokens similarly begin life as part of an investment contract, but can evolve beyond that as promises are fulfilled and the issuer’s control role diminishes.

This formulation is convincing. Rather than treating security status as permanent, it recognizes the dynamic nature of tokens and networks. Still, Atkins left with important questions.

For example, what is “?”functional“In the context of network independence, when is a network appropriate?”functional”, so token holders are no longer dependent on the issuer’s management efforts?

Relatedly, what is the threshold for ‘?’decentralization“Is it enough (participants, nodes, governance mechanisms, token holder voting, etc.) to remove dependence on the issuer’s management efforts? To what extent?”control distribution()? ” The role of the publisher is simply “decrease(despite its own inherent ambiguity), ordisappear()” Completely?

This ambiguity has led to continued debate, and the SEC has indicated that it is open to industry feedback on how to define these terms.point” Tokens are no longer securities.

What it means for the crypto industry

For token issuers and developers, Atkins’ remarks provide both optimism and direction. The SEC appears willing to distinguish between investment activities and network utilities. This is an important nuance that could allow a project to evolve legally just as it evolves technologically.

From a practical standpoint, publishers and developers need to document when and how their roles will decline as the network matures. Platforms and custodians must prepare for a dual-regime world where some assets are securities and others are not. And investors should continue to monitor future rulemaking by both Congress and the SEC. project encryption The team is expected to further clarify token classification and investor protection.

A path to constructive progress

Commissioner Atkins’ tone was one of balance and optimism, and regulation was a guidepost, not a hammer. His call for fair, clear, and functional oversight continues to mark a meaningful evolution in the SEC’s engagement with digital assets. For an overview of the SEC, see project encryptionsee article Project Crypto: A New Era of US Financial Regulation.

Although questions remain as to what is sufficient;decentralization,”or”functional” In the network, the spirit of the message is clear. The SEC is ready to work with the crypto industry, not against it.

At Kelman PLLC, we welcome this constructive approach and encourage our clients in the digital asset space to work with Project Crypto. Crypto Task Force. We continue to monitor developments in cryptocurrency regulation across jurisdictions and advise our clients as they navigate this evolving legal landscape. For more information or to schedule a consultation, please contact us. here.