SEC Chairman's Latest Speech: Farewell to a Decade of Chaos, Encryption Regulation Enters a Clarification Era

Written by: Paul S. Atkins, Chairman of the SEC

Compiled by: Luffy, Foresight News

Ladies and gentlemen, good morning! Thank you for your warm introduction, and thank you for inviting me here today. We will continue to explore how America is leading the next era of financial innovation.

Recently, when discussing the leadership of the United States in the digital financial revolution, I described “Project Crypto” as a regulatory framework established to match the vitality of American innovators (note, the SEC launched the Project Crypto initiative on August 1 of this year, aimed at updating securities rules and regulations to enable on-chain capabilities in U.S. financial markets). Today, I would like to outline the next steps in this process. The core of this step lies in upholding fundamental fairness and common sense principles in the application of federal securities laws to crypto assets and related transactions.

In the coming months, I expect the SEC (U.S. Securities and Exchange Commission) to consider establishing a token classification system based on the long-standing Howey investment contract securities analysis, while acknowledging the applicable boundaries of our laws and regulations.

The content I am about to elaborate on is largely based on the pioneering work carried out by the cryptocurrency special working group led by Commissioner Hester Peirce. Commissioner Peirce has constructed a framework aimed at providing coherent and transparent securities law regulation of crypto assets based on economic substance rather than slogans or panic. I would like to reiterate my agreement with her vision. I value her leadership, hard work, and her unwavering commitment over the years in promoting related issues. I have worked closely with her for a long time and am very pleased that she agreed to take on this task.

My speech will revolve around three themes: first, the importance of a clear token classification system; second, the applicable logic of the Howey test, acknowledging the fact that investment contracts may terminate; third, what this means in practice for innovators, intermediaries, and investors.

Before we begin, I would like to reiterate: although SEC staff are diligently drafting the rule amendments, I fully support Congress's efforts to codify a comprehensive framework for the cryptocurrency market. My vision aligns with the bill currently under consideration by Congress, aimed at complementing rather than replacing Congress's critical work. Commissioner Peirce and I have prioritized supporting congressional action and will continue to do so.

It has been a pleasure collaborating with Acting Chair Pham, and I wish the Commodity Futures Trading Commission (CFTC) Chairman nominee Mike Selig, nominated by President Trump, a smooth and swift confirmation. My experiences working with Mike over the past few months have convinced me that we are all committed to assisting Congress in quickly advancing the bipartisan market structure bill and submitting it for President Trump's signature. Nothing is more effective in preventing regulatory abuse than sound legal provisions established by Congress.

To reassure my compliance team, I hereby make a routine disclaimer: my statements represent only my personal views as the chair and do not necessarily reflect the overall position of other commissioners or the SEC.

A decade full of uncertainty

If you are tired of hearing the question “Are crypto assets securities?”, I completely understand. The confusion around this question arises because “crypto assets” is not a term defined in federal securities law; it is a technical description that merely indicates the manner in which records are maintained and value is transferred, while it hardly mentions the legal rights associated with specific instruments or the economic substance of specific transactions, which are exactly the keys to determining whether an asset is a security.

I believe that most of the cryptocurrencies traded today are not securities themselves. Of course, a specific token may be sold as part of an investment contract in a securities offering, which is not a radical view but a direct application of securities law. The statutory definition of securities lists common instruments such as stocks, notes, and bonds, and adds a broader category: “investment contracts.” The latter describes the relationship between parties rather than a permanent label attached to a specific item. Unfortunately, the statute does not define it either.

Investment contracts can be performed or terminated. It cannot be assumed that the investment contract is valid forever just because the underlying assets of the investment contract are still being traded on the blockchain.

However, in recent years, too many people have advocated the view that if a token was once the subject of an investment contract, it is forever a security. This flawed view even further presumes that every subsequent transaction of that token (regardless of where or when) is a securities transaction. I find it difficult to reconcile this view with legal texts, Supreme Court rulings, or common sense.

Meanwhile, developers, exchanges, custodians, and investors have been groping in the dark without guidance from the SEC, facing obstacles instead. The tokens they see serve as payment tools, governance tools, collectibles, or access keys, while some have mixed designs that are hard to categorize into any existing category. However, for a long time, the regulatory stance has treated all these tokens as equivalent to securities.

This viewpoint is neither sustainable nor practical. It incurs huge costs while yielding minimal results; it is unfair to market participants and investors, inconsistent with the law, and has triggered a wave of offshore migration among entrepreneurs. The reality is: if the United States insists on forcing every on-chain innovation to navigate the minefield of securities laws, these innovations will migrate to jurisdictions that are more willing to distinguish between different types of assets and more willing to establish rules in advance.

On the contrary, we will do what regulators should do: draw clear boundaries and explain them in clear language.

The core principles of Project Crypto

Before expressing my views on the applicability of securities law to cryptocurrencies and trading, I would like to first outline two fundamental principles that guide my thinking.

First, whether stocks are presented as paper certificates, recorded in accounts with the Depository Trust & Clearing Corporation (DTCC), or in the form of tokens on a public blockchain, they are essentially still stocks; bonds do not cease to be bonds simply because their payment flows are tracked through smart contracts. No matter how they are presented, securities are always securities. This is easy to understand.

Second, economic substance prevails over form. If an asset essentially represents a claim on the profits of a business and is sold with a promise that relies on the core management efforts of others, then even if it is called a “token” or “non-fungible token (NFT)”, it cannot be exempt from current securities laws. Conversely, just because a token was once part of a financing transaction does not mean it will magically transform into stock of an operating company.

These principles are not novel. The Supreme Court has repeatedly emphasized that, when determining the applicability of securities law, one should focus on the substance of the transaction rather than its form. The new change lies in the scale and speed of the evolution of asset types in these new markets. This pace requires us to respond flexibly to the urgent demands of market participants for guidance.

A coherent token classification system

Against this background, I would like to outline my current views on various types of crypto assets (please note that this list is not exhaustive). This framework has been developed based on months of roundtable discussions, over a hundred meetings with market participants, and hundreds of public written submissions.

First of all, regarding the bill currently being reviewed by Congress, I believe that “digital commodities” or “network tokens” are not securities. The value of these crypto assets is essentially related to the programmatic operation of a “functionally complete” and “decentralized” cryptocurrency system and arises from it, rather than from the expected profits brought about by the key management work of others.

Secondly, I believe that “digital collectibles” are not securities. These crypto assets are intended for collection and use, and may represent or confer rights to the holder for digital expressions or references to artworks, music, videos, trading cards, in-game items, or online memes, characters, current events, and trends. Buyers of digital collectibles do not expect to profit from the everyday management activities of others.

Thirdly, I believe that “digital tools” are not securities. These crypto assets have practical functions such as membership, tickets, vouchers, proof of ownership, or identity badges. Buyers of digital tools do not expect to profit from the day-to-day management work of others.

Fourth, “tokenized securities” are currently and will continue to be securities. These crypto assets represent ownership of the financial instruments listed in the definition of “securities,” which are maintained on the crypto network.

Howey Test, Commitment and Termination

Although most crypto assets are not securities themselves, they may be part of an investment contract or subject to investment contract obligations. Such crypto assets often come with specific representations or promises that the issuer needs to fulfill management responsibilities, thus meeting the requirements of the Howey test.

The core of the Howey test is: investing money in a common enterprise and reasonably expecting to profit from the efforts of others' core management. The buyers' profit expectations depend on whether the issuer has made statements or commitments to undertake core management efforts.

In my opinion, these statements or commitments must clearly and unequivocally specify the core management efforts that the issuer will undertake.

The next question is: how to separate non-securities crypto assets from investment contracts? The answer is simple yet profound: the issuer either fulfilled the statements or commitments, or failed to do so, or the contract was terminated for other reasons.

To help everyone understand better, I would like to talk about a place in the rolling hills of Florida. I have been very familiar with it since childhood, as it was once the home of the William J. Howey Citrus Empire. In the early twentieth century, Howey purchased over 60,000 acres of undeveloped land, planting orange and grapefruit groves next to his mansion. His company sold orchard plots to individual investors and was responsible for planting, harvesting, and selling the fruit for them.

The Supreme Court reviewed Howey's arrangement and established the test standard for defining investment contracts, a standard that has influenced generations. However, today, Howey's land has undergone a dramatic transformation. The mansion he built in 1925 in Lake County, Florida still stands a century later, hosting weddings and other events, while the citrus groves that once surrounded the mansion have largely disappeared, replaced by resorts, championship golf courses, and residential areas, making it an ideal retirement community. It's hard to imagine that anyone standing in these fairways and cul-de-sacs today would think of them as securities. However, over the years, we have seen the same test rigidly applied to digital assets, which have also undergone the same profound transformation, yet still carry the labels from their issuance as if nothing has changed.

The land surrounding the Howey mansion was never a security; it became the subject of an investment contract through specific arrangements, and when that arrangement terminated, it was no longer bound by the investment contract. Of course, even though the business on the land underwent a complete change, the land itself remained unchanged.

Commissioner Peirce's observation is very correct: the token issuance of a project may involve investment contracts in its early stages, but these commitments are not forever valid. The network will mature, the code will be implemented, control will be decentralized, and the role of the issuer will weaken or even disappear. At some point, buyers will no longer rely on the core management efforts of the issuer, and most token transactions will no longer be based on the reasonable expectation that “a certain team is still in control.” In short, a token will not forever be considered a security just because it was once part of an investment contract transaction, just as a golf course will not become a security simply because it was once part of a citrus orchard investment plan.

When an investment contract can be recognized as having been fulfilled or terminated according to its terms, the tokens may continue to be traded, but these transactions will not become securities solely because of the token's origin story.

As many of you know, I strongly support the super apps in the financial sector, which allow the custody and trading of multiple asset classes under a single regulatory license. I have asked SEC staff to prepare relevant recommendations for the SEC's consideration: to allow tokens related to investment contracts to be traded on platforms not regulated by the SEC, including intermediaries registered with the Commodity Futures Trading Commission (CFTC) or subject to state regulatory frameworks. While financing activities should still be regulated by the SEC, we should not stifle innovation and investor choice by requiring that the underlying assets can only be traded in a specific regulatory environment.

Importantly, this does not mean that fraudulent behavior suddenly becomes acceptable, or that the SEC's level of concern has diminished. Anti-fraud provisions still apply to false statements and omissions related to the sale of investment contracts, even if the underlying asset itself is not a security. Of course, regarding the classification of these tokens as commodities in interstate commerce, the Commodity Futures Trading Commission (CFTC) also has anti-fraud and anti-manipulation authority to take action against misconduct in the trading of these assets.

This means that our rules and enforcement will be consistent with the economic substance of “investment contracts may terminate, and the network can operate independently.”

Cryptocurrency regulatory actions

In the coming months, as envisioned by the bill currently under review by Congress, I hope the SEC will also consider a series of exemption clauses to establish a tailored issuance system for crypto assets that are part of or bound by investment contracts.

I have asked the staff to prepare relevant recommendations for the SEC's review, which are aimed at promoting financing, fostering innovation, while ensuring investor protection.

By simplifying this process, innovators in the blockchain space can focus their energy on development and user interaction, rather than navigating the maze of regulatory uncertainty. Moreover, this approach will foster a more inclusive and vibrant ecosystem, allowing smaller projects with limited resources to experiment freely and thrive.

Of course, we will continue to work closely with the Commodity Futures Trading Commission (CFTC), banking regulators, and corresponding departments in Congress to ensure that non-securities crypto assets have an appropriate regulatory framework. Our goal is not to expand the jurisdiction of the SEC, but to ensure that investor protection is in place while allowing financing activities to flourish.

We will continue to listen to all voices. The cryptocurrency special working group and relevant departments have held multiple roundtable meetings and reviewed a large amount of written feedback, but we still need more input. We need feedback from investors, developers concerned about code delivery, and traditional financial institutions eager to participate in the on-chain market but unwilling to violate the rules set for the paper era.

Finally, as I mentioned before, we will continue to support Congress's efforts to incorporate a comprehensive market structure framework into statutory law. Although the SEC can provide reasonable opinions under current law, a future SEC may still change direction. That is why a tailored bill is so important, and why I am pleased to support President Trump's goal of introducing a cryptocurrency market structure bill by the end of the year.

Integrity, Understandability, and Rule of Law

Now, I want to clarify what this framework does not include. It is not a commitment by the SEC to relax enforcement; fraud is fraud. Although the SEC protects investors from securities fraud, there are many other federal regulatory agencies capable of overseeing and preventing illegal activities. That said, if you raise funds by building a network with promises and then abscond with the money, we will certainly find you and take the most severe action allowed by law.

This framework is a commitment to integrity and transparency. For entrepreneurs who wish to start a business in the United States and are willing to comply with clear rules, we should not only respond with shrugs, threats, or subpoenas; for investors trying to distinguish between purchasing tokenized stocks and buying game collectibles, we should not just provide a complex web of enforcement actions.

Most importantly, this framework reflects a humble recognition of the SEC's own boundaries of authority. Congress enacted securities laws to address specific issues — namely, situations where individuals entrust their funds to others based on the integrity and capability of those individuals. These laws are not intended to serve as a universal charter for regulating all new forms of value.

Contract, Freedom, and Responsibility

Let me conclude with the historical review from the speech delivered by Commissioner Peirce in May of this year. She evoked the spirit of an American patriot who, at great personal risk and even at the brink of death, defended the principle that free people should not be subjected to arbitrary rules.

Fortunately, our work does not require such sacrifices, but the principle is the same. In a free society, the rules governing economic life should be known, reasonable, and appropriately constrained. When we extend securities law beyond its rightful scope, when we presume every innovation to be guilty, we deviate from this core principle. When we acknowledge the boundaries of our authority, when we recognize that investment contracts may terminate and networks can operate independently based on their own value, we are practicing this principle.

The SEC's reasonable regulatory approach to cryptocurrencies will not, in itself, determine the fate of the market or any specific project; that will be decided by the market. However, it will help ensure that the United States remains a place where people can experiment, learn, fail, and succeed under firm and fair rules.

This is the significance of Project Crypto and the goal that the SEC should pursue. As the chair, I make a commitment to you today: we will not allow the fear of the future to trap us in the past; we will not forget that behind every debate related to tokens are real people — entrepreneurs striving to build solutions, workers investing in the future, and Americans working hard to share in the prosperity of this country. The role of the SEC is to serve these three groups of people.

Thank you all, looking forward to continuing the dialogue with you in the coming months.