Whether bitcoin and other digital assets are considered securities depends on many factors and a host of nuances. The differences in how these assets are currently classified primarily depends on how they were issued and how they are used.

Let’s explore the current classifications for the most common digital asset classes.

Current Regulatory Landscape

When it comes to classifying a certain asset class as a security or a commodity, the U.S. Securities and Exchange Commission (SEC) relies on the Howey Test. The Howey Test is a legal framework used to determine whether a transaction qualifies as an investment contract (and therefore a security) under United States law.

In order to be considered a security, an asset must check ALL of the following 4 boxes:

• An investment of money: investors provide capital (i.e. cash other assets).
• In a common enterprise: investor funds are pooled together or tied to the success of one central entity.
• With an expectation of profits: investors anticipate earning returns (i.e. appreciation, dividends, revenue-sharing).
• Derived from the efforts of others: the success of the investment primarily depends on the work of a third party (i.e. developers or leaders of the project).

Over the past few years, Congress and the courts have been stuck in seemingly constant debates over developing clear guidelines for classifying digital assets. With a pro-crypto administration now in power, 2025 and the years following could prove pivotal for regulation in the digital asset space.

Bitcoin

At this time, bitcoin is generally not considered a security. The SEC has consistently stated that bitcoin is a commodity, not a security. This distinction comes from the fact that bitcoin:

1. Is fully decentralized and not controlled by a single entity.
2. Was not issued through an Initial Coin Offering (ICO).
3. Functions primarily as a store of value and medium of exchange (as opposed to an investment contract).

The Commodity Futures Trading Commission (CFTC) also views bitcoin as a commodity (like gold and oil). For tax purposes, the IRS currently classifies bitcoin as property.

Ethereum

In 2018, former SEC Director William Hinman stated that Ethereum was not a security because it had become “sufficiently decentralized.”

In 2023, SEC Chairman Gary Gensler muddied the waters, saying that Ethereum could be considered a security after its transition to Proof of Stake (PoS).

In July of 2024, the SEC approved nine spot Ether ETFs, allowing them to begin trading.

While the SEC has not officially declared Ethereum a security, ongoing investigations and lawsuits suggest that the classification could change in the future.

Altcoins & Tokens

Altcoins are generally defined as all cryptocurrencies other than bitcoin (some also add Ethereum to this definition). While every coin is different, many ICOs and tokens (like XRP and some DeFi tokens) either have faced or continue to face SEC scrutiny under the Howey Test.

Ripple’s Legal Battle with the SEC

In December of 2020, the SEC sued Ripple Labs, its CEO Brad Garlinghouse, and its co-founder Chris Larsen. The SEC alleged that:

1. XRP was an unregistered security
2. Ripple raised $1.3 billion through XRP sales without proper registration

Ripple consistently denied the claims, arguing that XRP is a currency like Bitcoin or Ethereum, not a security. This lawsuit has carried on for years and raised many concerns about regulatory clarity in the digital asset space. On July 13, 2023 Judge Analisa Torres of the U.S. District Court for the Southern District of New York issued a split decision in the case.

• Institutional Sales of XRP: The court ruled in favor of the SEC, stating Ripple’s direct sales of XRP to institutional investors met the Howey Test, and therefore qualified as securities transactions.
• Programmatic Sales (Retail/Exchange Sales) of XRP: The court ruled in favor of Ripple, stating that sales of XRP to retail investors on exchanges did not qualify as securities transactions. This decision was based on buyers not having a reasonable expectation of profit directly tied to Ripple’s efforts.

This decision was seen as a partial win for the crypto industry. Ripple was fined $125M for their institutional sales, but the court denied the SEC’s request for disgorgement. A disgorgement request is a legal demand that requires a party to relinquish any profits or gains obtained through illegal or unethical means.

Both Ripple and the SEC appealed the 2023 decision, and no further decisions have been made in the courts. Only a couple weeks ago, the SEC removed the Ripple lawsuit from their website. Whether the case is officially over or not remains to be seen.

NFTs

If an NFT is primarily marketed as an investment with profit expectations – especially if its value depends on the work of a single centralized team – it could be considered a security. However, there are many different types of NFTs on the market.

Most art & collectibles are considered low risk of being deemed a security, while fractionalized NFTs (those divided into multiple ownership shares) are considered a higher risk of being labeled a security. NFTs providing a specific utility – like access to events or in-game items – are also generally not considered securities. If an NFT generates revenue from secondary sales, staking rewards, or profit-sharing mechanisms, the SEC could argue that buyers expect profits from the issuer’s efforts. This makes the potential that this type of NFT would be considered a security much higher.

Stay Up-to-Date on Digital Asset Regulation Changes

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.