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Cryptocurrency Compliance: What The Howey Test Really Means

Understanding the Howey Test is essential for anyone involved in cryptocurrency transactions or digital asset investments in 2025. Crypto has quickly become a popular and versatile form of investment, so understanding how to manage it well and address legal regulations can be key to financial success. Schwab & Gasparini was founded in 2007 and has decades of experience serving clients in the New York area. The firm knows that attorneys must think beyond conventional methods when assisting clients and incorporate original ideas to achieve results. For questions about cryptocurrency regulations, consider reaching out to the Syracuse office at (315) 422-1333, the Albany office at (518) 591-4664, the White Plains office at (914) 304-4353, or the Hudson Valley office at (914) 304-4353.

What Does The Howey Test Really Mean?

The Howey Test, as defined by the Legal Information Institute (LII), is a legal standard established by the United States Supreme Court in 1946 to determine whether a transaction qualifies as an investment contract and therefore constitutes a security. Under this test, an asset is considered a security if it involves an investment of money in a common enterprise with an expectation of profits derived primarily from the efforts of others. When applied to cryptocurrency, regulators use this framework to decide which digital assets fall under federal securities laws and require registration with the Securities and Exchange Commission.

Summary of Cryptocurrency Compliance

This blog explains how the Howey Test is used to decide whether a cryptocurrency should be treated as a security under U.S. law. It breaks down the four parts of the test and shows how regulators apply them to digital tokens. The article also highlights recent SEC actions and why some cryptocurrencies, like Bitcoin, are considered decentralized enough not to qualify as securities. Finally, it stresses the importance of staying compliant with regulations and suggests steps investors and businesses can take to reduce legal risks.

The Four Prongs of the Howey Test

The Howey Test consists of four essential elements that regulators examine when evaluating whether a cryptocurrency or digital token should be classified as a security.

• Investment of Money: The first prong requires that purchasers invest money or other valuable consideration to acquire the asset. In the cryptocurrency context, this includes purchasing tokens with fiat currency, other cryptocurrencies, or through mining efforts.
• Common Enterprise: The second prong examines whether investors pool their assets together with the expectation that profits will come from collective participation. Courts have interpreted this element broadly, often finding a common enterprise when token holders share in the success or failure of a project.
• Expectation of Profits: The third prong asks whether purchasers reasonably anticipate earning returns on their investment. Marketing materials, white papers, and public statements from project developers often serve as evidence of profit expectations.
• Efforts of Others: The fourth prong considers whether any anticipated profits depend primarily on the managerial or entrepreneurial efforts of third parties rather than the investors themselves. This element frequently applies to cryptocurrency projects where development teams control the technology and business decisions.

All four criteria must be met for an asset to fall under securities regulations.

How the SEC Applies the Howey Test to Cryptocurrency

The Securities and Exchange Commission has increasingly applied the Howey Test to digital assets as the cryptocurrency market has expanded. The agency has brought enforcement actions against numerous token issuers, alleging that their initial coin offerings involved unregistered securities offerings, which has shaped how digital assets are evaluated under federal securities laws.

The SEC has consistently stated that Bitcoin is not a security due to its decentralized structure, while Ethereum has not been formally classified, despite prior statements suggesting it may be sufficiently decentralized. However, many other tokens, particularly those sold through initial coin offerings or by identifiable development teams making promises about future development, may still qualify as securities under the Howey framework.

Why Cryptocurrency Compliance Matters for New York Investors

Failing to understand cryptocurrency compliance requirements can lead to significant legal consequences for both issuers and investors. Token issuers who sell unregistered securities may face enforcement actions, substantial fines, disgorgement of profits, and requirements to return funds to investors. Individual investors could also encounter tax implications, potential liability if they participate in offerings that violate securities laws, and difficulty recovering losses if a project fails. The attorneys at Schwab & Gasparini help clients understand these risks and develop strategies to address them.

The regulatory landscape continues to evolve as lawmakers and agencies work to establish clearer frameworks for digital assets. Congress has considered various bills that would provide more definitive guidance on when cryptocurrencies should be regulated as securities versus commodities. Many discussions in online communities reflect ongoing confusion about which tokens are subject to securities regulations and which might be exempt under current interpretations of the law.

Steps for Navigating Cryptocurrency Regulations

Individuals and businesses involved in cryptocurrency transactions may consider taking several proactive measures to address compliance concerns and protect their interests in this rapidly changing regulatory environment.

• Conduct thorough due diligence before participating in any token sale or initial coin offering
• Review project documentation, including white papers and terms of service, for indications of how tokens might be classified
• Maintain detailed records of all cryptocurrency transactions for tax and regulatory purposes
• Stay informed about regulatory guidance from the SEC and other relevant agencies
• Consider consulting with a knowledgeable transactional lawyer who understands digital asset regulations

Many investors find it helpful to follow cryptocurrency discussions online to stay current on emerging trends.

Consider Speaking with Schwab & Gasparini About Cryptocurrency Matters

Understanding the Howey Test and its application to cryptocurrency requires careful analysis of each unique situation. The facts and circumstances surrounding any particular token or digital asset transaction can significantly affect how regulators might classify the asset. Unlike many other law firms, Schwab & Gasparini has put a client-focused philosophy to work and has the proven results to demonstrate how clients have benefited from this thoughtful approach. The firm provides seasoned counsel for those navigating the complex intersection of digital assets and securities law.

Consider consulting an experienced attorney to discuss how cryptocurrency regulations may affect your circumstances. Contact the Syracuse office at (315) 422-1333, the Albany office at (518) 591-4664, the White Plains office at (914) 304-4353, or the Hudson Valley office at (914) 304-4353 to learn more about available legal services.

Relevant Frequently Asked Questions About Cryptocurrency and the Howey Test

The Howey Test may not be familiar to many investors. Understanding the answers to these common FAQs may help clarify any issues. 

What Is the Howey Test in Securities Law?

The Howey Test is a legal standard used to determine whether a transaction qualifies as an investment contract. If an arrangement meets all four elements of the test, it may be regulated as a security under federal law.

How Does the Howey Test Apply to Cryptocurrency?

Regulators use the Howey Test to decide whether a digital token functions as an investment contract. Tokens that meet all four prongs may require registration with the Securities and Exchange Commission.

Why Does Decentralization Matter Under the Howey Test?

Decentralization affects the “efforts of others” prong of the test. If no centralized group directs the project or controls its value, regulators may view the asset as less likely to be a security.

What Are the Four Prongs of the Howey Test?

The test analyzes whether there is an investment of money, a common enterprise, an expectation of profit, and reliance on the efforts of others. Each element must be satisfied for a token to be treated as a security.

How Has the SEC Used the Howey Test in Crypto Enforcement?

The SEC has filed enforcement actions against token issuers whose offerings allegedly met the elements of the test. These cases often involve promotional materials, white papers, or token sales that suggest an expectation of profits.

Are Bitcoin and Ethereum Considered Securities Under This Test?

Regulators have consistently stated that Bitcoin is not a security due to its decentralized nature. Ethereum has not been formally classified, although past regulatory statements have suggested it may be sufficiently decentralized.

What Risks Do Cryptocurrency Issuers Face if Their Tokens Qualify as Securities?

Issuers may encounter enforcement actions, financial penalties, or requirements to return funds to purchasers. Failure to register a security can also create long-term regulatory complications.

Do Individual Investors Have Compliance Responsibilities?

Individuals must consider whether participation in a token sale could involve securities law obligations. Maintaining accurate records and conducting thorough research may help reduce legal exposure.

How Can Individuals Navigate Evolving Cryptocurrency Regulations?

Those interacting with digital assets may review project documentation, follow regulatory guidance, and remain informed about new developments. Professional legal guidance may also help individuals understand potential obligations.

How Can Schwab & Gasparini Assist With Cryptocurrency Compliance Questions?

The team at Schwab & Gasparini works to ensure clients understand the legal implications of digital asset transactions. Consider consulting an experienced attorney at Schwab & Gasparini to learn more about available legal options for cryptocurrency compliance.

Mon Feb 23 2026, 12:00am