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The Token Itself Is Not Always the Security
The opinion editorial below was written by Alex Forehand and Michael Handelsman for Kelman.Law.
A central development in modern crypto jurisprudence is the growing recognition that a token, standing alone as a digital object, is not automatically a security. What may constitute a security is the investment contract—the arrangement, scheme, or promises surrounding the token’s distribution—rather than the token itself.
Several courts have now endorsed this distinction, most prominently in SEC v. Ripple Labs, where the court held that secondary-market sales of XRP were not securities transactions because the purchasers were not buying based on Ripple’s managerial efforts. The legal significance is substantial: if the contract is the security rather than the token itself, then the security status does not automatically attach to all downstream transactions.
For now, the SEC seems to have adopted this position as well. SEC Commissioner Paul Atkins recently explained how “it is possible that a particular token might have been sold as part of an investment contract in a securities offering,” but that he believes “most crypto tokens trading today are not themselves securities.”
What’s more, Atkins also suggested that a token that was once a security may evolve into something other than a security, explaining:
“Networks mature. Code is shipped. Control disperses. The issuer’s role diminishes or disappears. At some point, purchasers are no longer relying on the issuer’s essential managerial efforts, and most tokens now trade without any reasonable expectation that a particular team is still at the helm.”
This distinction reshapes how secondary markets are analyzed. It means that the buying and selling of tokens on exchanges may not constitute securities transactions if those trades are detached from the original investment contract and the expectations foundational to that contract.
In such cases, exchanges facilitating those trades may avoid classification as securities brokers or exchanges, because the transactions no longer resemble investment contracts. The inquiry turns on whether the link between issuer-driven value expectations and the token trade persists, rather than on the token’s mere existence.
When Secondary Transactions Raise Securities Issues
The fact that tokens are not inherently securities does not mean every secondary-market transaction is safe. Those evaluating secondary trades should focus on whether the economic reality of the transaction continues to reflect an investment contract, even after tokens have entered general circulation.
The inquiry is whether purchasers still rely—explicitly or implicitly—on the issuer’s efforts to drive the token’s value, whether promotional statements or ongoing marketing campaigns continue to emphasize growth driven by the team, and whether the issuer maintains a significant role in “ecosystem management,” such as treasury operations, token issuance schedules, network upgrades, or public roadmap commitments.
Also read: Is Crypto a Security? Part II: Utility Tokens
It is also important to consider whether purchasers and developers possess asymmetric information. If insiders know materially more about the project’s health, progress, or risks than open-market buyers, that imbalance can support a finding that purchasers reasonably relied on the issuer’s efforts.
Critically, courts acknowledge that tokens can evolve, shifting from security-like instruments during early, issuer-dependent stages to commodity-like assets once decentralization meaningfully reduces reliance on a core team. Regulators, however, have just recently begun to embrace this dynamic view, leaving uncertainty around when or whether such a transition occurs.
Staying informed and compliant in this evolving landscape is more critical than ever. Whether you are an investor, entrepreneur, or business involved in cryptocurrency, our team is here to help. We provide the legal counsel needed to navigate these exciting developments. If you believe we can assist, schedule a consultation here.