Crypto Asset Fraud and the Efficacy of Rule 10b-5 Class Actions in Protecting Secondary Market Investors: A Legal and Policy Analysis of Investor Rights in Digital Assets

The crypto asset market has long grappled with a paradox: its promise of decentralization and innovation clashes with the need for regulatory frameworks to protect investors. At the heart of this tension lies the Howey Test, a 1946 legal standard for determining whether an arrangement constitutes an "investment contract"-and thus a security-under U.S. securities law. Over the past three years, courts and regulators have repeatedly applied this test to digital assets, shaping the enforceability of Rule 10b-5 class actions and, by extension, the ability of secondary market investors to seek redress for fraud. This article examines how evolving interpretations of the Howey Test and Rule 10b-5 are redefining investor protection, fraud deterrence, and the legitimacy of crypto markets.

The Howey Test: A Moving Target in Crypto Regulation

The Howey Test defines an investment contract as an arrangement involving (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit, and (4) derived primarily from the efforts of others. In 2023, the Ninth Circuit reaffirmed the test's relevance in SEC v. Barry, ruling that fractionalized interests in life settlements qualified as investment contracts because investors' returns depended on the managing entity's efforts. This logic extends to crypto tokens: if a token's value is tied to the efforts of a centralized promoter or team, it likely qualifies as a security.

However, the test's application has grown more nuanced. In SEC v. Ripple Labs, the Southern District of New York distinguished between institutional and programmatic sales of XRP tokens. Institutional buyers, who engaged directly with Ripple, were deemed to have an expectation of profit from the company's efforts, classifying their transactions as securities. Conversely, programmatic sales on exchanges-where buyers had no direct relationship with Ripple-were not. This split decision highlights a critical ambiguity: how the method of sale and the nature of public statements influence the Howey Test's outcome.

In 2025, the SEC issued no-action relief for DePIN (Decentralized Physical Infrastructure Network) tokens, arguing that their value derived from decentralized network participants rather than a centralized entity, thus failing the fourth prong of the Howey Test. Meanwhile, Congress passed the GENIUS Act, explicitly excluding fiat-backed stablecoins from securities classification. These developments suggest a regulatory push to differentiate between functional tokens (e.g., DePIN) and speculative ones (e.g., many NFTs or staking tokens), but the lack of a unified framework leaves room for inconsistent enforcement.

Rule 10b-5: A Double-Edged Sword for Investor Protection

Rule 10b-5, which prohibits fraud in connection with the purchase or sale of securities, has become a cornerstone of SEC enforcement in crypto. In 2025, it accounted for the majority of federal securities litigation. However, its efficacy hinges on whether a crypto asset is classified as a security under the Howey Test.

For instance, in SEC v. MyConstant, the SEC secured a $9.8 million settlement against Huynh Tran Quang Duy for violating Rule 10b-5 by falsely promising high returns on a crypto-based loan service. Similarly, a $46 million default judgment was obtained against entities involved in a crypto mining and trading scheme, where defendants allegedly manipulated investors through platform control. These cases underscore Rule 10b-5's utility in holding bad actors accountable-but only if the asset in question is deemed a security.

Yet, courts have tightened pleading standards for Rule 10b-5 claims. The Second Circuit clarified in 2025 that pure omissions (e.g., under Item 303 of Regulation S-K) are not actionable unless they render affirmative statements misleading. decision, which challenged the presumption of classwide reliance in Rule 10b-5 cases. As a result, plaintiffs now face higher hurdles in certifying class actions, particularly in decentralized or secondary market contexts where direct relationships between issuers and investors are tenuous.

The Interplay Between Howey and Rule 10b-5: A Judicial Divide

The interplay between the Howey Test and Rule 10b-5 enforcement has created a judicial divide in post-issuance trading. In SEC v. Ripple Labs, Judge Analisa Torres ruled that programmatic XRP sales did not constitute securities, limiting Rule 10b-5's reach. Conversely, in SEC v. Terraform Labs, Judge Jed Rakoff found that public statements about future profits-even in secondary markets-could trigger securities law obligations. This inconsistency raises critical questions:

1. Does the method of sale (institutional vs. programmatic) determine securities status?
2. Can public statements about a token's utility or future value create an "expectation of profit" under the Howey Test?

The answer to these questions will shape whether Rule 10b-5 can be applied to secondary market fraud. If the Second Circuit upholds Ripple Labs, it may narrow the scope of Rule 10b-5 enforcement to primary market transactions. Conversely, a Terraform Labs-aligned precedent could expand it to any trading activity involving assets marketed with profit expectations.

Implications for Investor Protection and Market Legitimacy

The current legal landscape has profound implications for fraud deterrence and market legitimacy.

• For Investors: If a token is not classified as a security, investors lose access to Rule 10b-5 protections. This creates a "regulatory gray zone" where fraudulent actors may exploit ambiguity to avoid liability. For example, stablecoins and DePIN tokens-excluded from securities status-could become hotbeds for unregistered offerings or misleading marketing.
• For Markets: A fragmented regulatory approach risks eroding trust. While the SEC's no-action relief for DePIN tokens encourages innovation, inconsistent enforcement of the Howey Test may deter institutional participation. Conversely, overly broad securities classifications could stifle utility-driven tokens, undermining the decentralized ethos of crypto.

The solution lies in clarity. Congress or the SEC must provide a unified framework to distinguish between functional tokens and speculative ones. Until then, courts will continue to grapple with competing precedents, and investors will remain exposed to enforcement gaps.

Conclusion: A Call for Regulatory Coherence

The crypto market's future hinges on balancing innovation with investor protection. The Howey Test and Rule 10b-5 are powerful tools, but their efficacy depends on consistent application. As the SEC and courts navigate this evolving terrain, stakeholders must advocate for clearer definitions of what constitutes a security and how fraud claims are enforced. Without such coherence, the promise of crypto-transparency, efficiency, and democratized finance-will remain at odds with the realities of a fragmented legal landscape.