Determining When Crypto Qualifies as a Security: Applying the Howey Test to Assess Investment Risk and Regulatory Exposure

The U.S. Securities and Exchange Commission (SEC) continues to shape the regulatory landscape for cryptocurrencies through its application of the Howey Test, a framework established in 1946 to determine whether an arrangement constitutes an investment contract-and thus a security. As the crypto industry evolves, the SEC's enforcement actions and guidance highlight the nuanced criteria for classifying digital assets under federal securities laws. This analysis examines recent cases from August 2025, illustrating how the Howey Test's four prongs-investment of money, expectation of profit, common enterprise, and reliance on others' efforts-are evaluated to assess regulatory exposure and investment risk.

The Howey Test: A Framework for Crypto Regulation

The Howey Test, derived from the Supreme Court case SEC v. W.J. Howey Co., defines an investment contract as:
1. An investment of money,
2. In a common enterprise,
3. With an expectation of profit,
4. Derived from the efforts of others according to Skadden.

In the crypto context, the SEC applies this test to determine whether tokens, staking arrangements, or other digital asset activities qualify as securities. The August 2025 enforcement actions and guidance underscore the agency's focus on distinguishing between legitimate utility-driven projects and schemes that exploit investor expectations.

Case Study 1: Liquid Staking and the Limits of the Howey Test

In August 2025, the SEC's Division of Corporation Finance issued guidance clarifying that certain liquid staking arrangements do not constitute securities under the Howey Test. Liquid staking involves depositing crypto assets with a third-party provider in exchange for Staking Receipt Tokens (SRTs), which represent ownership of the deposited assets and accrued rewards.

The SEC reasoned that liquid staking providers act as agents for depositors, performing administrative tasks rather than entrepreneurial or managerial efforts. This distinction is critical: SRTs are treated as receipts for underlying assets, not as securities generating independent returns. The agency emphasized that this conclusion applies only when providers do not make discretionary staking decisions or guarantee returns. If such conditions are violated, the arrangement could fall under securities laws according to SEC guidance.

This guidance provides clarity for market participants, signaling that not all crypto activities are automatically subject to securities regulation. However, it also reinforces the SEC's scrutiny of projects that blur the line between utility and investment.

Case Study 2: The $46M Enforcement Action Against a Crypto Mining MLM Scheme

Contrasting the liquid staking guidance, the SEC secured a $46 million default judgment in August 2025 against entities operating a multi-level marketing (MLM) scheme tied to cryptocurrency mining packages according to a recent enforcement action. The enforcement action alleged that participants pooled funds for mining operations, with returns contingent on the efforts of the scheme's operators.

Applying the Howey Test, the SEC argued that the arrangement met all four prongs:
- Investment of money: Participants contributed fiat or crypto funds.
- Common enterprise: The mining venture pooled resources into a shared operation.
- Expectation of profit: Promotions emphasized returns from mining activities.
- Reliance on others' efforts: Operators controlled the technical infrastructure and staking decisions according to SEC analysis.

This case exemplifies the SEC's focus on fraudulent schemes that misrepresent the nature of crypto investments. By framing mining as a low-risk, high-return opportunity, the operators exploited investor trust, leading to severe regulatory consequences.

Case Study 3: Huynh Tran Quang Duy and Misrepresented Crypto Lending

In another August 2025 enforcement action, the SEC settled with Huynh Tran Quang Duy, founder of the online lending platform MyConstant. The agency alleged that Duy misrepresented the platform's "Loan Matching Service" as a low-risk investment, while secretly allocating funds to high-risk assets like TerraUSD (UST) according to SEC allegations.

The SEC's application of the Howey Test centered on Duy's misrepresentations:
- Investment of money: Investors contributed funds under the guise of a lending service.
- Common enterprise: Funds were pooled and managed by the platform.
- Expectation of profit: Promises of returns were made despite the absence of a viable business model.
- Reliance on others' efforts: Duy controlled fund allocation and misrepresented risk profiles according to SEC findings.

The settlement required Duy to pay $10.6 million in penalties and a lifetime ban from serving as a public company officer. This case underscores the SEC's emphasis on transparency and the dangers of conflating lending with investment.

Implications for Investors and the Industry

The SEC's August 2025 actions highlight a dual approach: providing clarity for innovative models (e.g., liquid staking) while aggressively pursuing fraud. For investors, the Howey Test serves as a critical tool to assess whether a crypto project involves speculative risks tied to third-party efforts. Projects that emphasize utility, decentralization, and technical autonomy are less likely to trigger securities laws-but only if they avoid profit-driven marketing or centralized control.

Regulators and market participants must also grapple with the evolving nature of crypto projects. The Ninth Circuit's recent ruling in SEC v. Barry reaffirmed the Howey Test's applicability to tokenized assets, such as fractionalized life settlements according to Mofo insights. This precedent suggests that the SEC will continue to apply the test rigorously to new financial instruments, including tokenized real estate or NFT-based ventures.

Conclusion

The SEC's enforcement actions and guidance demonstrate that the Howey Test remains a cornerstone of crypto regulation. While liquid staking arrangements can avoid securities classification through administrative design, projects that prioritize profit promises or centralized control face heightened scrutiny. Investors must remain vigilant, evaluating whether a project's structure and marketing align with the four prongs of the Howey Test. As the industry matures, the interplay between innovation and regulatory compliance will define the next phase of crypto's evolution.