Utility is the new narrative. The SEC's Howey Test framework, which hinges on an 'expectation of profits,' is becoming irrelevant as protocols like Uniswap and Aave generate billions in fees from pure utility—swaps and lending—not speculation.
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Why the 'Expectation of Profits' Argument Is Eroding
A technical breakdown of how Judge Torres' Ripple ruling dissected buyer intent for programmatic sales, creating a critical legal fault line in the SEC's application of the Howey Test to crypto assets.
introduction
THE SHIFT
Introduction
The legal 'expectation of profits' argument for crypto assets is collapsing under the weight of functional utility.
Protocols are infrastructure, not securities. The market now values fee-generating mechanisms and governance rights over speculative token appreciation. A DAO's treasury yield from Compound or Maker is a cash flow, not a dividend promise.
Evidence: The total value locked (TVL) in DeFi has shifted from pure yield farming to collateralized utility. Over $50B is locked in protocols where the primary user action is borrowing assets, not trading the governance token.
thesis-statement
THE HOWEY TEST
The Core Legal Fault Line
The SEC's reliance on the 'expectation of profits' prong is collapsing under the weight of functional, non-speculative utility.
The SEC's central thesis is that most tokens are investment contracts because buyers expect profits from the efforts of others. This framework is failing as protocols like Uniswap and Aave demonstrate primary utility for governance and collateral, not passive appreciation.
The counter-intuitive reality is that token value accrual is now a byproduct of network function, not its purpose. The fee switch for UNI holders or staking rewards for securing EigenLayer are operational mechanics, not profit promises.
Evidence: The DAO Treasury model, where protocols like Optimism and Arbitrum fund public goods, legally decouples token holding from corporate profit. Tokenholders are governors, not investors in a common enterprise.
key-trends
WHY THE 'EXPECTATION OF PROFITS' ARGUMENT IS ERODING
The Ripple Effect: Three Legal Shifts
The SEC's primary weapon for classifying tokens as securities is being systematically dismantled by market evolution and legal precedent.
01
The Problem: The Howey Test's Fatal Flaw
The SEC's reliance on the 1946 Howey Test is crumbling in the face of decentralized, functional assets. The 'common enterprise' and 'expectation of profits' prongs fail when value is derived from utility, not a promoter's efforts.
- Key Shift: Courts now scrutinize actual use over promotional hype.
- Key Precedent: The Ripple Labs ruling established that programmatic sales on exchanges lack a common enterprise.
>70%
Of Top 50 Tokens
1946
Outdated Law
02
The Solution: Protocol-Led Utility Proliferation
Projects like Uniswap, Aave, and Lido have engineered tokens that are fundamentally governance and utility instruments. Staking for fees, voting on upgrades, and providing collateral are core functions that decouple price from promoter promises.
- Key Metric: $20B+ in governance-controlled treasury assets.
- Legal Shield: Active use creates a prima facie case for commodity status, pushing the burden of proof onto regulators.
$20B+
Gov. Treasuries
1000s
Daily Proposals
03
The Catalyst: Institutional Demand for Clarity
BlackRock, Fidelity, and VanEck launching spot Bitcoin ETFs created an irreversible precedent. Their filings explicitly argued Bitcoin is a store of value, not a security. This institutional pressure forces the SEC into a defensive, reactive posture.
- Market Force: $50B+ in ETF AUM creates a political reality.
- Domino Effect: Establishes a legal blueprint for Ethereum and other proof-of-stake assets, further eroding the 'profits from others' efforts' argument.
$50B+
ETF AUM
S-1
Legal Blueprint
THE EXPECTATION OF PROFITS PRONG
Deconstructing the Howey Test: Ripple vs. SEC Interpretation
A comparative analysis of the legal arguments and market realities surrounding the 'expectation of profits' prong of the Howey Test in the context of digital assets.
| Legal & Market Dimension | SEC's Position (Investment Contract) | Ripple's Position (Currency/Utility) | Market Reality (2024) |
|---|---|---|---|
Primary Use Case Alleged | Capital appreciation via efforts of others | Cross-border settlement & liquidity tool | Speculative trading dominates (~95% volume) |
Reliance on Promoter Efforts | |||
Direct Utility Consumption | Limited; on-chain utility <5% of supply activity | ||
Marketing & Communications Focus | Emphasized future value & ecosystem growth | Emphasized tech solutions for banks | CEX listings & trading pairs drive 90%+ of retail acquisition |
Holder Distribution Metric | Concentrated sales to institutional investors | Open market sales & ODL customers | ~80% of assets held on centralized exchanges |
Formal Profit Promise | Implied via exchange listings, futures, ETFs (BTC/ETH) | ||
Judicial Precedent Cited | SEC v. Telegram, SEC v. LBRY | SEC v. Ripple (Programmatic Sales ruling) | Hinman Speech, Commodity vs. Security ambiguity |
deep-dive
THE LEGAL FRONTIER
Why Buyer Intent is the Kill Switch
The SEC's core 'investment contract' argument is being dismantled by on-chain data that proves users are buying for utility, not passive profit.
The Howey Test fails when the primary motivation for acquisition is consumption, not investment. The SEC's framework relies on proving an 'expectation of profits' from the efforts of others, a premise that dissolves when analyzing actual user behavior on networks like Ethereum and Solana.
On-chain data is the evidence. Transaction analysis from platforms like Dune Analytics and Nansen shows the majority of token transfers are for gas fees, governance votes, or protocol access—not speculative holding. This creates an irrefutable, data-driven narrative for courts.
The precedent is shifting. Legal arguments in cases like SEC v. Ripple already distinguish between institutional sales (investment) and programmatic sales/distribution (utility). This distinction is the legal wedge that decentralized protocols will use to secure regulatory clarity.
case-study
THE HOWEY TEST UNDER SIEGE
Precedent in Action: Post-Ripple Legal Landscape
The SEC's reliance on the 'expectation of profits' prong of the Howey Test is being systematically dismantled by judicial rulings and market evolution.
01
The Ripple Ruling: A Functional Distinction
Judge Torres's ruling created a critical legal firewall: programmatic sales on exchanges are not securities, while institutional sales can be. This shattered the SEC's 'one-size-fits-all' enforcement strategy.\n- Key Precedent: Establishes that token utility and secondary market dynamics negate investment contract status.\n- Market Impact: Directly enabled exchanges like Coinbase and Kraken to relist XRP, validating a $30B+ market cap asset.
$30B+
Market Validated
1
Landmark Ruling
02
The Problem: Secondary Market Trading as a 'Common Enterprise'
The SEC's theory collapses when applied to anonymous, global spot markets. Post-distribution, token value is driven by protocol utility (e.g., Uniswap governance, Ethereum gas) not a promoter's efforts.\n- Legal Reality: Courts increasingly reject the idea that every secondary trade is an investment in the original issuer.\n- Data Point: >90% of daily crypto volume is on secondary DEXs/CEXs, disconnected from issuer control.
>90%
Secondary Volume
Decentralized
Price Drivers
03
The Solution: The 'Sufficiently Decentralized' Defense
Projects like Ethereum and Filecoin have operationalized a legal strategy: once development and governance are decentralized, the asset is a commodity. This is the new compliance benchmark.\n- Key Mechanism: Transitioning from founder-led development to DAO governance (e.g., MakerDAO, Compound).\n- Regulatory Outcome: Forces the SEC to target centralized promoters, not the underlying network—a framework Grayscale used to win its ETF case.
DAO-Led
Governance Model
Commodity
Legal Status
04
The Binance Settlement: A Blueprint for Compliance
The $4.3B DOJ/CFTC settlement with Binance conspicuously excluded the SEC, highlighting the agency's weakening position. The path forward is now clear: register as exchanges and broker-dealers, not as securities issuers.\n- Strategic Shift: Focus on KYC/AML and market structure, not asset reclassification.\n- Market Signal: Major players like Coinbase are doubling down on this regulated exchange model, not fleeing it.
$4.3B
Non-SEC Settlement
KYC/AML
New Focus
05
The Grayscale ETF Victory: Market Structure Over Asset Nature
The D.C. Circuit Court didn't rule on Bitcoin's status as a security; it ruled the SEC was 'arbitrary and capricious' in approving futures ETFs but not spot ETFs. This procedural victory is more powerful.\n- Legal Tactic: Attack the SEC's inconsistent application of its own rules on custody and market manipulation concerns.\n- Result: Forced the SEC's hand, leading to the approval of spot Bitcoin ETFs from BlackRock and Fidelity, which now hold ~$60B in AUM.
~$60B
ETF AUM
Procedural
Win Strategy
06
The Future: Legislation Trumps Regulation by Enforcement
The FIT21 Act passing the House demonstrates political momentum to codify the CFTC as the spot market regulator for digital commodities. The SEC's campaign is creating its own obsolescence.\n- Endgame: A clear, congressional mandate separating securities (**
- Endgame: A clear, congressional mandate separating securities (tokenized assets) from commodities (decentralized protocols).\n- Implication: The 'expectation of profits' argument becomes legally irrelevant for protocols like Solana and Avalanche operating as global utility networks.
FIT21
Key Bill
CFTC
Primary Regulator
counter-argument
THE LEGAL FRONTIER
The SEC's Uphill Battle and Narrowing Path
The SEC's primary legal argument for classifying tokens as securities is collapsing under the weight of technological evolution and judicial scrutiny.
The Howey Test is failing. The 'expectation of profits' prong, the SEC's favorite weapon, requires a common enterprise. Modern decentralized protocols like Uniswap and Lido structurally eliminate this commonality, as profits are not derived from a promoter's efforts but from autonomous, permissionless software.
The 'investment contract' is the asset, not the token. The Supreme Court's ruling in the Ripple case established this critical distinction. Purchasing XRP on a secondary exchange does not constitute an investment contract, setting a precedent that protects most secondary market token transactions from SEC jurisdiction.
Token utility is now provable on-chain. The SEC's argument relies on abstract promises. Today, protocols like Aave and Compound demonstrate utility through billions in verifiable loans and deposits. This on-chain proof of function directly contradicts the 'solely from the efforts of others' requirement in Howey.
Evidence: The SEC's courtroom record is 3-4 in major crypto cases since 2023, with losses against Ripple and Grayscale. Each loss narrows the legal path for future enforcement based on the securities framework.
takeaways
THE PROFIT MOTIVE SHIFT
TL;DR for Builders and Investors
The SEC's 'expectation of profits' framework is collapsing under the weight of modern crypto primitives that deliver tangible utility first.
01
The Problem: Passive Staking as a Security
Traditional Proof-of-Stake delegators are pure capital allocators, creating a clear expectation of profit from others' efforts.\n- Legal Risk: Directly fits the Howey Test's 'common enterprise' prong.\n- Market Cap: Affects $100B+ in staked assets across chains like Ethereum, Solana, and Cardano.
100B+
TVL at Risk
High
Regulatory Scrutiny
02
The Solution: Active Work Tokens (e.g., Chainlink, The Graph)
Tokens are required to pay for a specific, non-financial service, decoupling value from speculative profit.\n- Utility-First: LINK pays for oracle data; GRT pays for querying.\n- Legal Shield: Revenue is a fee for service, not a passive dividend.\n- Market Signal: Protocols with >50% of tokens used for utility see stronger regulatory positioning.
>50%
Utility Usage
Service Fee
Revenue Model
03
The Problem: Governance-Only Tokens
Tokens like UNI or MKR that offer only voting rights provide minimal utility, making their value almost purely speculative.\n- Weak Defense: Hard to argue against 'profit expectation' when the sole function is steering a treasury.\n- Precedent: The SEC's case against Uniswap Labs explicitly targets this model.
Low
Utility Score
Active Target
SEC Focus
04
The Solution: Fee-Accrual & Burn Mechanisms
Protocols like Ethereum (post-EIP-1559) and Lido redirect value directly to token holders through burns or staking rewards from real usage.\n- Value Capture: Fees from Uniswap, Aave, Lido create a direct, usage-based flywheel.\n- Legal Argument: Profit is tied to network adoption, not promotional efforts.
Billions
Fees Burned
Usage-Linked
Value Accrual
05
The Problem: Centralized Promoters & 'Ecosystem Funds'
Heavy marketing and foundation-controlled treasuries used to boost token prices reinforce the 'efforts of others' argument.\n- Howey Trigger: Foundational grants and influencer campaigns are seen as promotional.\n- Historical Baggage: Directly mirrors ICO-era pitfalls.
High Risk
Legal Liability
ICO-Era
Playbook
06
The Solution: Credibly Neutral Infrastructure (e.g., Base, Arbitrum)
Layer 2s and appchains that position as public infrastructure, with tokens used for gas and sequencing, minimize promoter liability.\n- Focus on Throughput: Value is derived from >1M daily users and <$0.01 fees.\n- Investor Takeaway: Back protocols where the tech is the sales pitch.
1M+
Daily Users
<$0.01
Avg. Fee
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