Why Token Utility Is Irrelevant to the SEC

Utility is legally irrelevant. The SEC's enforcement actions against Ripple, Telegram, and LBRY prove that a token's function within a network does not negate its status as a security. The legal analysis centers on the investment contract's terms, not the underlying asset's technical capabilities.

The Howey Test is binary. An asset is either a security or it is not; there is no 'sufficiently decentralized' carve-out in the law. Projects like Helium and Filecoin, despite having clear utility, faced regulatory scrutiny because their initial sales constituted investment contracts.

Investor expectation of profit from the efforts of others is the core determinant. This expectation is often cemented by marketing, roadmap promises, and centralized development teams, as seen in the cases against Kik and Block.one.

Evidence: The SEC's 2019 Framework explicitly states that 'the focus of the Howey analysis is not on the form... but on the substance.' In the Ripple case, the court differentiated institutional sales (securities) from programmatic sales, highlighting that the context of the sale, not the XRP token's utility for payments, was decisive.

The Howey Test is transactional. The Supreme Court's 1946 ruling analyzes the sale of an asset, not the asset's inherent properties. A token's technical architecture or on-chain utility is secondary to the economic realities of its initial offering.

Post-launch utility is irrelevant. The SEC's cases against Ripple (XRP) and Telegram (TON) established that a token's later use on a functional network does not retroactively cleanse an unregistered securities offering. The legal analysis is fixed at the point of sale.

The 'common enterprise' and 'expectation of profit' prongs are decisive. Promotional materials, marketing promises, and the structure of token lockups for teams and VCs create an investment contract regardless of the underlying code's sophistication.

Evidence: In the Ripple summary judgment, the court ruled institutional sales were securities, while programmatic sales to retail on exchanges were not. The identical XRP token had two legal statuses based solely on the context of its sale.

The Howey test is binary: An asset is a security if it involves an investment of money in a common enterprise with an expectation of profits from the efforts of others. Decentralization is a spectrum, but the legal test is not. The SEC's position, as seen in cases against Ripple and LBRY, is that the initial sale and marketing create the security contract, regardless of the network's later state.

Token utility is a distraction: A token can have a thousand uses—governance in Compound, gas on Ethereum, or collateral in MakerDAO. The SEC argues utility does not negate the initial investment contract. The critical moment is the point of sale, where promotional materials and team control create profit expectations from managerial efforts.

'Sufficiently Decentralized' is a market narrative, not a legal defense: The term lacks a statutory definition. The SEC's 2018 Hinman speech suggested a possible path, but it is not law and was explicitly disclaimed. Relying on it is a strategic gamble, not a compliance framework. The agency's subsequent enforcement actions against Coinbase and Binance demonstrate this principle in practice.

Evidence: In the SEC v. Ripple summary judgment, the court ruled XRP sales to institutional investors were securities transactions, while secondary market sales were not. This bifurcated ruling highlights that decentralization of the network does not retroactively cleanse the initial offering of its security status.