Declassifying Crypto: How the ‘Token Taxonomy’ Could Free Most Tokens from Securities Law
The Crypto World’s Billion-Dollar Question: Security or Not?
For years, the cryptocurrency industry has operated under a cloud of regulatory uncertainty. Project founders, investors, and developers all ask the same question: Is this token a security? The answer determines everything, from how a token can be sold to who can buy it, with the U.S. Securities and Exchange Commission (SEC) holding the power to make or break a project with its ruling. This ambiguity has stifled innovation and created a high-stakes legal minefield.
But what if there was a clearer way? A framework designed for the digital age, not for Florida orange groves from the 1940s. This is the vision put forward by former SEC Commissioner Paul S. Atkins, who has been a vocal proponent of a more nuanced approach to crypto regulation.
Breaking Down the Regulatory Wall: Atkins’ ‘Token Taxonomy’
At the heart of the regulatory debate is the Howey Test, a legal precedent from a 1946 Supreme Court case used to determine if something is an “investment contract” and therefore a security. While groundbreaking for its time, applying its principles to decentralized, digital assets has proven to be like fitting a square peg in a round hole.
In response to this challenge, a clear and logical framework is needed. This is precisely what former Commissioner Atkins has championed. The core of his proposal, as part of a broader push for responsible financial innovation, is a concept that could change everything: a ‘token taxonomy’.
So, what is it? A token taxonomy is essentially a classification system for digital assets. Instead of lumping all tokens into one undefined basket, it would create distinct categories based on a token’s purpose, features, and underlying economic reality. This is the crux of the idea where the
Potential Categories in a Token Taxonomy:
- Cryptocurrencies/Payment Tokens: Assets like Bitcoin, designed to act as a medium of exchange or a store of value.
- Utility Tokens: Tokens that provide access to a specific product or service on a network, like a digital key or an in-app credit.
- Security Tokens: These are the digital equivalent of traditional securities like stocks or bonds, representing ownership in an asset or enterprise.
By creating clear definitions, a token taxonomy would provide a straightforward guide for everyone. Developers would know the rules of the road before they even start building, and investors would have a much clearer understanding of what they are purchasing.
The Game-Changing Statement: “Most Crypto Tokens Not Securities”
Perhaps the most significant part of this vision is the conclusion it leads to. According to Atkins and other proponents of this approach, if you apply a logical taxonomy, you’ll find that
The argument is simple: if a token’s primary purpose is to be used on a network—to pay for transaction fees, to access a feature, or to participate in a protocol—it functions more like a software license or a consumable good than a share in a company. It fails the “expectation of profit derived from the efforts of others” part of the Howey Test because its value is tied to its utility, not just to speculative investment.
This perspective fundamentally shifts the conversation from one of blanket enforcement to one of nuanced classification, acknowledging that not all digital assets are created equal.
What a Clear Framework Means for the Future of Blockchain
Implementing a clear regulatory framework like the one Atkins envisions would be a watershed moment for the crypto and blockchain industry. The benefits would be far-reaching:
- Unlocking Innovation: With clear rules, U.S.-based developers and entrepreneurs would be free to build the next generation of decentralized applications without the constant fear of surprise enforcement actions.
- Enhancing Investor Protection: A taxonomy helps protect investors by ensuring they know what they’re buying. A security token would come with full disclosures and protections, while a utility token would be understood for its functional purpose.
- Boosting Mainstream Adoption: Regulatory clarity is one of the biggest hurdles for institutional investors and large corporations. A defined framework would open the floodgates for capital and integration into the broader economy.
While Paul S. Atkins is a former commissioner, his ideas remain incredibly relevant. The debate he contributed to years ago is now at the forefront of discussions in Congress and within regulatory agencies. We see echoes of his call for clarity in proposals like SEC Commissioner Hester Peirce’s “Safe Harbor” plan, which also aims to give projects a grace period to decentralize.
Conclusion: Moving from Ambiguity to Action
The crypto industry has matured far beyond its early days. It’s time for a regulatory approach that matures with it. The vision for a ‘token taxonomy’ offers a pragmatic and sensible path forward—one that protects consumers, fosters innovation, and provides the certainty the market desperately needs.
By recognizing that most tokens are not securities but a new kind of digital asset with unique properties, regulators can create a framework that allows this transformative technology to flourish safely and responsibly. The question is no longer if we need clarity, but how quickly we can achieve it.
