Security vs Commodity: The Classification That Determines Everything

The most consequential legal question in US crypto regulation is not about fraud, AML compliance, or tax treatment — it is about classification. Whether a crypto asset is a security or a commodity determines which federal agency has regulatory authority over it, which legal requirements apply to its offer and sale, what exchange must register to trade it, and what investor protections attach to its purchase. Getting this classification wrong — in either direction — exposes issuers, exchanges, and intermediaries to severe legal liability. Yet for most crypto assets, the answer remains genuinely contested.

The Legal Framework

US securities law and commodity law create two separate regulatory regimes with their own agencies, statutory frameworks, and legal standards. Securities are regulated under the Securities Act of 1933 and the Securities Exchange Act of 1934, enforced by the SEC. The definition of a security is broad, encompassing stocks, bonds, investment contracts (the Howey test category), and various other instruments. Commodities are regulated under the Commodity Exchange Act of 1936, enforced by the CFTC. Commodities are broadly defined to include all goods and articles, with the CFTC’s most direct authority over futures and derivatives on commodities rather than spot trading.

For spot crypto asset trading, the jurisdictional picture is complicated: the CFTC has authority over futures and derivatives on crypto commodities, but there is no comprehensive federal spot market regulation for crypto commodities, creating a gap that states (through money transmitter licences), the CFTC (through fraud-based jurisdiction), and the SEC (through securities law, where applicable) have all sought to fill.

The Bitcoin Consensus

Bitcoin’s classification as a commodity commands the broadest bipartisan consensus of any crypto classification question. Both the CFTC and multiple federal courts have characterised Bitcoin as a commodity. The rationale is consistent with the decentralisation test underlying the CLARITY Act: Bitcoin has no founding team controlling its development, no company whose efforts drive its value, and no ongoing promise of returns from a central party. The Howey test fails on the “efforts of others” prong: Bitcoin’s value is determined by market supply and demand dynamics, not by the efforts of any identifiable promoter. This consensus has enabled the approval of Bitcoin spot ETFs by the SEC in January 2024 and the listing of Bitcoin futures on regulated CFTC-supervised exchanges since 2017.

The Ether Question

Ether’s classification has been more contested. Under Chair Gensler, the SEC declined to state clearly that Ether is a commodity, and SEC enforcement actions against crypto platforms avoided taking a definitive position on Ether’s classification. The CFTC has consistently treated Ether as a commodity — Ether futures have traded on CFTC-regulated exchanges, and the CFTC has brought enforcement actions characterising Ether as a commodity in the process. Following Gensler’s departure and the approval of Ether spot ETFs in 2024, the CFTC’s position that Ether is a commodity appears to have prevailed, though no formal SEC rulemaking has confirmed this.

The contested period also involved the argument that Ether’s transition from proof-of-work to proof-of-stake consensus (The Merge, September 2022) might have increased its security-like characteristics — stakers earn yield for providing a service to the network, which some SEC staff argued was more analogous to an investment contract. This argument has not been adopted by courts or in formal regulatory guidance.

Most Other Tokens: Disputed

For the vast majority of crypto tokens — the thousands of altcoins, governance tokens, DeFi tokens, and layer-1 network tokens — the securities vs commodity classification question remains genuinely unresolved under current US law. The Howey test analysis depends on facts specific to each token: whether there is an identifiable promoter whose efforts drive value, whether token holders had reasonable investment expectations at the time of purchase, and whether the network has sufficiently decentralised. These are fact-intensive inquiries that courts must resolve case by case.

The CLARITY Act’s Proposed Resolution

The CLARITY Act, which passed the House and awaited Senate action as of early 2026, would replace the case-by-case Howey analysis for crypto with a two-category statutory framework. Digital commodities would be CFTC-regulated spot assets from sufficiently decentralised networks; digital securities would be SEC-regulated assets from networks that have not yet reached the decentralisation threshold. The threshold test incorporates specific metrics: no more than 20% of tokens held by the issuer/affiliates, no single party with unilateral protocol control, among others. Tokens could transition from digital securities to digital commodities as their networks decentralised. If enacted, the CLARITY Act would resolve the most important single ambiguity in US crypto law.