The SEC issued a long-awaited interpretive release regarding the circumstances under which it will characterize crypto assets as securities and transactions involving crypto assets as securities transactions. In summary, the guidance confirmed that digital or tokenized securities that constitute financial instruments enumerated in the definition of "security" that are formatted or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks are deemed to be securities. The SEC noted that "a security is a security regardless of whether it is issued, or otherwise represented, offchain or onchain. All devices and instruments that have the economic characteristics of a security are securities regardless of format or label." In contrast, the guidance clarified that a number of other categories of crypto assets and related activities are NOT securities or securities offerings based on their nature and characteristics, including each of the following:

• Digital Commodities – Crypto assets that are intrinsically linked to and derive their value from the programmatic operation of a crypto system that is “functional,” as well as supply and demand dynamics, rather than from the expectation of profits from the essential managerial efforts of others.
• Digital Collectibles – Crypto assets that are designed to be collected and/or used and may represent or convey rights to artwork, music, videos, trading cards, in-game items, or digital representations or references to internet memes, characters, current events, or trends, among other things.
• Digital Tools – Crypto assets that perform a practical function, such as a membership, ticket, credential, title instrument, or identity badge.
• Stablecoins – Defined in the GENIUS Act as “payment stablecoin issued by a permitted payment stablecoin issuer.”
• Protocol Mining, Staking & Wrapping – Protocol mining, protocol staking and the "wrapping" of non-security crypto assets, as such complex activities are described in the release, do not involve the offer and sale of a security.
• Airdrops – Certain crypto asset disseminations known as “airdrops” do not involve an “investment of money” under the Howey test.

The SEC release further provided important guidance on the nature of the representations or promises made when offering non-security security crypto and what may constitute a security offering, including the source of the representations or promises, the medium by which they are communicated, and the level of detail they must provide.

While this new guidance provides helpful clarification regarding certain digital assets that can reasonably be excluded from the definition of security for purposes of reporting under an adviser's code of ethics, the full analysis is still very nuanced. Accordingly, advisers and their employees who actively engage in investing in crypto assets should review the guidance carefully and consult with counsel before concluding that their activities are not covered by the federal securities laws.