Sep 01, 2023

Is Your Digital Token Subject to U.S. Securities Law?

Cryptocurrency, Securities Attorneys (Exchange Act) By Chris Soares
Man wearing suit using laptop with blurred computer system in the background

Do securities laws apply to your digital token? Depending on the context, courts may interpret whether your digital token is subject to U.S. securities laws differently.

On July 31, 2023 Judge Jed S. Rakoff, on a motion to dismiss in SEC v. Terraform Labs Pte. Ltd. and Do Hyeong Kwon, of the United States District Court for the Southern District of New York (“SDNY”), had the opportunity to weigh in on this issue and ruled in favor of the United States Securities and Exchange Commission (“SEC”).

He found that the sales of crypto assets to retail investors in public marketplaces does not exempt tokens from being considered “securities” and thus are subject to the SEC’s registration requirements. Although the substance of the case was not adjudicated, Judge Rakoff’s decision is one example that it is necessary to go through a full securities analysis on a case-by-case basis.

One only needs to look earlier that month to find alternative opinions on similar matters, highlighting the fast-paced digital asset space. On July 13, 2023, Judge Analisa Torres of SDNY in SEC v. Ripple Labs, Inc., Bradley Garlinghouse, And Christian A. Larsen found that sales of the “XRP” token in secondary transactions through digital asset exchanges or through the use of trading algorithms were not subject to securities registration requirements.

Rather, only those sales of XRP to institutional investors pursuant to written contracts constituted “investment contracts,” thus an unregistered offering of securities in violation of U.S. securities laws. The SEC has stated its intent to appeal the court’s ruling and has asked Judge Torres to stay her decision in the meantime.

SEC v. Terraform Labs Pte. Ltd. and Do Hyeong Kwon highlights that the final verdict on whether, or at what point, the sale of crypto assets constitutes the sale of a “security” has not likely been reached. Additionally, neither decision is currently binding on other courts. As of now, this issue remains fact-specific and interpretive.

As the digital asset space grows, this issue will rapidly evolve. As such, companies in the digital asset space must closely monitor court and enforcement developments.

Please do not hesitate to contact me at or (202) 869-0888 (ext. 115) if you would like assistance evaluating your digital asset products and where they may fit in this legal landscape.