The Good Tech Companies - Educational Byte: The Howey Test’s Role in Crypto and Securities Rules

Episode Date: January 28, 2026

This story was originally published on HackerNoon at: https://hackernoon.com/educational-byte-the-howey-tests-role-in-crypto-and-securities-rules. Strange but true that a citrus-grove dispute now influences crypto and securities rules. Let's see what the Howey Test is and how to face it. Check more stories related to web3 at: https://hackernoon.com/c/web3. You can also check exclusive content about #crypto-regulation, #howey-test, #crypto-security, #sec-crypto-regulation, #the-dao-incident, #the-dao-report, #obyte, #good-company, and more. This story was written by: @obyte. Learn more about this writer by checking @obyte's about page, and for more stories, please visit hackernoon.com. The Howey Test is a 1946 U.S. Supreme Court decision that defines investment contracts as securities. When people contribute money to a shared project and expect profits from someone else’s effort, the setup should be treated as a security. In July 2017, the US Securities and Exchange Commission said the DAO tokens were securities.

This audio is presented by Hacker Noon, where anyone can learn anything about any technology. Educational Bight The Howie Tests's role in crypto and securities rules. By Obite, why the United States and other countries treat some tokens one way and others another way can be puzzling. Crypto is never the same as yesterday, but the legal system leans on rules that were written long before this industry appeared. That old toolbox, whether we like it or not, is now shaping how tokens are created,

how they are sold, and how teams talk about them. These rules influence the whole atmosphere around launches, pre-sales, and community expectations. And one name often sits in the middle of this discussion, the Howie Test. When it refers to crypto, we may also call it nobody wants their token to be a security. Let's see why. What exactly is the Howey Test? Howey's name comes from a 1946 U.S. Supreme Court decision, SEC versus W.J. Howey Co. Which shaped how investment contracts are defined in American law. In that ruling, the court explained that when people contribute money to a shared project and expect profits from someone else's effort, the setup should be treated as a security. In the original dispute, buyers were purchasing citrus groves

without any plants a farm them themselves. They relied on the company's management to run everything, which is why the court concluded that passive profits commes should and escape securities rules. You see, securities rules aren't exactly friendly or easy. Once something counts as a security, teens fall under the long rulebook from the Securities Act of 1933, or its equivalent in other countries. That brings forms, disclosures, audits, and long waits, plus huge legal bills that can drain a small project. Most builders want to ship features, not juggle filings or burn cash, so they try to avoid that

label as much as possible. Over time, the Howie test settled into four elements. Money invested, common enterprise, profit expectation, and dependence on promoters or third parties. When crypto arrived, regulators didn't switch to a new standard. They took their time discovering cryptocurrencies, and when they did, they applied some old rules to this new industry. Why crypto keeps getting measured with Howie? The Dow case sits at the beginning of this story. This decentralized investment fund by SLOC. It launched in 2016 on Ethereum. Buyers sent ETH to receive Dow tokens, which let them vote on different projects. Things grew too fast, then everything collapsed when an attacker exploited a flaw in its smart contract and drained a massive amount of ETH. The event panicked the

industry and caught the attention of regulators who had never handled anything like it. In July 2017, the U.S. Securities and Exchange Commission, SEC, released its Dow report, which said the Dow tokens were securities under the Howie test. Therisening focused on fundraising, central coordination by the creators, promotional efforts, and the expectation that token holders would profit from the team's work. The Dow itself dissolved, but the report stayed, along with others. It became the template for examining ICOS, token launches, and early pre-sales. From 2018, another major case added more nuance.

The company Ripple had been distributing its native token XRP in different ways. ways, and the SEC sued them, considering that XRP was an unregistered security. In 2023, a U.S. Court underscore-Uld underscore underscore-Uld underscore-UldsRP sold directly to institutions counted as a security, while XRP sold to the public on exchanges or distributed in other ways did not, since holders in those settings could not assume Ripple was using their money for development. This result showed that a token's legal status can shift depending on how it sold or promoted. Howey test and Clarity Act. Laws aren't as fast as crypto, but they eventually arrive. By 2025, in addition to the

Howey test, other crypto-related regulations were introduced, including the Clarity Act in the United States. This is a proposed law that sets out categories for digital assets such as digital commodities, investment contract assets, securities, and mature blockchain systems. It aims to reduce uncertainty by making it clearer which regulator oversees which type of token. Clarity could free many tokens from automatic securities analysis, yet the Howey test will remain part of the legal landscape. Tocons structured around profit promises, centralized control, or fundraising models that resemble traditional investments would still meet the Howey criteria. Builders need to keep this in mind when shaping token design, marketing language, airdrops, and staking features. It's also important

to consider that the same crypto network may host varied assets such as utility tokens, governance tokens, yield-bearing products, and fully regulated securities. In Obite, the native token G-BY-T-E couldn't be conside-read-a security under the Howie test. It wasn't even sold, but distributed. However, anyone can create their own customized tokens with any purpose and features, and they may or may not be considered securities. For its part, clarity may narrow the number of cases that rely on Howie, but it doesn't send the test into retirement. When we understand both rules, the whole landscape feels easier to navigate, quirks and all. Featured vector image by Vector4 stock, FreePic thank you for listening to this Hackernoon story, read by artificial intelligence.

Visit hackernoon.com to read, write, learn and publish.