The SEC regulates crypto assets to ensure investor protection and market transparency. Here's what you need to know:
- Howey Test: Determines if a cryptocurrency qualifies as a security based on criteria like investment expectations and reliance on others' efforts.
- Compliance Requirements: Crypto securities must be registered or exempt. Traders and platforms must follow strict rules, including licensing and custody standards.
- Investor Protections: Registered securities offer legal safeguards, like SIPC coverage up to $500,000. Unregistered assets lack these protections.
- Recent Actions: High-profile cases (e.g., FTX, Gemini) highlight the consequences of non-compliance, including fines and bans.
- Fraud Prevention: Stay alert to scams like "pig butchering" and AI-generated deepfakes. Verify all communications through official channels.
- AI Tools for Compliance: Platforms like StockioAI help traders navigate regulations, manage risks, and monitor fraud.
SEC and Crypto: Understanding US Securities Regulations Explained
How to Determine if a Cryptocurrency is a Security
The Howey Test Explained
The Howey Test is the legal standard the SEC uses to determine whether a cryptocurrency qualifies as a security. This framework dates back to a 1946 Supreme Court case involving a Florida citrus grove [6].
For a cryptocurrency to be classified as a security, it must meet four key criteria: there must be an investment of money, in a common enterprise, with a reasonable expectation of profits, and the profits must come from the entrepreneurial or managerial efforts of others [6][9]. If even one of these conditions isn’t met, the asset typically won’t be considered a security.
A critical question is: Who is responsible for creating the value of the asset? If you’re buying a token expecting profits based on the efforts of a development team or company - whether through building features, marketing, or improving the network - that’s a warning sign. The SEC has made it clear that an investment is considered a security when the expectation of returns relies on someone else’s work.
The SEC focuses on the economic reality of a transaction rather than how it’s labeled. Simply calling a token a "utility" doesn’t exempt it from securities laws [6]. What matters is whether investors are pooling their money into a venture managed by others, expecting those managers to generate returns.
This framework forms the foundation for how the SEC evaluates whether a cryptocurrency qualifies as a security.
SEC Guidance on Crypto Securities
The SEC has expanded on the Howey Test by applying a token taxonomy to modern digital assets. As of late 2025, under Chair Paul Atkins, the agency categorizes digital assets into four types: tokenized securities (representing ownership in traditional financial instruments), digital commodities (tokens with value tied to decentralized operations), digital collectibles (like NFTs), and digital tools (such as tickets or credentials) [5]. Only tokenized securities fall under strict securities regulations.
Decentralization plays a major role. If a network is decentralized enough - meaning no single group controls its value - the asset may not be classified as a security [6][9]. For instance, in September 2025, the SEC issued a no-action letter to a Decentralized Physical Infrastructure Network (DePIN) foundation. The agency determined that programmatic token distributions to network providers didn’t qualify as securities because the rewards depended on the providers’ own efforts, not on a central promoter [5]. Similarly, in November 2025, Fuse Crypto Limited received a no-action letter for its "Fuse Token." The SEC concluded the token acted as a utility within its ecosystem and didn’t rely on managerial efforts from the Fuse team to generate profits [5].
Bitcoin is a prime example of this principle. The SEC considers Bitcoin a commodity - often referred to as "digital gold" - because there’s no central company or promoter whose efforts determine its value [10]. Contrast this with the broader crypto market: in 2022, former SEC Chair Gary Gensler estimated that most of the nearly 10,000 tokens available at the time were securities [7]. Why? Many tokens were launched through fundraising campaigns and roadmaps that relied on identifiable teams promising future development.
How a project markets its token also matters. If a token is promoted as an investment opportunity, with emphasis on price increases or developer-led milestones, the SEC is likely to view it as a security [8][9]. For example, in July 2022, the SEC flagged nine tokens - including AMP, RLY, and POWR - as securities. The agency argued that the issuing companies solicited investments by promising future development efforts aimed at increasing the tokens’ value [8].
SEC Compliance Requirements for Crypto Traders
Registration and Exemption Rules
Crypto assets classified as securities must either be registered under the Securities Act or qualify for an exemption, such as Regulation A [11]. This obligation primarily applies to token issuers rather than individual traders.
Licensing for Individuals: Traders who manage investments for others or provide advisory services are required to obtain specific licenses. Failing to comply with these licensing rules can lead to severe consequences, including hefty fines and even imprisonment [12].
Platforms and Entities: Platforms operating as Alternative Trading Systems (ATS) must register as broker-dealers, and transfer agents handling Section 12 securities are also required to register [3].
Once registration is completed, the next step involves ensuring proper custody of crypto asset securities.
Custody and Possession Requirements
According to SEC Rule 15c3-3, broker-dealers must maintain physical possession or control of fully paid and excess margin securities [4][13]. For crypto asset securities, this translates into having direct access to private keys and the ability to transfer the assets using the relevant distributed ledger technology (DLT).
"A broker-dealer that intends to obtain and maintain possession of a customer's fully paid and excess margin crypto asset security directly has access to the crypto asset security and the capability to transfer it on the associated distributed ledger technology." – SEC Division of Trading and Markets [4]
The SEC mandates thorough assessments of the DLT and its governance structure before and during custody. Firms can’t claim "possession" if they’re aware of significant security or operational vulnerabilities in the network. Written policies must address private key security, potential blockchain failures, 51% attacks, and hard forks.
Broker-dealers are required to either hold private keys themselves or demonstrate control by storing assets at approved third-party locations [13][14]. In December 2025, the Office of the Comptroller of the Currency granted conditional approval to five national trust banks for crypto custody services, broadening the range of acceptable "control" locations under Rule 15c3-3. Additionally, firms are encouraged to use Multi-Party Computation (MPC) to safeguard private keys and to develop liquidation plans that allow asset transfers to a trustee in case of insolvency [4][13].
Trading Platform and Exchange Registration
Beyond registration and custody, crypto platforms must adhere to strict exchange registration standards.
Platforms facilitating the trading of crypto securities must register with the SEC [15]. They have two options: register as a national securities exchange (NSE) or operate as an Alternative Trading System (ATS).
The ATS pathway is particularly popular among fintech companies. This route involves registering as a broker-dealer and complying with Regulation ATS. Firms must file Form ATS (for non-NMS stocks) or Form ATS-N (for NMS stocks) to disclose details about their operations, subscriber access, and trading processes [3]. Broker-dealer operators of an ATS may also provide additional services like custodial or clearing functions, as long as these activities align with their regular brokerage or dealing operations [3].
"An ATS must register as a broker-dealer; however, the broker-dealer operator of the ATS is not precluded from engaging in broker, custodial, or clearing functions in addition to operating its ATS." – SEC Division of Trading and Markets [3]
Federal securities laws allow NSEs and ATSs to offer pairs trading - exchanging a crypto security for a non-security crypto asset - provided they meet reporting requirements and value transactions in U.S. dollars. However, it’s worth noting that crypto assets treated as investment contracts but not registered under the Securities Act of 1933 are generally excluded from coverage by the Securities Investor Protection Corporation (SIPC), which typically protects customers up to $500,000 for securities and cash [3].
Preventing Fraud and Market Manipulation
Identifying and Preventing Fraud
The SEC continues to emphasize protecting investors, and staying alert to fraud is a critical part of that effort. Crypto scammers are becoming increasingly clever, using advanced techniques to deceive traders. One such tactic is the "pig butchering" scam, where fraudsters cultivate fake relationships over weeks or months before introducing fraudulent investment opportunities. Another alarming trend involves AI-generated deepfakes of celebrities or officials promoting bogus trading schemes. Traders may also encounter advance fee fraud, where scammers claim accounts have been frozen by regulators and demand a "tax" or "fee" to unlock funds. The SEC warns that these payments vanish without a trace, as crypto funds are notoriously hard to recover [17].
"An investment may not be legitimate if you are required to pay for it with crypto assets." – SEC Office of Investor Education and Advocacy [17]
To protect yourself, verify any SEC-related communications through official channels. Be cautious about making investment decisions based on online or social media advice, especially if the payment method is limited to crypto assets or Bitcoin ATMs. Tools like Investor.gov can help confirm whether brokers or investment advisers are licensed to sell securities [16].
Understanding how tokenized securities align with federal regulations is another key area investors should be aware of.
Tokenized Securities Regulations
Tokenized securities, such as digital versions of stocks or bonds, are still subject to the same federal securities laws as traditional securities. Even platforms operating under specific SEC no-action relief - like the 2006 Commodity-Based Investment Vehicles (CBIV) letter for crypto-based exchange-traded products - must adhere to anti-fraud and anti-manipulation rules [3][5].
"Tokenized securities are still securities... market participants must consider - and adhere to - the federal securities laws when transacting in these instruments." – Hester M. Peirce, SEC Commissioner [5]
The SEC has shown it takes violations seriously. For instance, in October 2024, the agency charged ZM Quant Investment Ltd., Gotbit Consulting LLC, and CLS Global FZC LLC with market manipulation and fraudulent activities in the crypto market. These firms used fake websites and deceptive tactics to mislead retail investors [19]. Be wary of red flags such as tokens being marketed primarily for quick price gains, reliance on a central team, or promises of creating a secondary market [1].
Tools for SEC Compliance
Using StockioAI for Compliance and Risk Management
Keeping up with SEC regulations can feel like a daunting task, but tools like StockioAI make it easier for traders to stay compliant while refining their trading strategies. StockioAI’s AI-powered platform provides real-time trading signals - Buy, Sell, and Hold recommendations - with an impressive accuracy rate of 80–90%. These tools are backed by policies designed to counteract "AI washing", which refers to misleading claims about AI capabilities. Starting in 2026, the SEC will require AI-driven outputs to be monitored for accuracy and compliance, with this oversight becoming a standard part of examinations [20].
StockioAI’s risk calculators help traders meet the SEC’s fiduciary "duty of care" by analyzing factors like investment volatility, liquidity, performance under different market conditions, and exit costs. Its market analytics simulate transactions in real time to uncover potential fraud - an essential feature, especially for the irreversible nature of on-chain trades [20][21]. Additionally, the platform runs automated crypto analyses every four hours on major assets such as BTC, ETH, SOL, and XRP, ensuring human oversight is integrated into AI-driven decisions [20].
On the cybersecurity front, StockioAI strengthens defenses against emerging threats like polymorphic malware and AI-enabled social engineering attacks, including deepfakes used in phishing schemes. Its AI-powered pattern recognition tools continuously monitor for risks to market integrity, such as fraud, manipulation, front-running, and wash-trading - issues frequently flagged by the SEC [20]. Moreover, large institutions must adhere to updated Regulation S-P incident response requirements by December 3, and StockioAI’s features can assist in meeting these demands [20].
These compliance-driven tools also offer a range of strategic benefits, making them indispensable for traders navigating today’s complex markets.
Benefits of AI Tools for Crypto Traders
AI tools do more than just ensure compliance - they also provide traders with a competitive edge. These platforms can track intricate token supply rules, including minting schedules, burning processes, and vesting periods, which are critical for meeting SEC disclosure requirements [2][18]. They also analyze smart contracts and network code to confirm that technical specifications align with documented holder rights [2]. For traders working with non-USD pairs, AI tools can standardize asset values by converting them to USD, ensuring consistency in regulatory reporting [3].
"I believe that most crypto tokens trading today are not themselves securities." – Paul S. Atkins, Chairman, SEC [22]
As the SEC’s Project Crypto initiative develops clearer regulations, AI tools play a key role in helping traders determine whether assets fit into the proposed token taxonomy, which categorizes digital commodities, collectibles, tools, and tokenized securities [22]. StockioAI’s portfolio tracking and advanced risk management features also support the meticulous recordkeeping practices that the SEC emphasizes for audits and investor protection [3]. With premium access priced at $79.99 per month, traders gain unlimited AI trading signals, advanced pattern recognition, and real-time market alerts - helping them stay compliant while seizing strategic opportunities in an increasingly regulated crypto landscape.
Conclusion
SEC compliance isn't just about following rules - it's about safeguarding your investments and preserving trading opportunities. Adhering to SEC guidelines helps bridge the information gap between issuers and investors, ensures fair market practices, and provides the legal foundation necessary for long-term success [1][2]. Key focus areas should include understanding the Howey test, proper registration, and conducting Distributed Ledger Technology (DLT) risk assessments [4].
Failing to register properly can strip you of essential investor protections [3]. The SEC has made its stance on enforcement crystal clear. As Chairman Paul Atkins once stated:
If you raise money by promising to build a network, and then take the proceeds and disappear, you will be hearing from us, and we will pursue you to the full extent of the law [22].
On the flip side, compliance can unlock opportunities by creating clearer pathways for regulated digital assets. The SEC's "Project Crypto" initiative continues to refine how digital assets can operate within a regulated framework [22]. By staying up to date on token classifications and monitoring network maturity, traders can better identify which assets qualify for specific regulatory treatments and adjust their strategies accordingly. This evolving landscape makes having the right tools even more critical.
To stay ahead in this complex environment, advanced tools are no longer optional - they're essential. Platforms like StockioAI make compliance easier while giving you a competitive edge. With features like real-time signals, detailed analyses, and AI-driven risk management, StockioAI ensures you're meeting SEC disclosure requirements and staying vigilant against fraud. For $79.99 per month, you gain unlimited access to tools like advanced pattern recognition and compliance-focused analytics, helping you navigate ever-changing regulations with confidence.
FAQs
How does the SEC decide if a cryptocurrency is considered a security?
The Howey Test, employed by the SEC, helps determine whether a cryptocurrency falls under the category of a security. This test evaluates four key factors:
- Investment of money: There must be a financial investment involved.
- Common enterprise: The investment is part of a shared venture.
- Expectation of profits: Investors anticipate earning profits.
- Efforts of others: The profits largely depend on the work of a third party.
If a cryptocurrency meets all these criteria, it could be regulated as a security under federal law. Knowing these rules is essential for traders aiming to align with SEC standards.
What are the SEC compliance requirements for cryptocurrency platforms?
Cryptocurrency platforms managing assets classified as securities must adhere to specific SEC regulations. For starters, if a platform holds crypto-asset securities on behalf of customers, it needs to register as a broker-dealer. This also means meeting the net capital requirements outlined in Rule 15c3-1 and following the customer protection rule (Rule 15c3-3), which ensures the safety of client funds and securities.
Platforms are also required to prove they can securely store assets. The SEC permits platforms to meet custody rules by employing qualified custodians or secure storage methods, such as on-chain vaults, while maintaining auditable control over these assets. Furthermore, platforms handling tokenized securities must work with SEC-registered transfer agents and implement custody arrangements that meet institutional standards.
Key areas of compliance include registration, capital requirements, custody safeguards, segregation of client funds, and keeping up with ongoing SEC guidance. Understanding and adhering to these rules is essential for maintaining compliance and ensuring the protection of customer assets.
What steps can crypto traders take to avoid fraud and scams?
Crypto trading can be risky, but there are ways to protect yourself by staying alert and following some key practices. Start by verifying legitimacy - make sure the platforms or services you use are registered with the SEC or another trusted U.S. regulator. Watch out for unregistered "crypto asset securities", as these are often linked to fraudulent schemes. Also, always check that websites use secure HTTPS connections and official domains to avoid falling victim to phishing scams.
Keep your sensitive information private. Never share details like private keys, passwords, or seed phrases. Strengthen your account security by enabling two-factor authentication. Be skeptical of unsolicited offers that promise high returns or pressure you with "limited-time" deals - these are classic signs of scams. Before investing, do your homework. This includes reviewing whitepapers, verifying the credentials of the team behind the project, and checking for third-party audits.
Tools like StockioAI can be incredibly helpful for making smarter trading decisions. With features such as real-time trading signals, technical analysis, and risk management tools, StockioAI can help you spot unusual price changes and assess investment opportunities more effectively. By combining careful research, secure practices, and data-driven tools, you can minimize risks and trade with greater confidence.
