On July 22, Senate Republicans released updated text of the Digital Asset Market Clarity Act (the CLARITY Act), combining the work of the Senate Banking and Agriculture Committees into a 616-page package. Most commentary and debate has focused on the ethics and decentralized-finance provisions, as well as the bill’s effort to close the GENIUS Act loophole that permits third parties to offer interest-like rewards on stablecoins. The provisions that will matter most in the long run, however, sit in Title I, which redraws the boundary of the federal securities laws.
Title I’s central premise is the crypto industry’s “separation theory”: a token sold as part of an investment contract is separate from that investment contract and therefore is not itself a security. The argument draws on SEC v. W.J. Howey Co., the 1946 Supreme Court decision involving sales of Florida orange grove plots bundled with service contracts under which the promoter would cultivate the groves and remit profits. The groves alone were real estate, but when combined with the promoter’s promise of profits, however, the entire arrangement was an investment contract and therefore a security. The crypto industry extrapolates from that distinction: a token is like an orange grove, while the fundraising scheme surrounding it may be a securities offering. The token itself, in this view, is a commodity, and securities-law obligations fall away once it reaches the secondary market.
For most of crypto’s history, courts rejected that argument. Judge P. Kevin Castel in SEC v. Telegram treated the Gram purchase agreements, the tokens, and their anticipated public resale as “a single scheme” under Howey. He enjoined the distribution because the Grams were how purchasers expected to realize profits.[1] Judge Jed Rakoff in SEC v. Terraform Labs likewise declined “to erect an artificial barrier between the tokens and the investment protocols with which they are closely related.”[2] Judge Analisa Torres’s 2023 ruling in SEC v. Ripple was the first crypto decision to embrace the separation theory.[3]
As I told the SEC’s Crypto Task Force in March 2025, Ripple is the outlier, and the separation theory fails on its own terms. An orange grove produces oranges regardless of whether its owner participates in Howey’s management scheme. A crypto token, by contrast, is created by the promoter, is unique to the promoter’s enterprise, and serves as the means by which investors enter and exit that enterprise. In many token offerings, the promoter’s promised return consists of increasing the token’s market value. The token is therefore the instrument through which the investment scheme operates. Courts have always looked beyond the face of an instrument to determine whether it is a security. That was true of the land interests in SEC v. C.M. Joiner Leasing Corp., the orange groves in Howey, and the tokens in Telegram.[4]
Title I would settle this judicial debate in the industry’s favor. It defines a “network token” as a digital commodity “that is intrinsically linked to a distributed ledger system and that derives, or is reasonably expected to derive, its value from the use of such distributed ledger system,” and directs that it be treated as a non-security under the federal securities laws. An “ancillary asset” is a network token whose value depends on the entrepreneurial or managerial efforts of its originator or a related person. New Securities Act section 4B provides that an originator’s offer or sale of an ancillary asset constitutes an offer or sale of an investment contract involving that asset, while the asset itself remains a non-security. Secondary-market transactions in both network tokens and ancillary assets generally are deemed not to involve a security, and inconsistent state securities laws are preempted. This is the separation theory in statutory form.
Title I acknowledges a point the crypto industry has long understood but rarely states plainly: there is no immaculate conception in crypto. Tokens are typically born through fundraising transactions in which purchasers give money to an identifiable team whose future work will help determine the token’s value. The bill reflects that reality by requiring an ancillary-asset originator to furnish SEC-supervised disclosures while its entrepreneurial or managerial efforts remain important to the token’s value, even though the asset itself is statutorily treated as a non-security. Those disclosures would cover basic information about the originator and its management, financial condition, token supply and distribution, development plans, governance and control, material related-party transactions, and the risks associated with the token and related network.
Everything surrounding that concession is designed to minimize its regulatory cost. Title I creates Regulation Crypto, a new exemption from SEC registration that allows an originator to raise the greater of $50 million annually for up to four years or 10 percent of the asset’s outstanding value, subject to a $200 million aggregate cap. The general public may participate, and issuers may use general solicitation. The bill does not require an originator to decentralize the network, or even make a good-faith effort to do so. No existing securities-registration exemption combines comparable fundraising capacity, retail access, general solicitation, and duration.
The ancillary asset disclosure regime also lacks the liability structure that makes public-company disclosure credible. The required disclosures are “furnished” rather than filed and do not constitute a registration statement. That distinction matters. Section 11 of the Securities Act gives purchasers a powerful remedy for material misstatements or omissions in a registration statement: the issuer faces essentially strict liability, while directors, underwriters, and other specified participants can avoid liability only by establishing a due-diligence defense. Because Regulation Crypto involves no registration statement, Section 11 never applies.
Section 12(a)(2) is narrower. It permits a purchaser to sue a person who offers or sells a security through a prospectus or oral communication containing a material misstatement or omission, unless that seller can show it did not know, and could not reasonably have known, of the problem. Title I treats its disclosures as a prospectus for this purpose only with respect to purchasers in the exempt primary offering, and only against the person who made the statement. Secondary-market purchasers – meaning nearly everyone who will ever own the token – therefore have no claim under either Section 11 or Section 12(a)(2).
The bill preserves the SEC’s antifraud authority and does not purport to eliminate any otherwise available private claim under Rule 10b-5. But Rule 10b-5 is a far weaker substitute for the Securities Act’s registration-based remedies. A private plaintiff generally must prove a material misstatement or deceptive conduct, scienter, reliance, economic loss, and loss causation, and must show that the fraud occurred in connection with the purchase or sale of a security. That last requirement becomes especially problematic when the statute simultaneously declares that a secondary-market transaction in the token does not involve a security.
The July text further weakens accountability by adding a safe harbor for forward-looking statements. An ancillary asset issuer generally cannot face private liability for projections, development milestones, claims about a token’s utility, or predictions of system adoption if it identifies the statement as forward-looking and accompanies it with meaningful cautionary language. For a token project, the roadmap is often the sales pitch: purchasers are asked to invest today based on promises about the network’s future functionality, adoption, and value. The safe harbor therefore protects precisely the representations most likely to influence a purchaser’s decision. Disclosure without meaningful accountability is marketing.
The bill’s certification process adds another layer of confusion. A network token is presumed to be an ancillary asset, but its originator—or even a digital asset intermediary—may certify that it is not. Unless the SEC rebuts that certification within 60 days, it becomes effective. An ancillary asset may later terminate its disclosure obligations when the originator or a related “certification covered party” certifies that, during the preceding 180 days, no covered party engaged in more than a “nominal” level of entrepreneurial or managerial efforts and that any such efforts were not a primary factor in the token’s value. The bill does not define “nominal”; it leaves the SEC to do so by rule. Subject to a separate certification regarding coordinated control, the certification becomes effective if the Commission does not act within 90 days.
The result is a regulatory exit based on a series of highly contestable judgments. A network token is defined as a digital commodity “intrinsically linked to a distributed ledger system” that “derives, or is reasonably expected to derive, its value from the use of such distributed ledger system.” Whether a token’s value derives from use of a ledger system, rather than speculation, marketing, or the continuing efforts of its promoter, is about as subjective a question as securities law can pose. The consequences of agency inaction run in the applicant’s favor, while the SEC must define and apply terms such as “nominal,” “primary factor,” and “intrinsically linked” to governance and economic arrangements designed by lawyers who know exactly where the lines are. Even the vocabulary obscures the result: an ancillary asset is already a network token. Once disclosure ends, the token does not graduate into a new category; it simply sheds the ancillary-asset obligations.
The Atkins SEC has already adopted Title I’s central legal premise. On March 17, 2026, the Commission issued an interpretive release classifying crypto assets into five categories: digital commodities, digital collectibles, digital tools, stablecoins, and digital securities. The release treats digital commodities, collectibles, and tools as non-securities; recognizes that stablecoins may or may not be securities depending on their characteristics; and treats digital securities as securities. Most importantly, it embraces separation theory: a non-security crypto asset may be offered and sold as part of an investment contract without the asset itself becoming a security.
As I explained in Is $WLFI an Unregistered Security?, the interpretation sharply narrows the class of crypto assets that the SEC views as securities in themselves through the same conceptual move Title I would codify. Even under the Commission’s own framework, World Liberty Financial’s $WLFI token appears to have been offered and sold as part of an investment contract. The Commission’s apparent failure, at least publicly, to investigate $WLFI is another data point raising questions about political favoritism. More broadly, the Atkins Commission has shown how separation theory operates in practice: the asset receives a non-security label, while regulatory consequences turn on whether a particular transaction is characterized as an investment contract.
Title I would convert the Atkins Commission’s current position into durable law before courts have had an opportunity to evaluate the interpretation. And should it become law, Title I’s definitions will invite gaming from two directions. One route is downward: a token that fails the network-token test can fall into the residual digital-commodity category, where Title I’s disclosure and other investor-protection provisions do not apply. The other is sideways: an issuer can seek network-token treatment by avoiding the bill’s listed “disqualifying financial rights,” even when the token’s economics still resemble an investment in the issuer’s enterprise.
The bill creates a nested taxonomy: digital commodities are digital assets; network tokens are digital commodities; and ancillary assets are network tokens. The drafting is partly circular. A network token is defined as a digital commodity, while the definition of “digital commodity” expressly includes network tokens. Major regulatory consequences turn on where an asset falls within this taxonomy, yet the boundaries depend on contestable judgments about technical function, economic value, managerial effort, and control. Clever lawyers will treat these definitions as a roadmap for structuring an offering into the least burdensome category.
At one end, a token that fails the network-token test because it has no meaningful function or distributed ledger system from which to derive value may still qualify as a digital commodity. The bill expressly includes “meme coins” promoted to an online community primarily for speculation. A meme coin can therefore bypass Title I’s disclosure, resale, and insider provisions and trade on CFTC-regulated exchanges from day one. The definition appears to encompass President Trump’s $TRUMP token. The result is a regulatory inversion: a functioning project with an identifiable team faces more regulation than a purely speculative token promoted around a personality or internet trend.
At the other end, the boundary between a security and a network token runs through a list of “disqualifying financial rights,” including debt and equity interests, liquidation rights, and entitlements to interest, dividends, payments, or other transfers of value. The bill appropriately extends the list to substantially equivalent rights and includes an anti-evasion provision aimed at obvious workarounds, such as removing a financial right from the token and reintroducing it through a related foundation, DAO, or controlled vehicle.
Those provisions still leave a large opening. The anti-evasion rule turns on whether a principal purpose of an arrangement is willful circumvention, while preserving arrangements supported by a legitimate business purpose. That places enormous weight on evidence of motive and gives sophisticated promoters ample room to document a business rationale for the structure they prefer.
None of this is hypothetical. Binance has used the model since 2017. BNB confers no formal entitlement to Binance’s profits, yet Binance has committed a share of its profits to quarterly BNB buy-and-burns—the economic equivalent of a buyback. The SEC’s 2023 complaint alleged that Binance offered and sold BNB as an unregistered security. The burn program’s long pre-bill history would make it difficult to characterize its original design as a willful effort to evade a statute that did not yet exist.
FTX followed the same basic playbook with FTT, committing one-third of its trading fees to weekly buy-and-burns while disclaiming any holder entitlement. The SEC’s complaints against FTX executives described FTT as an FTX-issued crypto asset security token and alleged that Alameda manipulated its market price. FTT also illustrates where Title I’s classifications can lead. Because FTX was a centralized exchange rather than a distributed ledger system, there is a strong argument that FTT would fail the network-token test and instead fall into the residual digital-commodity category – the bill’s lightest regime
$WLFI illustrates the same basic design. Token holders can be denied formal claims on revenue, while insiders retain control and economic upside through affiliated entities and other arrangements. Traditional financial firms can read a statute at least as well as World Liberty’s lawyers, and they will have every incentive to structure around its definitions.
This is Title I’s fundamental problem. Howey asks what the transaction really is: whether investors gave money to a common enterprise with a reasonable expectation of profits from the efforts of others. Title I replaces that flexible, economic-reality inquiry with a dense taxonomy, specified formal rights, short certification clocks, and standards that the SEC and CFTC must translate into rules. Each new definition and boundary creates another line for issuers and their lawyers to exploit. Regulatory arbitrage is the predictable result.
In Reves v. Ernst & Young, the Supreme Court explained that Congress defined “security” in broad terms because it recognized “the virtually limitless scope of human ingenuity, especially in the creation of countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Congress painted with a broad brush in 1933 because promoters would always innovate faster than a statutory list. Title I redraws that boundary in fine print, hands promoters a detailed map of the lines, and calls the result clarity. In Howey, the Supreme Court refused to let a promoter escape the securities laws by pointing at the oranges. Eighty years later, Congress is preparing to write the orange-grove analogy into law. The result will be chaos, not clarity.
Lee Reiners is a Lecturing Fellow at Duke University
[1] SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020).
[2] SEC v. Terraform Labs Pte. Ltd., 684 F. Supp. 3d 170 (S.D.N.Y. 2023).
[3] SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308 (S.D.N.Y. 2023);
[4] SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344 (1943).
The CLARITY Act provides long-awaited statutory certainty, but Title I’s separation theory may shift the focus from economic reality to legal form. As a cryptocurrency lawyer, I believe investor protection depends not only on disclosure, but also on meaningful accountability and enforceable remedies throughout a token’s lifecycle.