Token Classification Tool
Determine Token Classification
Answer the questions below to assess whether your token is likely classified as a utility token or security token under the Howey Test.
Results
Token Classification Result:
Key Findings:
Itâs 2025. Youâre building a blockchain app. Youâve coded the smart contracts, designed the tokenomics, and youâre ready to raise funds. But hereâs the question no one tells you until itâs too late: Is your token a utility token or a security token? The answer isnât about what you call it. Itâs about how it works, how you sell it, and what investors expect. Get this wrong, and you could be facing an SEC investigation, a $5 million fine, or worse-your project shut down.
What Makes a Token a Security?
The legal line between utility and security tokens comes from a 1946 U.S. Supreme Court case: SEC v. W.J. Howey Co. Back then, the court ruled that selling citrus grove contracts with promises of profits from the sellerâs management counted as an investment contract-and therefore, a security. Fast forward to 2017, and the SEC applied that same logic to blockchain tokens. Thatâs when the Howey Test became the global benchmark for classifying digital assets.
A token is a security if it meets all three parts of the Howey Test:
- You invest money (or crypto) into the project.
- Thereâs a common enterprise-your success is tied to the teamâs efforts.
- You expect profits primarily from the work of others, not your own.
It doesnât matter if the token is called "FuelCoin" or "AccessPass." If the marketing materials say things like "invest in the future of our platform" or "holders will benefit from network growth," youâre likely selling a security. The SEC doesnât care about the name. They care about the substance.
Real-world examples? Tradeflow eNote⢠is a security token-it represents a share in a debt instrument. When you buy it, youâre not buying access to a service. Youâre buying a financial stake. And if your token is backed by real estate, company equity, or revenue shares, youâre in security territory. These tokens must comply with securities laws: registration, disclosures, investor accreditation rules, and ongoing reporting. Issuing one in the U.S. can cost between $100,000 and $500,000 just in legal fees.
What Makes a Token a Utility?
Utility tokens are meant to be used, not held for profit. Theyâre digital keys. Think of them like arcade tokens-you donât buy them to resell. You buy them to play games.
Take ETH. The SEC officially said in 2018 that Ethereumâs native token isnât a security because it functions as fuel for the network. You need it to pay for transactions, deploy smart contracts, or interact with dApps. Its value comes from demand for usage, not from promises of returns.
Other examples: IXS Token gives access to DeFi trading tools. Chainlinkâs LINK is used to pay node operators for data feeds. These tokens have a functional role inside their ecosystems. If you hold them, youâre not expecting the team to make you rich-youâre expecting to use the service.
But hereâs the trap: many projects start as utility tokens and turn into securities by accident. If your tokenâs price spikes 300% because the team built a successful product, and then you start promoting it as "a great investment opportunity," the SEC can retroactively classify it as a security. Thatâs what happened to Kik Interactive in 2019. Their Kin token was marketed as a "digital currency for messaging," but the SEC said the marketing focused on profit potential. They paid $5 million.
Why the Distinction Matters
This isnât just legal jargon. It changes everything about how you raise money, who can invest, and how your token trades.
Security tokens are locked down. You can only sell them to accredited investors unless you go through a full SEC registration-which takes years and millions. Trading is restricted to regulated platforms like the SIX Digital Exchange in Switzerland, which processed over CHF 1 billion in security token trades in early 2023. But the upside? Institutional investors love them. One fund manager told me last year: "Security tokens gave us the regulatory comfort to put $5 million into blockchain for the first time."
Utility tokens? Theyâre wide open. Anyone can buy them. You can list them on Uniswap or Binance. No KYC, no investor limits. Thatâs why over $40 billion is locked in DeFi protocols using utility tokens. But thereâs no investor protection. If the team vanishes, your token becomes worthless. And if regulators decide it was a security all along? Youâre on the hook.
Market data shows the split: over 10,000 utility tokens exist, with a combined market cap of $950 billion. Security tokens? Only $11.1 billion in 2022-but projected to hit $22.5 billion by 2025. The growth is slow but steady, driven by real estate, private equity, and bond tokenization.
Where the Rules Are Changing
The U.S. has been the main driver of enforcement, but other places are catching up-and offering clearer paths.
Switzerlandâs FINMA has three clear categories: payment, utility, and asset tokens. Only asset tokens (equivalent to securities) need heavy regulation. Singaporeâs MAS follows a similar model. Both are popular with startups because the rules are predictable.
The EUâs MiCA regulation, which took full effect in 2024, is a game-changer. It explicitly defines utility tokens as those providing access to services and excludes them from securities rules-if they meet specific criteria. The U.S. is catching up too. The FIT21 Act passed the House in May 2024 and would create a safe harbor for tokens with genuine utility. The SECâs own Digital Asset Securities Act proposal (March 2024) could soon carve out exemptions for tokens that donât promise profits.
But the biggest shift? The Ripple case in February 2024. The court ruled that XRP sold to retail buyers on exchanges was a security-but XRP sold directly to institutions wasnât. Thatâs the first time a U.S. court drew a line based on how a token was sold, not just what it does. This sets a new precedent: same token, different treatment based on distribution method.
What Projects Get Wrong
Most failed token launches donât fail because of bad code. They fail because of bad legal design.
Common mistakes:
- Promising price appreciation in whitepapers or Discord chats.
- Having the core team hold 30%+ of tokens with no vesting schedule.
- Marketing the token as "an investment in our ecosystem."
- Using centralized governance where one entity controls upgrades.
- Linking token value directly to company revenue or profits.
One developer on Reddit shared that their project flew under the radar for 18 months-until their token price jumped after a major upgrade. Then the SEC sent a letter. They had to shut down the token sale and refund investors. "We didnât think we were selling securities," he wrote. "But the SEC saw profit expectations in every tweet."
The fix? Design for compliance from day one.
- Use time-locked vesting for team tokens (e.g., 4-year cliff).
- Avoid any language about "returns," "ROI," or "investment opportunities."
- Make the tokenâs utility undeniable-can you use it without owning it? Can it be used by non-investors?
- Decentralize development: let the community contribute, not just your core team.
According to CoinDeskâs 2023 survey, 68% of blockchain teams now hire securities lawyers before launching a token. In 2018, it was 22%. Thatâs not paranoia. Thatâs survival.
Hybrid Models Are the Future
The future isnât utility vs. security. Itâs both.
Projects like Avalanche are already using dual-token systems: one token for network fees (utility), another for governance and profit-sharing (security). This lets them serve retail users and institutional investors at the same time.
Real estate tokenization is another hybrid space. A property is tokenized into 10,000 security tokens (each representing ownership), but users pay rent or maintenance fees in a separate utility token. The security token gets regulated. The utility token stays free-flowing.
Even Ethereum is moving this way. ETH is utility. But staking rewards? Those are income-generating. The SEC hasnât ruled on staking rewards yet-but if theyâre seen as passive income from the networkâs operation, they could be classified as securities. Thatâs the next legal battleground.
What You Should Do Now
If youâre launching a token in 2025, hereâs your checklist:
- Donât call it a "token sale." Call it a "service access launch."
- Write your whitepaper like a user manual, not an investment pitch.
- Make sure the token has a clear, non-speculative use case-like paying for compute power, storage, or data.
- Keep team tokens locked for at least two years.
- Get a legal opinion from a blockchain-specialized attorney before launch.
- Document everything: design choices, marketing materials, user onboarding flows.
And if youâre an investor? Donât assume a token is safe just because itâs on Coinbase or Binance. Ask: "Is this token being sold as a way to profit from someone elseâs work?" If yes, itâs probably a security-and it may not be registered.
The blockchain world isnât lawless anymore. The regulators are watching. The tools to detect violations are better than ever. And the penalties? Theyâre not just fines. Theyâre project deaths.
Build with utility. Sell with honesty. And never, ever confuse a tool with an investment.
Are utility tokens completely unregulated?
No. While utility tokens arenât classified as securities, they still fall under anti-money laundering (AML), know-your-customer (KYC), and tax laws. In the U.S., the IRS treats them as property. In the EU, MiCA requires transparency in token issuance. Even if youâre not selling an investment, you still need to verify users and report transactions.
Can a token start as a utility and become a security later?
Yes. This is called "reclassification." The SEC looks at the economic reality over time. If a tokenâs price rises because the teamâs efforts made the platform valuable-and the marketing starts promoting it as a profit opportunity-it can be reclassified as a security, even if it was originally designed as utility. Kikâs Kin token is a prime example.
Whatâs the difference between a security token and a stock?
Security tokens are digital representations of traditional assets like stocks, bonds, or real estate. Theyâre built on blockchain and can be traded 24/7 with lower fees. But legally, theyâre treated the same as stocks: they represent ownership, pay dividends, and require regulatory compliance. The difference is the technology, not the legal rights.
Why does the SEC care about tokens that arenât sold in the U.S.?
The SEC claims jurisdiction if U.S. investors can buy the token, even if the company is overseas. If your website accepts U.S. dollars, allows U.S. IP addresses, or promotes your token in English to a global audience, youâre likely subject to U.S. law. The SEC has pursued cases against companies in Canada, Singapore, and the UK based on this principle.
Is ETH a utility token? What about staking rewards?
Yes, ETH is classified as a utility token by the SEC because itâs used to pay for network operations. But staking rewards are a gray area. If you stake ETH and earn rewards because the Ethereum network runs on consensus mechanisms, itâs likely still utility. But if youâre told "stake and earn 5% yearly" as an investment, regulators may argue itâs a security. The SEC hasnât ruled yet-but many legal experts believe staking rewards could face scrutiny.
What happens if I ignore the legal distinction?
You risk enforcement actions: fines, asset freezes, or criminal charges. Kik paid $5 million. Telegram paid $18.5 million and shut down its Gram token. In extreme cases, founders face personal liability. Even if youâre outside the U.S., you may be blocked from U.S. exchanges, banks, or payment processors. Your project could become untouchable.
25 Responses
Bro, I just bought a token called "ZapCoin" and called it a "utility token" because you need it to unlock memes on our app đ But now Iâm scared the SEC is gonna come knockinâ with a subpoena and a Starbucks gift card đ¤
It is imperative to recognize that the SECâs enforcement actions are not arbitrary; they are the logical extension of centuries-old common law principles governing fiduciary duty and contractual obligation. The Howey Test remains the only coherent doctrinal framework for distinguishing speculative instruments from legitimate utility. Any deviation from this standard constitutes a dangerous erosion of investor protection and market integrity.
i mean⌠i get why people panic about the sec. but like⌠most devs just wanna build cool shit, yknow? like, i made this dapp where you pay in tokens to get a custom ascii art of your cat. nobodyâs getting rich off it. itâs just dumb fun. why does it gotta be so complicated? đĽş
Wait so if I use my token to pay for my yoga classes online, is that utility? Or if I post pics of my yoga mat on Instagram and say "this token is gonna 10x" is it security? đ Iâm confused now. Can someone explain like Iâm 5? Iâm from India and we just wanna make apps without lawyers!
Itâs not just about legal definitions-itâs about power. Who controls the narrative? Who controls the liquidity? Who gets to say whether your token is a "tool" or a "bet"? The SEC doesnât care if youâre a 19-year-old coder in Bangalore or a VC in Palo Alto. They care about control. And control? Itâs always held by those who write the rules. So⌠whoâs really being protected here? And whoâs being silenced?
Ohhhhh so THATâS why Coinbase listed XRP? They knew the SEC was gonna lose. This whole thing is a rigged game. The SEC is just a puppet for Wall Street to crush decentralized finance. They donât want you to own anything-they want you to rent it. From them. Always from them. đľď¸ââď¸đ¸
They took Kikâs money. They shut down Telegram. Now theyâre coming for you. And youâre still posting memes? Wake up. This isnât a game. This is war. And youâre already losing.
Letâs not conflate regulatory arbitrage with innovation. The fact that 98% of utility tokens are just security tokens with a different name is a market failure, not a loophole. If your tokenâs price is driven by speculation, not utility, then your entire tokenomics model is a Ponzi with a whitepaper. The real innovation? Compliance. Thatâs the new DeFi.
There is a quiet dignity in building something useful, even if the world doesnât reward it with riches. A token that lets someone pay for a meal in a refugee camp, or access a medical record across borders-thatâs the kind of utility that outlives lawsuits. Maybe weâve lost sight of why we started this in the first place.
Oh wow, so if I say "buy this token and youâll get a free NFT" itâs utility? But if I say "buy this token and youâll get rich" itâs security? What a joke. The SEC doesnât read your marketing-they just read your bank account. And if itâs big enough? Congrats, youâre a criminal.
Of course ETH is a utility token. Everyone knows that. But letâs be real-no one buys ETH to pay for gas. They buy it because they think itâll hit $100K. So stop pretending. The entire crypto space is a theater of illusions. And the SEC? Theyâre just the audience clapping.
Hey! If youâre building something cool-donât panic! Just be honest. Donât promise moonshots. Donât use "invest" in your Discord. Say "this token lets you do X" and mean it. Iâve seen teams go from zero to $50M valuation without ever saying "ROI." You can do it. Youâre not alone. đŞâ¨
Everyone here is clueless. You think MiCA or FIT21 changes anything? No. The SEC owns every exchange, every wallet, every blockchain node. They control the infrastructure. Youâre not building a token-youâre building a target. And if youâre not paying a $200k legal retainer, youâre already dead. Wake up. Youâre not a founder. Youâre a liability.
Just made a token for my local coffee shop. You use it to buy lattes, get discounts, and vote on new flavors. No price promises. No staking. Just coffee and community. đ¤â The lawyer said itâs fine. The SEC hasnât called. And guess what? People love it. Sometimes, simple works.
why do we even need to label it at all like its some kind of religion utility this security that why cant we just let people decide what they want to buy
Security tokens are just stocks with blockchain glitter. Utility tokens are just scams with better PR. I donât care what you call it. Just give me the moon.
So if I make a token that gives you access to my private Spotify playlist⌠is that utility? Or am I just a criminal with a playlist?
They say the future is decentralized. But the regulators are the new kings. They sit in their offices, sipping espresso, deciding whether your meme coin is a tool or a trap. And you? Youâre just the peasant with the code. The revolution was sold to Wall Street long ago.
Regulatory clarity is not the enemy of innovation-it is its foundation. Without clear boundaries, markets cannot function. Without trust, capital cannot flow. The path forward is not evasion. It is engagement. Collaboration. Legal design as a core component of product development. This is not censorship. It is civilization.
Back home in India, we donât have lawyers for everything. We just build. My friend made a token to pay for rickshaw rides. People use it. No one cares about SEC. Maybe the world doesnât need your rules. Maybe your rules are too big for the real world.
I just want to say⌠Iâve been in crypto since 2017. Iâve seen projects rise and crash. Iâve lost money. Iâve cried over spreadsheets. But Iâve also seen a 70-year-old woman in Ohio use a utility token to buy insulin from a decentralized pharmacy. Thatâs not speculation. Thatâs survival. And if the SEC takes that away⌠I donât know what weâre even fighting for anymore.
Itâs funny how we obsess over labels. A hammer is still a hammer whether you call it a "tool" or a "potential weapon." The real question isnât whether itâs a security-itâs whether the people using it are being treated fairly. If your token empowers, donât hide it. If it exploits, donât disguise it. The law will catch up. But ethics? Thatâs your job.
Let me tell you whatâs really happening. The SEC isnât trying to stop innovation. Theyâre trying to stop fraud. And guess what? 90% of these "utility tokens" are just fraud with a whitepaper. The ones that are legit? Theyâre quiet. They donât tweet. They donât have influencers. They just build. And thatâs the real story. The quiet builders. The ones who donât need a moonshot to sleep at night.
Why should American regulators dictate what happens in India, Brazil, or Nigeria? This isnât global finance-itâs digital colonialism. You think your SEC rules are universal? Theyâre not. Theyâre just loud. And the world is getting tired of listening.
Wait⌠so if I make a token that lets you vote on what my dog eats⌠is that utility? đ