As crypto adoption accelerates, a growing number of people are asking the right questions: What exactly are these tokens everyone keeps talking about? Why do they exist? Shouldn’t they be regulated like everything else? And why does it seem like everything, from dollars to real estate to loyalty points, is being tokenized? These are fair concerns, especially in a landscape filled with hype, speculation, and noise. But beneath the surface, tokens represent more than digital assets, they are programmable building blocks for a new economic system.
In this post, we explore what tokens are and how they differ, how they should be regulated based on economic function, why traditional regulatory tools like the Howey Test fall short in this context, and finally, why tokenizing parts of the economy isn’t just a financial trend but a structural shift in how value, trust, and coordination can work in a digital world.
What are Tokens?
In their article titled Defining Tokens published on a16z Crypto, Miles Jennings, Scott Duke Kominers, and Eddy Lazzarin present a categorization of tokens into 7 categories based on the answer to the questions:
Where value accrues? And who controls the token?
The resulting categories are network tokens, security tokens, company-backed tokens, arcade tokens, collectible tokens, asset-backed tokens, and meme-coins.
Network tokens are foundational to blockchain protocols, often used to operate, govern, or incentivize behavior on decentralized networks. Their value is closely tied to the performance and usage of the underlying protocol. Examples of network tokens include Bitcoin’s BTC, Ethereum’s ETH, Solana’s SOL, and Uniswap’s UNI.
Security tokens represent digitized versions of traditional or novel securities, such as equity, debt, or revenue-sharing instruments. They grant explicit rights and are typically controlled by an issuer. Notable examples include Etherfuse Stablebonds and Aspen Coin, a fractional ownership interest in the St. Regis Aspen Resort.
Company-backed tokens are issued by centralized entities and derive value from offchain products or services. While they may have utility onchain, they resemble securities because their value depends on the issuing company’s efforts. FTX’s FTT is a cautionary example, and Binance’s BNB is noted for evolving into a more decentralized network token over time.
Arcade tokens, in contrast, are intentionally non-investable and are used within closed ecosystems such as games or loyalty programs. Their utility is limited, speculative intent discouraged. Arcade tokens are also sometimes called “points.”
Collectible tokens (such as NFTs) represent ownership of unique goods, art, in-game items, or event tickets, and often confer utility or identity. They are generally non-fungible and not reliant on third-party efforts.
Asset-backed tokens derive value from underlying assets, including fiat, crypto, LP positions, or staked tokens. They can serve as stores of value or financial primitives and range in regulatory treatment depending on structure. Examples include USDC, stETH, Compound’s cTokens, and OPYN’s Squeeth.
Lastly, memecoins lack inherent utility or backing and are driven purely by market speculation. PEPE, SHIB, and TRUMP are good examples.
How Should Tokens be Regulated?
As token ecosystems evolve, it's increasingly important to differentiate which types of tokens resemble traditional securities, and which don’t, in order to apply regulation sensibly and protect market participants without stifling innovation. The key distinction lies in who controls the value, where information asymmetry exists, and whether investment capital is directed toward productive enterprise.
Company-backed tokens and security tokens most closely resemble equity securities. These tokens are issued and controlled by centralized entities, derive their value from the efforts of a company or team, and often promise (explicitly or implicitly) future returns. This creates clear parallels to stocks, where the issuer holds asymmetric information, can materially affect outcomes, and owes duties to tokenholders similar to fiduciary duties to shareholders. Just as insider trading or fraud in equities undermines fair capital formation, similar abuses with company-backed tokens can mislead investors and distort markets, making these tokens sensible candidates for securities regulation.
In contrast, network tokens are more akin to commodities. Their value emerges from decentralized economic activity and protocol usage, rather than the actions of any single party. Like oil or gold, no one person or company controls the supply or future prospects of the network. As a result, many of the foundational justifications for securities laws, such as regulating insider trading or disclosure of material non-public information, break down. There is no “insider” on Ethereum or Bitcoin in the traditional sense; any information about protocol upgrades or activity is publicly available. Regulating these assets like securities risks misapplying tools designed for hierarchical organizations to decentralized, open systems.
Collectible tokens, such as NFTs representing digital art or in-game items — are more appropriately compared to traditional collectibles or art. Their value comes from subjective appreciation, cultural significance, or utility within niche ecosystems. Just as the SEC doesn’t regulate the sale of a Picasso or a signed baseball card, imposing financial regulations on NFTs without investment-like characteristics misses the mark. These markets already function based on voluntary valuation, not institutional capital formation.
Similarly, arcade tokens resemble in-game currencies or loyalty points. They exist within bounded environments, typically have no speculative promise, and are often non-transferable or intentionally inflationary. Treating them as securities would be like regulating Starbucks points or Fortnite V-Bucks under the SEC, a clear regulatory overreach that misunderstands their purpose.
Even memecoins, often derided for their lack of utility or fundamentals, arguably fall outside traditional regulatory logic. If a token is explicitly understood by participants to be valueless, a digital game of “hot potato,” then treating it as an investment product assumes a level of deception that often isn’t present. While anti-fraud protections should still apply, especially against pump-and-dump schemes or market manipulation, it’s questionable whether capital markets laws should govern what is effectively zero-sum gambling with no claim on productive assets.
Ultimately, not all tokens serve the same economic function, and they shouldn’t be regulated as if they do. Securities laws are meant to protect investors in hierarchical systems where asymmetric information and issuer control create risk. Applying those laws too broadly, to protocols, games, or memes, would be an egregious overreach of regulatory authority.
Is the Howey Test Outdated?
To most people, it can be mystifying when the crypto industry argues that cryptocurrencies shouldn’t be regulated like traditional securities. After all, tokens are often traded on exchanges, can go up or down in value, and sometimes resemble speculative investments, so why shouldn’t they follow the same rules?
But as we saw above, there are good reasons for this resistance. Many crypto tokens function less like stocks and more like digital commodities, utility infrastructure, or even governance tools within decentralized networks. Treating all of them as securities risks forcing square pegs into round holes, potentially stifling innovation or decentralization by applying frameworks designed for intermediated, corporate-driven financial systems. What looks like regulatory evasion from the outside is often a call for frameworks that recognize the unique nature of open, programmable, and borderless digital systems.
The Howey Test, established by the U.S. Supreme Court in the 1946 case SEC v. W.J. Howey Co., to determine if a transaction is an "investment contract" and therefore a "security" under federal securities laws, established four criteria for an investment contract: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, and (4) to be derived solely from the efforts of others.
While a foundational tool for identifying investment contracts under U.S. securities law, often contradicts core first principles of sound market regulation when applied to crypto and decentralized systems. Its four-part framework was designed for traditional centralized businesses, not open-source, decentralized protocols. As a result, it can misclassify novel assets in ways that undermine regulatory goals like fairness, transparency, and effective consumer protection.
For example, information asymmetry, a core rationale for securities laws, arises when issuers possess insider knowledge unavailable to investors. This principle clearly applies in centralized systems, where founders or companies control the fate of a project. But in decentralized networks like Ethereum or Bitcoin, no privileged insiders exist and all relevant information is publicly accessible on-chain.
Despite this symmetry, Howey may still apply based on early token distribution events, ignoring the fact that the project may now be fully decentralized. This creates a mismatch between the purpose of disclosure-based regulation and the reality of on-chain transparency.
The same contradiction arises with the principle of agency and fiduciary duty. Securities regulation is built on the assumption that investors are handing capital to someone else, a founder, a CEO, or a management team, who has a duty to act in their best interest. In traditional companies, this makes sense. But in decentralized protocols with open participation and no central authority, there is no agent controlling investor outcomes.
Nevertheless, Howey still treats tokens as securities if they were initially promoted or sold by a team, even when that team no longer exerts control. This penalizes projects that evolve toward decentralization, contrary to the principle of proportionate oversight based on control.
On the topic of fraud and manipulation, the Howey Test can be redundant or misapplied. Fraudulent behavior should be punished under anti-fraud laws, which are already robust and technology-agnostic. However, regulators sometimes invoke Howey to classify a token as a security just to bring fraud charges, even when there's no real investment contract involved. This blurs enforcement objectives and risks conflating investor protection with an overly broad regulatory reach.
With respect to systemic risk, Howey doesn’t address one of the most important modern concerns in finance: protecting the integrity of the broader ecosystem. A DeFi protocol holding billions in user funds may present real systemic vulnerabilities, while a memecoin with no underlying infrastructure does not. But Howey makes no distinction between the two, it focuses narrowly on form over function, failing to account for scale, impact, or risk to the financial system.
Finally, while consumer protection is a legitimate aim of securities law, Howey can overprotect in cases where no deception or implied promise of profit exists. For instance, if a memecoin is transparently a joke or an NFT is sold purely as art, applying securities laws doesn’t reduce risk, it just misclassifies cultural expression as regulated investment. This not only wastes enforcement resources, but also confuses market participants and undermines confidence in regulation itself.
In sum, while Howey still works in its original context, centralized, expectation-driven fundraising, it fails to map cleanly onto decentralized, community-driven, or utility-based systems. Regulation should reflect actual risks and relationships, not simply fit every digital asset into a legacy framework designed in the 1940s. The Supreme Court should overturn Howey Test because it no longer reflects the realities of today’s digital and decentralized markets.
Why Tokenize the Economy?
We’ve made the case that not all tokens should be regulated similarly and that our existing laws are deeply flawed. However, this doesn’t answer the question that most people often ask, on why we should tokenize the economy at all, and what's broken with the current system. To many, the existing financial and digital infrastructure seems good enough.
Recall that securities laws were written to address the failures of traditional finance; in some sense, DeFi wasn’t designed to avoid these protections, but instead designed to eliminate the need for them altogether by solving the underlying problems at the protocol level. The entire architecture of DeFi is an answer to the failures of traditional finance that persisted even after a century of regulation.
For example, Bitcoin was born out of the 2008 financial crisis, a direct rejection of the hidden leverage, regulatory capture, and too-big-to-fail bailouts that left the public footing the bill for systemic mismanagement. Bitcoin solves the custodial risk of banks by enabling self-sovereign ownership through private keys.
Where traditional finance relies on layers of intermediaries, gatekeepers, and proprietary infrastructure, DeFi protocols offer transparent, open-source alternatives that anyone can verify and use. Instead of applying to a bank for a loan, subject to credit checks, discrimination, or arbitrary terms, users can borrow against crypto collateral using smart contracts that cannot discriminate. These innovations directly address the same risks that securities laws were meant to solve, but through code.
However, the most fundamental failure of traditional finance isn’t just opacity, risk, or inefficiency, it is the capacity for coercion. Governments do not merely oversee markets, they own the monetary base, control the banking rails, and reserve the right to seize, censor, inflate, or redirect capital without individual consent. Through taxation, capital controls, monetary debasement, and legal mandates, states extract resources and reallocate them, sometimes for social goods, but often for war, political entrenchment, or corporate favoritism. In this system, your money is never truly yours. It exists at the mercy of banks, regulators, and sovereigns.
DeFi rejects this arrangement at its root; it is the only world where voluntary exchange and individual sovereignty takes precedence over imposed authority. It elevates markets over governments, choice over coercion, and reason over power. This is not a theoretical benefit. History is filled with examples of governments using the financial system to exert force:
In 1933, the U.S. government confiscated private gold holdings.
Authoritarian regimes freeze bank accounts of political dissidents.
Entire populations have seen their wealth evaporated through hyperinflation, not by market failure, but by deliberate state policy.
In 2022, Canadian authorities froze the bank accounts of peaceful protesters without trial.
Around the world, capital controls limit how citizens can spend, save, or move their own money.
A permissionless system fixes this not by lobbying for better laws, but by removing the ability to impose control in the first place. Traditional finance fundamentally cannot offer this. It is structurally dependent on gatekeepers, banks, regulators, governments, who can all, at a moment’s notice, deny access, reverse transactions, or extract value by force. Even democratic societies do this in the name of control, stability, or compliance. But stability without consent is still tyranny. Compliance without recourse is still subjugation.
The real promise of crypto is not just a more efficient market, it is a freer one. It forces us to confront a fundamental question: Do we want systems where freedom is selectively granted by institutions, or systems where freedom is intrinsic and owned outright by individuals and enforced through code and consensus? At its core, crypto challenges the assumption that trust, legitimacy, and economic coordination must flow through centralized authorities. It proposes a world where these functions can be decentralized, permissionless, and transparent.
To appreciate the scale of this shift, it helps to recognize that technological change tends to come in three forms. The first is marginal improvement, better, faster, cheaper versions of existing systems. This is like moving from landline phones to fiber optics, or from paper checks to digital banking. The second type is new capabilities, technologies that enable us to do things that were previously impossible, like the internet, personal computers, or smartphones. But the third, and rarest, form is structural reordering, technologies that fundamentally restructure power, institutions, and society itself.
Crypto belongs firmly in this third category. It is not just about making finance more efficient or unlocking new functionality. Like the printing press (1440 AD), which began as a way to reproduce books but ultimately fueled the Reformation (1517 AD), the Scientific Revolution, and the Enlightenment, crypto redefines who has the authority to create, move, and store value.
The printing press shattered the church’s monopoly on knowledge and empowered individuals to read, think, and interpret for themselves. Likewise, crypto dismantles the state and corporate monopoly on financial infrastructure, allowing individuals to transact, govern, and organize without gatekeepers. It’s a shift not just in technology, but in the very architecture of freedom.
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