Since the dawn of blockchain technology, a single legal question has plagued every founder starting a crypto project in the United States and beyond – is this token a security? The answer determines everything, such as regulatory jurisdiction, disclosure obligations, listing eligibility, and personal liability exposure. Yet the existing legal framework provided no reliable guidance. In the absence of congressional action, courts were left to apply "the Howey Test," the long-standing investment contract doctrine born from a Florida citrus grove dispute, to sophisticated assets and market structures wholly foreign to its original design. The result was a regulatory environment defined not by clear rules, but by litigation and regulation-by-enforcement.

The Howey Test and Its Limits in the Digital Age

To appreciate what the Clarity Act accomplishes, it helps to understand precisely where the Howey Test breaks down when applied to digital assets. In SEC v. W.J. Howey Co., the Supreme Court held that an investment contract, and therefore a security subject to federal regulation, exists when a person (i) invests money, (ii) in a common enterprise, (iii) with an expectation of profit, (iv) derived from the efforts of others.[1] This framework has governed the definition of a security for almost a century. Applied to stocks, bonds, and limited partnerships, it worked as intended. Applied to digital assets proved far more nuanced. The four prongs are as follows:

1. Investment of Money – this prong asks whether an investor or purchaser committed something of value, such as cash, property, or other consideration, to a company or enterprise.
2. Common Enterprise – This prong asks whether investors are bound together in a shared venture and/or a common financial fate, with one another or with a promoter. A common enterprise is found through either horizontal or vertical commonality. Horizontal commonality asks whether investor funds are pooled and returns, or losses, are shared pro rata, while vertical commonality is when investor fortunes are tied to the success of a promoter, regardless of what investors share with each other. For decentralized token networks, where thousands of independent holders participate in a protocol with no pooled funds and no central operator, it is genuinely unclear whether either standard is satisfied.
3. Expectation of Profits – this asks whether investors entered the arrangement or made the investment hoping to make money, through dividends, distributions, or any price appreciation. Price appreciation has generally been treated as sufficient to satisfy this prong, regardless of whether the token also serves consumptive or utility purpose.
4. Derived from the Efforts of Others – This prong asks whether the expected profits depend primarily on the work of someone other than the investor, such as a promoter, manager, or founding team whose efforts drive the value of the investment. It is here that the Howey test has most acutely strained against the realities of decentralized networks. For early-stage token projects, where founding teams are actively building, marketing, and maintaining a protocol, this prong has almost invariably pointed toward being securities. The deeper problem, however, is not that Howey reaches the wrong answer for early-stage tokens, founders' efforts genuinely do drive early value. Token networks are not born decentralized. Further, the problem is that Howey, as a binary test, has no mechanism for recognizing that this reliance is transitional. A network that begins dependent on its founders may, if successful, reach a point of "sufficient decentralization," where the protocol runs autonomously and no single team's decisions materially affect the token's value.[2]

The Clarity Act addresses these gaps directly, in the expectation of profits from the efforts of others inquiries. These two prongs have generated the most conflict in the crypto context. Specifically, the Clarity Act transforms Howey's binary question into a spectrum with defined endpoints and a clear path between them. It is against this backdrop that Congress has acted.

The Senate Banking Committee Advances the Bill

As we have previously covered, after years of regulatory ambiguity between the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") over digital assets, Congress has moved decisively.[3] The Digital Asset Market Clarity Act of 2025 (the "Clarity Act") passed the House of Representatives last July by a 294-134 bipartisan vote,[4] establishing a framework that expressly allocates regulatory authority between the CFTC and SEC, creates registration pathways for exchanges and brokers, and, critically, anchors the industry's legal foundation in statute rather than in agency guidance susceptible to reversal with each change of administration.

On May 14, 2026, the Senate Banking, Housing, and Urban Affairs Committee voted 15-9 to advance the bill to the full Senate floor.[5] This article revisits the Clarity Act's core framework, which has not materially changed since the House passage. It further examines what we believe is the Clarity Act's most consequential contribution to founders building today: a statutory codification of the Howey Test's underlying logic that, for the first time, gives crypto projects a clear legal pathway acknowledging the arc of a token's development – from natural dependence to sufficient decentralization.

Digital Asset Classifications

Rather than leaving courts to apply the Howey Test to each new token on a case-by-case basis, the Clarity Act draws statutory lines between categories of digital assets: network tokens, ancillary assets, and stablecoins. At its core, the bill resolves a question that courts and agencies disputed for nearly a decade: when is a digital asset a commodity subject to CFTC jurisdiction, and when is it a security subject to the SEC? A digital asset is a digital commodity if it qualifies as a network token intrinsically linked to a blockchain network, deriving its value from the use of that system, and carrying no disqualifying financial rights against an identifiable issuer. If it carries equity-like rights, profit-sharing entitlements, or if its value depends on a team's managerial efforts, it remains within the SEC's orbit, either as a traditional security or ancillary asset subject to disclosure obligations. The practical distinction runs across the full spectrum of existing assets: Bitcoin, with no issuer, no founding team driving its value, and no equity rights, is a network token and digital commodity by any measure; a new token project's proprietary token whose value depends on a founding team's continued work is an ancillary asset; and a token conferring a contractual right to a share of a company's profits is a security outright. The line is not drawn at the word "token" it is drawn at the economic substance of what the instrument confers and whose efforts drive its value.

Stablecoins

The Clarity Act carves out a third category for stablecoins, payment instruments designed to maintain a fixed monetary peg, which sit entirely outside the network token and ancillary asset framework, governed by reserve requirements, redemption obligations, and issuer licensing. The most contested question in this lane has been regarding yield, specifically, whether stablecoin issuers may pay interest to holders.[6] A Senate draft prohibition on yield fractured the industry coalition supporting the bill and delayed the Senate Banking Committee markup by several months. A compromise was reached before the May 2026 vote, which prohibits crypto firms from paying any form of passive interest or yield solely for holding stablecoins, akin to a traditional bank deposit, while permitting rewards tied to bona fide activities on crypto platforms and networks.[7]

Network Tokens

Network tokens are the foundational category. Defined in the Clarity Act, a network token is a digital commodity intrinsically linked to a distributed ledger system, or blockchain network, whose value derives, or is reasonably expected to derive, from the use of that system.[8] A network token is not a security. It is not equity, debt, or a profit-sharing instrument. Bitcoin and Ethereum are the paradigmatic examples.

To prevent circumvention, the bill enumerates specific "disqualifying financial rights" that would pull a purported network token back into the securities regime, which are debt or equity interests in an issuer, liquidation rights, entitlements to dividends or profit distributions, and similar claims that give the holder a financial stake in the enterprise behind the token rather than in the network itself. The Clarity Act is deliberate about this distinction as each disqualifying financial right is measured against a person or identifiable legal entity, expressly excluding a decentralized governance system.

Economic Interests vs. Economic Rights

Further, the Clarity Act distinguishes between an economic right and an economic interest. A token may confer economic interests with respect to the blockchain system itself, like governance voting, value appreciation tied to network usage or distributions accruing from transaction fees flowing through the protocol, without crossing into "disqualifying" territory that would subject the token to heightened traditional securities scrutiny. On the other hand, the Clarity Act prohibits economic rights against the person or organization behind a token, debt claims, equity stakes, or profit entitlements owed by an identifiable issuer or originator. Ultimately, interests that flow from the network are permissible, and rights against the enterprise that built it are not.

By carving out network-based economic interests from the definition of disqualifying financial rights, the Clarity Act also implicitly recognizes that token holders can have a legitimate and meaningful economic relationship with the protocol without it being considered an "investment" in the company, and without satisfying the relevant Howey prong. A token that appreciates because its network grows is not the same as a share that appreciates because its issuer performs. The Clarity Act further reinforces this distinction by clarifying that nothing in the Clarity Act amends the fiduciary duties a company owes its investors or shareholders. The point is not to eliminate investor protections but to recognize that a decentralized blockchain network is not a company and the legal framework designed for one should not automatically be applied to the other.

Ancillary Assets

Token networks are not mature, decentralized networks at their inception. Most begin exactly where the Howey Test expects them to be, dependent on a founding team's efforts and vision. The Clarity Act does not treat that dependency as a permanent legal condition. For tokens that do not yet qualify as network tokens but are not traditional securities either, the bill creates a purpose-built intermediate category – the ancillary asset.

The Clarity Act defines an ancillary asset as a network token whose value is dependent upon the entrepreneurial or managerial efforts of an ancillary asset originator or a related person.[9] This definition is precise in what it does and does not capture. An ancillary asset is not a stock, bond, or an investment contract in a traditional sense, it carries none of the equity-like rights that characterize a security. It sits in the gray zone that Howey has always recognized without ever cleanly resolving, a token whose value remains meaningfully tied to what its founding team does next.

In defining an ancillary asset, the Clarity Act recognizes that the law should reflect economic reality, that dependence on the efforts of others is a core feature of early-stage crypto networks, which is a starting point and not a permanent legal status. The precise contours of the ancillary asset definition, including what constitutes "entrepreneurial or managerial efforts" will further be developed through SEC rulemaking under Section 105, which the SEC must issue within 270 days of enactment.

The Disclosure Regime

For ancillary assets, the Clarity Act creates a disclosure framework administered by the SEC, built around the question: does this token's value still depend on an identifiable person's efforts? If the answer is yes, the originator is subject to disclosure obligations filed with the SEC and calibrated to factors including the originator's size, the amount of tokens sold to the public, and the degree of coordinated control over the network.

The regime is deliberately lighter than a full securities registration, requiring transparency about what matters to token holders at this stage, which includes who is building the network, what the resources raised are being used for, and how dependent the token's value remains on the relevant team's continued involvement. In the Clarity Act, Congress recognizes that applying the full apparatus of the Securities Act to early-stage token projects would be neither proportionate nor workable.

Importantly, the bill creates a rebuttable presumption that a network token is an ancillary asset, placing the initial burden on originators and intermediaries to demonstrate otherwise through a written certification to the SEC supported by reasonable evidence. This presumption reflects the bill's foundational acknowledgment that most tokens begin in a state of founder dependence.

From Dependence to Decentralization

The graduation mechanism is where the Clarity Act's evolution of the Howey Test finds its fullest expression. Under Howey, the efforts of others inquiry was frozen at the point of sale, with no framework for revisiting that answer as a network matured. The Clarity Act resolves this by building the arc of a network's development directly into the statute.

Once the relevant entrepreneurial or managerial efforts cease, the originator may certify such fact to the SEC. When accepted, the token graduates from ancillary asset to network token, SEC jurisdiction gives way to CFTC oversight, and disclosure obligations terminate.

This is what sufficient decentralization, a concept William Hinman articulated in a 2018 speech[10] but never defined with legal precision, looks like translated into a statute. Hinman posed the question that would define crypto regulation for nearly a decade, which is whether a digital asset offered as a security can, over time, mature out of a securities classification. The Clarity Act establishes this bedrock. The graduation pathway — from ancillary asset to network token, from SEC disclosure obligations to CFTC oversight, from founder-dependent project to self-sustaining network — is a defined legal process with a defined legal consequence.

What Remains in the Road to Enactment

The Senate Banking Committee's vote is a milestone, but the bill is not yet law. It must be reconciled with the Senate Agriculture Committee's parallel legislation before a full floor vote, and the resulting text must then be reconciled with the House-passed version. Significant disagreements remain, including on illicit finance and DeFi oversight, where minority staff released a national security advisory arguing the bill leaves exploitable gaps, on ethics provisions restricting elected officials' crypto holdings.[11]

None of this diminishes what the bill has already accomplished conceptually. The network token vs ancillary asset framework, the graduation pathway, and the economic interest versus economic right distinction together represent a genuine intellectual contribution to how the law thinks about digital assets, one that will shape the field regardless of the precise form the final bill takes.

Implications for Founders Building Today

The Clarity Act reframes the questions founders should be asking. Under Howey, the central question was how to structure a token to avoid looking like a security at launch. Under Clarity, the more relevant questions are: Does the token carry disqualifying financial rights? Does its value depend on the founding team's efforts? For how long? And what does the path to decentralization look like in practice?

The ancillary asset category allows founders to be honest about what they are building. A token that launches into ancillary asset status is not a failed network token; it is a network token in development, subject to proportionate disclosure obligations that terminate once the network matures. Founders should be building with the graduation pathway in mind from day one, designing governance structures and development roadmaps that support a credible certification to the SEC that coordinated control has ceased.

Conclusion

The Clarity Act is not a departure from the Howey Test. It is its most thoughtful application yet. By encoding Howey's underlying logic into a statutory framework, Congress has codified that logic with a beginning, a middle, and an end. The ancillary asset is where the journey starts. The network token is where it finishes. And for the first time, the law provides a map for getting from one to the other. The answer to "what is a security?" will depend not just on what a token is today, but on what its network is becoming.

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[1]SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[2] WilliamHinman, Director, Division of Corporation Finance, U.S. Securities and ExchangeCommission, "Digital Asset Transactions: When Howey Met Gary(Plastic)," Remarks at the Yahoo Finance All Markets Summit: Crypto, SanFrancisco, CA, June 14, 2018, available at https://www.sec.gov/newsroom/speeches-statements/speech-hinman-061418.

[3] SulmanBhatti, "The CLARITY Act Stalemate: What Regulatory Delay Means forInstitutional Digital Asset Managers," Hivemind Capital, March 2, 2026,available athttps://www.hivemind.capital/content/the-clarity-act-stalemate-what-regulatory-delay-means-for-institutional-digital-asset-managers.

[4]Congress.gov, "Digital Asset Market Clarity Act of 2025," H.R. 3633,119th Congress (2025-2026), Library of Congress.

[5]Senate Banking Committee, "Chairman Scott, Senate Banking CommitteeAdvance Clarity Act in Historic Bipartisan Vote," United States SenateCommittee on Banking, Housing, and Urban Affairs, May 14, 2026.

[6] Supranote 3.

[7] CiaranLyons, "CLARITY Act Stablecoin Yield Rules Finalized: 'Go Time' For CryptoBill," CoinTelegraph, May 2, 2026, available athttps://cointelegraph.com/news/go-time-after-clarity-act-stablecoin-yield-compromise-finalized.

[8] TitleI, Sections 101–103, Digital Asset Market Clarity Act of 2025, H.R. 3633, 119thCongress (2025–2026). The precise contours of the network token definition,including the meaning of "entrepreneurial or managerial efforts" asit relates to the ancillary asset framework, will be further developed throughjoint SEC and CFTC rulemaking required under Section 105 within 270 days ofenactment.

[9] Id.

[10] Hinman,"Digital Asset Transactions: When Howey Met Gary (Plastic)," supranote 2.

[11] CryptoTimes, "Will Ethics Rules Sink the CLARITY Act? Breaking Down the 309-PageDraft Ahead of the May 14 Markup," May 12, 2026.

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