Why the Commission says existing rules are not fit-for-purpose

The Commission’s opening is a diagnosis, not a statute. Crypto market capitalization is still a fraction of global debt and equity, but the Commission treats the growth as a reason to stop relying on ad-hoc Howey application plus existing exemptions. It names two drawbacks of the pre-2025 approach.

• Howey is difficult to apply to crypto assets and to transactions in those assets.
• Existing rules are not fully “fit-for-purpose” for covered investment contract offerings — they demand disclosures that may be irrelevant and omit disclosures that are material, and they do not contemplate a security that later stops being a security.

The evolution point is the intellectual core of the entire proposal. Most financial instruments are permanently in or permanently out of the securities laws. A CIC, on the Commission’s 2026 Interpretation, can separate from the issuer’s representations or promises. Once purchasers no longer reasonably expect essential managerial efforts, the non-security crypto asset is no longer subject to the Federal securities laws. Existing Forms S-1, 1-A, C and D have no off-ramp for that event.

The second structural clash is network effects. The 2026 Interpretation (n.52) defines network effects as the increase in value, use and security as more users participate. Restricted securities (Rule 144(a)(3)(ii) for Reg D; Reg CF Rule 501 one-year resale lock) and accredited-only gates (Rule 506(c)) concentrate holdings. The Commission’s view is that concentration is the opposite of what a crypto network needs. That is why both proposed exemptions produce unrestricted securities and allow retail.

Without fit-for-purpose rules, existing regulatory requirements, many of which were adopted well before the proliferation of crypto assets, could complicate an issuer’s transaction planning and, in turn, impede capital formation and innovation.

The historical analogies the Commission chose

The paper analogizes to Regulation AB (asset-backed securities) and REIT registration forms — bespoke frameworks for unique asset classes. The analogy is imperfect on purpose. Those regimes are registration frameworks. This one is exemption-plus-safe-harbor, because the Commission expects many crypto projects to develop until the related crypto assets cease to be subject to investment contracts. That difference is the reason there is a Rule 400 at all.

• President’s Working Group on Digital Asset Markets, Strengthening American Leadership in Digital Financial Technology (July 30, 2025) — cited for market-size context and later as the source of three specific recommendations this paper implements.
• SIFMA 2025 Capital Markets Fact Book — $145.1 trillion global fixed income outstanding and $126.7 trillion global equity cap in 2024, used to keep crypto in proportion.
• Howey, 328 U.S. 293 (1946), as restated in the 2026 Interpretation: investment of money in a common enterprise with a reasonable expectation of profits from the essential managerial efforts of others.

Where to push in a comment

• If you think the “evolution” story is overstated — that most tokens never actually separate from a promoter — say so with data. The economic analysis’s baseline assumes the 2026 Interpretation is the law. Contesting that baseline is a Section IV letter, not a cover letter.
• If you run a network that needs retail holders on day one, document the resale-restriction tax you currently pay (Rule 144 seasoning, Reg CF 12-month lock, 506(b) no-general-solicitation). That is the evidence the Commission wants for the unrestricted-security choice.
• If you issue digital securities that will never “decentralize,” do not try to squeeze them into a CIC. The paper explicitly leaves those on the registered path. A comment asking for an S-1 crypto annex is a different rulemaking.
• Offshore substitution is asserted, not measured. Issuers that actually moved a sale to a Reg S structure to avoid U.S. retail can quantify that. The capital-formation claim is otherwise a slogan.