SEC Staff: Token Buybacks Don't Create a Security If the Network Is Functional
US accounting teams and legal counsel have been wrestling with a deceptively simple question for years: does a protocol buying back its own token transform that token into a security? SEC staff have now offered their clearest answer yet. According to guidance published by SEC staff, a token buyback mechanism does not, by itself, push a crypto asset over the Howey Test threshold and into securities territory, provided the underlying network is genuinely operational. That single condition, network functionality, carries significant weight for crypto financial statements, classification decisions, and audit support across US firms.
What the SEC Staff Guidance Actually Says
SEC staff guidance is not a formal rule and does not carry the same binding authority as a Commission release or court ruling. It does, however, signal how staff are likely to analyse fact patterns during reviews, and it shapes the risk calculus that legal and finance teams apply when classifying digital assets on the balance sheet.
The core position is that the existence of a token buyback programme, where a protocol uses revenue or treasury funds to repurchase tokens from the open market, does not automatically satisfy the "expectation of profits from the efforts of others" prong of the Howey Test. The staff reasoning centres on a distinction between a centralised issuer returning value to investors, which looks like a profit distribution and raises securities flags, and a decentralised network burning or retiring tokens as a protocol-level mechanism once that network is fully functional and operating without reliance on a core promoter group.
The Functionality Condition
The phrase "if the network works" is doing a lot of legal heavy lifting here. Staff appear to be drawing on the same analytical thread that runs through prior SEC statements on digital assets, including the 2019 framework for analysing whether a digital asset is an investment contract. In that framework, a network that has achieved genuine decentralisation and is operational for its intended purpose is treated differently from a network still dependent on a founding team to deliver future value.
Under the staff's current thinking, a buyback conducted on a live, functional, sufficiently decentralised network looks more like a mechanical supply adjustment than a return of capital driven by managerial effort. That framing matters because it is managerial effort, not the buyback itself, that drives Howey analysis.
What "Functional Network" Means in Practice
Staff have not published a bright-line checklist, so firms cannot simply tick boxes. The relevant factors drawn from prior SEC guidance include: whether the token has genuine consumptive use on the network today, not just promised future utility; whether decision-making is distributed rather than concentrated in a founding entity; whether the network continues to operate and deliver its core function independently of ongoing promoter action; and whether token holders are primarily participating to use the network rather than to profit from others' work.
Each of these factors feeds directly into how a finance team documents its classification analysis, an essential step for any firm that holds, issues, or facilitates transactions in tokens with buyback mechanics.
Accounting Classification: The Practical Stakes
The securities-versus-commodity or securities-versus-utility distinction is not merely a legal label. It determines which accounting standard applies, how the asset appears on the balance sheet, what disclosures are required, and how gains and losses flow through the income statement.
US GAAP: ASC 350-60 and the Fair Value Election
Under US GAAP, crypto assets that meet the definition in ASC 350-60 (the FASB's crypto asset standard, effective for fiscal years beginning after 15 December 2024) must be measured at fair value through net income each reporting period. This standard applies to assets that are not securities. If a token buyback programme caused a token to be reclassified as a security, the asset would fall outside ASC 350-60 and into a different measurement regime, potentially equity-method investment, available-for-sale debt security, or another category depending on the nature of the instrument, each with different volatility profiles in the income statement and different disclosure requirements.
SEC staff's position that buybacks don't automatically trigger securities status therefore supports continued application of ASC 350-60 fair value accounting for many tokens with buyback mechanics, assuming the network functionality test is met. For firms that have already adopted ASC 350-60, this is stabilising news. For those still classifying token holdings under older indefinite-lived intangible asset rules, the classification question now has one more layer of analysis to document.
For broader context on how US GAAP fair value requirements are reshaping corporate crypto financial statements, our coverage of Bitcoin treasury company accounting under ASC 805 and ASC 280 sets out how the interplay between FASB standards and SEC classification decisions is already affecting balance sheet presentation.
IFRS Crypto Assets: A Parallel but Distinct Analysis
For entities reporting under IFRS, the SEC staff position has indirect but real relevance. IFRS does not have a dedicated standard equivalent to ASC 350-60. Firms applying IFRS currently classify crypto assets under IAS 38 (intangible assets) or, where they are held for sale in the ordinary course, IAS 2 (inventories). A security classification would point toward IFRS 9 (financial instruments), which carries its own fair value or amortised cost measurement requirements and detailed disclosure obligations under IFRS 7.
IASB has been monitoring crypto asset accounting and has issued targeted IFRS amendments, but a comprehensive IFRS crypto standard remains pending. In the meantime, the SEC's articulation of when a token is not a security provides one data point that IFRS preparers, particularly those cross-listed in the US or with significant US investor bases, can reference when building their classification rationale under IAS 8's hierarchy of guidance.
Implications for Token Issuers on the Balance Sheet
Firms that have issued tokens with buyback features face a different set of questions. If the token is not a security, the issuer's repurchase of its own tokens may be treated as a reduction of a liability (if the token was initially classified as a financial liability) or as a treasury-style transaction. If the token were reclassified as a security, the issuer might face obligations under securities law, affecting how the buyback is accounted for and disclosed. SEC staff's guidance therefore reduces, though does not eliminate, the reclassification risk for issuers of tokens on functional networks.
Tax Implications for US Firms and CFOs
The tax treatment of token buybacks is a separate but linked question. Under the Internal Revenue Code, the classification of a digital asset as a security has consequences for wash-sale rules, constructive sale rules, and the treatment of gains and losses. Currently, the IRS's general position treats most crypto assets as property rather than securities, meaning wash-sale rules do not apply. However, if a token were determined to be a security for federal tax purposes, wash-sale rules would apply to losses realised on that token, eliminating a tax planning flexibility that many crypto-holding firms currently use.
Deferred Tax and Valuation
Under ASC 740, firms holding crypto assets measured at fair value through net income must account for deferred tax liabilities on unrealised gains. A change in classification from non-security to security, or vice versa, could alter both the measurement basis and the deferred tax calculation. Audit teams supporting clients with token holdings that have buyback features should revisit their deferred tax workpapers in light of this guidance to confirm that the classification assumption is documented and defensible.
The broader regulatory backdrop is also shifting. The SEC and CFTC have been actively debating jurisdictional boundaries over digital assets, a dynamic explored in our piece on how the CFTC and SEC are pushing tokenization forward after the Clarity Act stalls. The staff guidance on buybacks fits within that broader effort to provide workable analytical frameworks while formal legislation remains incomplete.
What Firms Should Do Now
SEC staff guidance shifts the landscape but does not provide certainty. The following steps are appropriate for accounting firms, audit teams, and CFOs with exposure to tokens that have buyback mechanics.
Revisit and Document Classification Decisions
Any existing position that a token with a buyback programme is a non-security should be reviewed against the network functionality factors described above. The documentation should address each Howey prong explicitly and note the staff guidance as supporting authority, while acknowledging its non-binding nature. If a client's token holding has not previously been evaluated for the buyback dimension, that gap should be closed before the next reporting period.
Assess ASC 350-60 Eligibility
For US GAAP reporters, confirm whether tokens with buyback features continue to qualify under ASC 350-60. If they do, ensure fair value measurement is being applied consistently and that the disclosure of significant judgements in the financial statements reflects the classification analysis performed.
Coordinate Legal and Accounting Views
The securities classification question sits at the intersection of law and accounting. Finance teams should not resolve it in isolation. A coordinated memo from legal counsel and the accounting team, signed off by the CFO, provides the strongest audit trail if the classification is later challenged.
Monitor for Follow-On Guidance
Staff guidance tends to evolve, particularly as the SEC Commission itself considers rulemaking. The functionality test described in the current staff position may be sharpened or broadened in future releases. Firms should have a process for monitoring SEC digital asset guidance and updating their classification memos accordingly.
Frequently Asked Questions
Does SEC staff guidance have the same legal force as a formal SEC rule?
No. Staff guidance reflects how staff approach analysis during reviews but is not binding law. Courts and the Commission itself are not bound by it. It is nevertheless influential and should be cited in classification documentation as supporting authority.
If a token has a buyback programme, does it automatically stay outside ASC 350-60?
Not automatically in either direction. The staff position reduces the risk that a buyback alone triggers securities classification, but the full Howey analysis, including the network functionality assessment, must still be documented. A token that fails the functionality test could still attract scrutiny regardless of buyback mechanics.
How does this affect IFRS reporters outside the US?
Directly, it doesn't bind IFRS preparers. Indirectly, it informs the classification rationale under IFRS 9 versus IAS 38, particularly for entities with US regulators or investors. Where the SEC's analytical framework supports a non-security conclusion, IFRS preparers can reference it as part of the broader body of regulatory thinking, while relying primarily on IFRS standards and IASB guidance.
What are the wash-sale tax implications if a token is reclassified as a security?
If a token is determined to be a security for federal tax purposes, wash-sale rules under IRC Section 1091 would apply, preventing firms from claiming a loss on a sale if a substantially identical token is repurchased within 30 days before or after the sale. This significantly affects tax planning strategies that currently exploit the absence of wash-sale rules for crypto property.
Should CFOs issue updated disclosures in light of this guidance?
Firms with material holdings in tokens that have buyback features should consider whether existing critical accounting judgement disclosures adequately describe the classification analysis. If the staff guidance changes the supporting rationale for an existing classification, an updated disclosure in the next interim or annual filing is prudent. Legal counsel should advise on whether a current report filing is warranted in any specific case.
Source: Decrypt