An orange grove bundled with a service contract will never transform into a self-sufficient orchard run by decentralized farmers. That sentence sounds absurd – and that is exactly the point. The Supreme Court’s 1946 Howey test was designed for a world where financial instruments stay what they are. Blockchain broke that assumption.

In Replacing Howey with CLARITY: Resolving Securities Regulation’s Temporal Paradox, I identify a structural flaw at the center of American securities law and argue that Congress has now fixed it. The flaw is what I call the “Temporal Paradox”: blockchain-based assets can transform their legal status over time, maturing from securities into something resembling commodities as their networks decentralize. The Howey test assumes asset classification is fixed and permanent. It provides no framework for assets whose legal identity evolves.

The paradox in practice

Consider a token sold by a startup to fund development of a new blockchain protocol. At launch, the token looks like a classic security: investors put up money, the development team does the work, and everyone expects profits from the team’s efforts. All four prongs of Howey are satisfied.

But five years later, the protocol is fully autonomous. The original development team has dissolved. Thousands of independent node operators maintain the network. The token now functions more like a commodity – a unit of exchange or access within a self-sustaining system. No one’s “efforts of others” are driving its value.

Is it still a security? Howey has no answer. The test was built to classify instruments at a single point in time, not to track their evolution.

When judges disagree

The consequences of this gap are not theoretical. I trace how two federal courts, applying the same Howey test to functionally similar tokens, reached opposite conclusions.

In SEC v. Ripple Labs, Judge Analisa Torres distinguished between institutional sales and programmatic sales of XRP. Institutional sales to accredited investors under written contracts were securities. But programmatic sales to retail buyers on exchanges were not – because those buyers could not “reasonably expect” that Ripple would use the capital to improve the XRP ecosystem.

One year earlier, in SEC v. LBRY, Judge Paul Barbadoro took the opposite approach. Analyzing functionally similar tokens, the court held that “all of LBRY’s past, present, and future offers and sales” constituted investment contracts. Unlike Ripple, LBRY did not distinguish between sale methods. The court treated the token itself as the relevant unit of analysis.

These cases present incompatible theories about what Howey classifies. Ripple asks: Did this transaction create reasonable profit expectations? LBRY asks: Does this asset embody an investment relationship?

This is the core problem of applying a test designed for orange groves to blockchain networks. The test’s flexibility – once celebrated as its great strength – has become a source of judicial fragmentation.

The SEC made it worse

The SEC attempted clarification in 2019 with its Framework for “Investment Contract” Analysis of Digital Assets, which expanded Howey’s four-part test into thirty-eight separate considerations. Commissioner Hester Peirce responded that “people not steeped in securities law and its attendant lore” would not know what to make of it.

I document the regulatory oscillation that followed. In 2018, then-SEC Division Director William Hinman acknowledged that digital assets can “morph” over time – that a sufficiently decentralized network might no longer satisfy Howey. This was the so-called Hinman Era, which recognized temporal transformation. Then came the Gensler Era (2021-2024), which rejected these distinctions and pursued aggressive enforcement across the board. The whiplash left the industry without stable guidance and courts without a consistent framework.

Enter CLARITY

The Digital Market Asset CLARITY Act of 2025 resolves the Temporal Paradox through what I call “institutional design that structures regulation around asset lifecycle phases.” Rather than asking courts to apply an 80-year-old test to shape-shifting digital assets, CLARITY creates a new statutory category and a phased regulatory process.

The Act works in three stages. In the entry phase, token offerings are regulated as securities through a conditional exemption requiring detailed disclosure and a development roadmap. In the transition phase, issuers can apply for maturity certification by demonstrating that their network has achieved autonomous operation and dispersed control. In the maturity phase, certified assets exit SEC jurisdiction entirely and fall under CFTC commodity regulation.

This is a structural shift from subjective legal doctrine to objective technical criteria. Courts no longer have to guess whether a network is “sufficiently decentralized.” Instead, they evaluate whether specific, measurable conditions have been met.

The new risk

I am not uncritical of this solution. CLARITY trades Howey’s doctrinal ambiguity for technical ambiguity. Courts must now consistently interpret whether networks have achieved “autonomous operation” and eliminated “concentrated control” across diverse blockchain architectures. If different courts diverge in interpreting these technical standards, they risk replicating the very fragmentation the Act was designed to eliminate.

The Act’s success therefore depends on whether courts develop sufficient technical interpretive capacity to apply these standards consistently. This institutional capacity, rather than statutory design, emerges as the limiting factor in the Act’s implementation.

The statute is well-designed. The question is whether the judiciary is ready for it.

Why it matters

The Temporal Paradox is not an academic curiosity. It has driven digital-asset development outside the United States, as entrepreneurs flee regulatory uncertainty. It has generated billions of dollars in litigation costs. And it has left ordinary token holders in a legal no-man’s-land, unable to determine whether the assets they hold are securities, commodities, or something else entirely.

CLARITY offers a principled resolution. But as I make clear, the path from a good statute to good outcomes runs through institutional capacity – the ability of courts, regulators, and market participants to apply new technical standards consistently and fairly. That capacity does not yet exist. Building it is the next challenge.

Read the full article: Seth C. Oranburg, Replacing Howey with CLARITY: Resolving Securities Regulation’s Temporal Paradox (2025).