Digital Asset Markets Report Working Group Emphasizes Taxonomy

If you’ve ever watched two smart people argue about whether a hot dog is a sandwich, you already understand why
taxonomy matters. When the rules change depending on what something “is,” everyone suddenly cares a lot about categories.
That’s exactly what’s happening in U.S. crypto policy: the President’s Working Group on Digital Asset Markets put
a giant, bright spotlight on digital asset taxonomya practical way to classify tokens so markets, regulators, and consumers can
stop living in the legal equivalent of “choose your own adventure.”

This article breaks down what the Working Group’s Digital Asset Markets Report is really saying, why it keeps coming back to taxonomy,
and how a clearer classification system can shape market structure, compliance, innovation, and even your tax paperwork.

Quick Table of Contents

• What the Working Group and Report are trying to do
• Why taxonomy is the report’s “big deal”
• The three-bucket taxonomy: security, commodity, and consumer/commercial tokens
• Where stablecoins fit (and why they get their own lane)
• What taxonomy changes in the real world
• Taxes: same token, different map
• How businesses can use taxonomy as a checklist
• Experiences: what teams learn when they try to classify tokens

What the Working Group and Report are trying to do

The President’s Working Group on Digital Asset Markets was formed to recommend regulatory and legislative proposals aimed at strengthening
U.S. leadership in digital assets and financial technology. In plain English: it’s a cross-government policy team charged with turning crypto
from a regulatory “who’s on first?” routine into something closer to a coherent playbook.

The Working Group’s report (a hefty roadmap) argues that the U.S. can support innovation and protect consumers by bringing clarity to:
market structure, oversight, consumer protection, risk management, stablecoins and payments, and a bunch of operational issues that don’t trend
on social media (but absolutely ruin your day when they break).

Why taxonomy is the report’s “big deal”

Taxonomy is a fancy word for “a structured way to classify stuff.” In digital asset markets, classification isn’t academicit can decide which
laws apply, which agency has oversight, what disclosures you must provide, what trading rules you follow, and what protections customers get.
If you don’t know what an asset is, you can’t reliably know what to do with it (or what penalties you’re sprinting toward).

The Working Group’s big premise is functional: the best starting point is what the digital asset does, not what it’s called,
not how it’s marketed in a late-night livestream, and definitely not what your cousin’s group chat says it is.
The report emphasizes segmenting the asset class by function to reduce confusion and create more predictable rules.

And yes, taxonomy sounds like something you’d study right before a frog-dissection quiz. But here it’s closer to organizing a messy garage:
you’re trying to separate the power tools (high-risk investment products) from the lawn chairs (consumer-use tokens) so you don’t step on a rake
at 2 a.m. and regret your life choices.

The three-bucket taxonomy: security tokens, commodity tokens, and consumer/commercial tokens

The Working Group discusses segmenting digital assets into three broad categories based on function:
security tokens, commodity tokens, and tokens for commercial and consumer use.
That sounds simpleuntil you meet the “hybrid token” that tries to be all three before breakfast.

1) Security tokens: when the token behaves like a security

A token lands in “security token” territory when it represents or functions like something already recognized as a securityor when it’s offered
and sold in a way that fits the legal concept of an “investment contract.” The report discusses tokenized securities (for example, equity or debt
represented on a blockchain) and emphasizes that tokenization doesn’t magically change the underlying substance of the security.

Concrete example: Imagine a company issues shares, but instead of updating a traditional shareholder ledger, the shares are
recorded and transferred on a distributed ledger. It’s still stock. It may be a slicker stock with a tech makeover, but it’s stock. That means
the familiar rules about registration, disclosures, intermediaries, and investor protections can still apply.

The report also highlights a major practical headache: some tokens may start life as part of an investment contract (where investors rely on a team’s
managerial efforts), and later the token’s role might shift as the network becomes more functional or decentralized. The “when does it stop being a
securities transaction?” question is one reason taxonomy matters: without a shared framework, market participants are stuck guessing.

2) Commodity tokens: when the token fits commodity-style oversight (especially for derivatives)

The report explains that many digital assets fall outside the definition of security and can be treated as commoditiesparticularly when they underlie
derivatives transactions. In practice, commodity classification matters a lot for futures, options, and swaps, because that’s where the Commodity
Futures Trading Commission (CFTC) has clear authority.

Concrete example: Bitcoin and ether are commonly cited as commodity-like digital assets in U.S. regulatory and legal discussions.
When derivatives reference a commodity token, those derivatives typically fall within established derivatives oversight frameworksthink requirements
around market integrity, transparency, clearing, and customer protections.

Here’s the key insight: a functional taxonomy doesn’t just label tokens; it helps map them to existing regulatory toolkits. Commodity-style oversight
is built for markets where leverage, margin, and derivatives are commonand where “it only went down 30% in an hour” is considered a slow Tuesday.

3) Tokens for commercial and consumer use: the “it’s for using, not investing” bucket

The Working Group describes commercial or consumer-use tokens as providing access to a specific good, service, or privilege and being subject to other
federal and state laws applicable to commercial transactions. These tokens are usually tied to a business model that looks more like commerce than
capital markets.

Concrete examples the report points to: arcade tokens, loyalty tokens, video game rewards, and tokenized points redeemable within a
closed system. It also notes other variations such as collectible tokens, like tokenized artwork or trading-card-style collectibles, where tokens can
serve as records of ownership or associate ownership rights with a digital identity.

The report’s posture here is pragmatic: regulation should focus on consumer protections and disclosure, while still allowing companies to experiment with
blockchain-based systems. Translation: if a token is basically “store credit on a chain,” treat it like a consumer product issuemarketing clarity, redemption
terms, and fairnessrather than forcing it into a full-blown securities framework.

Where stablecoins fit (and why they get their own lane)

Stablecoins deserve special handling because they’re often designed as payment instruments or settlement tools, not as “number-go-up” investments.
The Working Group’s report discusses “payment stablecoins” separately and references a federal stablecoin framework enacted in 2025 (the GENIUS Act).
The overall message: a taxonomy that treats stablecoins like just another token type will miss what actually makes them risky (and useful).

Think of it this way: a payment stablecoin is less like a startup equity token and more like a digital-value instrument whose safety depends on reserves,
redemption rights, operational resilience, and compliance controls. When things go wrong, stablecoin issues can look like payment system stress, consumer
confusion, or run risknot just “bad investments.”

The SEC has also weighed in through staff guidance focused on certain stablecoins designed and marketed for payments. That doesn’t end the debate, but it shows
why taxonomy helps: you can’t sensibly regulate “stablecoins” as a monolith if one token is used like cash-on-rails and another is basically a yield product
wearing a trench coat.

What taxonomy changes in the real world

A workable digital asset taxonomy doesn’t just make policy people happy. It changes day-to-day reality for exchanges, issuers, banks, developers, and customers.
Here’s what gets easier (or at least less chaotic) when classification becomes more consistent.

Regulatory jurisdiction and compliance planning

Clear categories help market participants understand which rules they’re stepping into. If an asset is a security token, the compliance universe looks like
securities registration and disclosure, broker-dealer and exchange/ATS issues, custody rules, and investor protection standards. If it’s a commodity token
underpinning derivatives, the CFTC world of DCMs, SEFs, clearing, margin, and market integrity becomes central. For consumer-use tokens, the lens shifts toward
consumer protection, marketing transparency, redemption terms, and commercial law concepts.

Market structure: trading venues, custody, and safeguards

The report discusses how regulators could use existing rulemaking and exemptive authorities to enable trading of digital assets and support innovation while
keeping safeguards. In other words: taxonomy can be the blueprint for “fit-for-purpose” rulesguardrails that match how the asset is used rather than forcing
every token into one rigid box.

Consumer protection and disclosure that actually fits the product

Disclosures for a tokenized security should look like disclosures for securities (ownership rights, risks, issuer information).
Disclosures for a consumer-use token should focus on redemption, limitations, fees, and how the token works in the product ecosystem.
Stablecoin disclosures should emphasize reserves, redemption mechanics, and operational controls.
Taxonomy helps regulators and businesses avoid the classic failure mode: “We disclosed 78 pages, so consumers must understand,” which is… optimistic.

Illicit finance controls and financial integrity

AML/CFT obligations don’t start with token labels, but classification can shape expectations. FinCEN’s long-running approach to virtual currency and money
services business obligations has influenced compliance programs for exchanges and other service providers. A clearer taxonomy can support more consistent
supervision and help legitimate businesses invest in the right controls instead of guessing what will be demanded after the fact.

Bank participation and “can we do this?” clarity

Banks and regulated institutions often live in a world where uncertainty equals “no.” When agencies clarify permissibility (for example, around custody or certain
digital asset activities), taxonomy makes those clarifications easier to operationalize. A bank can’t design controls for “crypto” in general; it can design controls
for custody of tokenized securities, or custody of commodity tokens, or stablecoin-related activitieseach with distinct risks.

Taxes: same token, different map

One of the most underappreciated points in digital asset policy is that regulatory taxonomy and tax taxonomy are not the same thing.
Securities law asks, “Is it a security?” Commodity law asks, “Is it a commodity (especially for derivatives)?” Consumer protection asks, “Is it a commercial product?”
The IRS asks different questions: “Is it property? What’s the basis? What’s the gain? Who has to report it?”

In recent years, the IRS and Treasury have moved toward more standardized third-party reporting for digital asset transactions, including a dedicated information
reporting form (Form 1099-DA) and related broker reporting rules. The big-picture direction is familiar to anyone who’s ever received a 1099 for stocks:
more standardized reporting, more matching, and fewer “oops I forgot” moments at tax time.

Taxonomy still matters here, because operational reality depends on what the token does. A payment stablecoin used in commerce can create different reporting
patterns than a long-term-held commodity token or a tokenized security. And if a business touches multiple categoriessay, a platform that lists consumer-use tokens,
supports stablecoin settlement, and offers derivatives on commodity tokenstax compliance can become a multi-lane highway with very different speed limits.

How businesses can use taxonomy as a checklist (without losing their minds)

You don’t have to be a regulator to benefit from taxonomy. In fact, businesses that do this well tend to move faster because they spend less time in decision-paralysis.
Here’s a practical way to use the Working Group’s taxonomy mindset:

Step 1: Describe the token’s primary function in one sentence

• “This token represents equity ownership recorded on a blockchain.” (Security token vibes.)
• “This token is used as a decentralized network asset and is traded widely.” (Commodity token vibes, depending on facts.)
• “This token redeems for in-app features and loyalty rewards.” (Commercial/consumer-use vibes.)
• “This token is designed for 1:1 redemption and payments.” (Stablecoin lane.)

Step 2: List the rights the holder gets (and what they don’t get)

Taxonomy becomes clearer when you focus on rights: revenue claims, governance, redemption, access, or none of the above.
Rights drive legal analysis more reliably than branding. “Utility token” is not a magic spell.

Step 3: Map the token to the likely compliance universe

This is where legal counsel matters, but taxonomy helps even before lawyers arrive:
security-like tokens tend to pull in securities frameworks; commodity-like tokens may matter most for derivatives;
consumer-use tokens pull in consumer protection and commercial law; stablecoins pull in payment and reserve-focused frameworks.

Step 4: Build disclosures that match the use case

A good taxonomy program reduces the temptation to “over-disclose everything.” Disclose what a reasonable user needs to know to understand the product:
what it is, how it works, key risks, and key limits. If your token can be frozen, say so. If redemption is restricted, say so. If it’s not redeemable at all, say so
(and don’t bury it on page 47 under “miscellaneous vibes”).

Step 5: Revisit classification when the product changes

Tokens evolve. A network may decentralize, a token may gain new utility, or a project may introduce reward features that change economic incentives.
Taxonomy should be treated like risk management: updated when facts change, not “set once and forget forever.”

Common taxonomy traps the report is trying to avoid

Trap 1: Hybrid tokens that mix commerce and investment narratives

A token can provide access to a service and still be marketed as an investment. When you combine “use it in the app!” with “we’re going to the moon!”
you’ve created a classification problemand often a compliance problem. The Working Group’s function-first approach is designed to cut through mixed messaging.

Trap 2: Assuming tokenization changes what the asset is

Tokenization is a technology method, not a legal transformation spell. Putting a traditional asset on a ledger may improve transfer and settlement mechanics,
but the underlying economic reality often remains the same. The report’s discussion of tokenized securities leans into this: “tokenized” does not mean “unregulated.”

Trap 3: Treating “decentralized” as a binary label

“Decentralization” can be technical, economic, or governance-basedand projects often fall along a spectrum. The report suggests that if agencies create
frameworks or safe harbors, criteria should be clear and objective so participants can plan with certainty.

So what’s the point of emphasizing taxonomy?

The Working Group’s emphasis on taxonomy is ultimately about building a stable foundation for market structure. Classification is how you decide which
rules attach to which products, how trading venues can operate, how customer assets should be safeguarded, and what enforcement should focus on.
Without taxonomy, you end up with regulation-by-guessing, where the “rules” are often discovered the hard way.

In a healthy market, taxonomy isn’t a weaponit’s a shared dictionary. The goal isn’t to force every token into a single perfect box. It’s to create enough
clarity that innovators can build, consumers can understand what they’re buying, and regulators can supervise without turning every policy question into a brawl.

Experiences related to “Digital Asset Markets Report Working Group Emphasizes Taxonomy” (added)

When organizations actually try to implement taxonomy in the real world, the experience is equal parts enlightening and humbling. Teams quickly learn that
classification is not a one-time label; it’s an ongoing discipline that touches product design, marketing, compliance, engineering, customer support, and even finance.
And the most consistent lesson is this: tokens rarely behave like the neat categories we want them to fituntil you force the conversation back to function.

One common experience shows up in early product meetings. A team might start with a simple goal“We’ll issue a token for our platform”and then, within
20 minutes, someone suggests staking rewards, another person proposes governance voting, and a third person wants the token to be used for in-app purchases.
Suddenly the token has three jobs, two incentive layers, and a marketing plan that sounds suspiciously like an investment pitch. Taxonomy becomes the moment
someone asks, “What is this token primarily for?” That question often prevents a product from drifting into a hybrid structure that’s difficult to explain to users
and even harder to defend under scrutiny.

Another real-world pattern: compliance teams often discover that the same token can look different depending on where you stand. Engineers describe tokens
by what the smart contract can do. Business teams describe tokens by what customers will feel. Legal and compliance teams describe tokens by rights,
obligations, and how the token is distributed and marketed. Taxonomy becomes a translation layer between these worlds. The “security token vs. commodity token vs.
consumer-use token” framing helps teams align on language and identify gapslike missing disclosures, unclear redemption terms, or incentive designs that make the token
feel like a promised return rather than a functional access tool.

Exchanges and marketplaces report a different kind of experience: taxonomy turns into listing and surveillance logic. If an asset is treated as security-like,
platforms may need a more robust approach to disclosures, conflicts management, and custody standards. If an asset is treated as commodity-like, market integrity
controls and derivatives-related risks can come forward. If it’s consumer-use, teams may focus more on fair marketing and the risk of confusing users about redemption
value. Even customer support scripts change. A consumer-use token dispute often sounds like a commerce issue (“Why can’t I redeem my points?”), while a security-style
issue sounds like an investor complaint (“I didn’t understand the rights or risks.”).

Stablecoins add a special “operational reality check” to taxonomy efforts. Teams working with payment stablecoins frequently learn that users judge them like money:
they expect predictable redemption, fast settlement, and clear rules when something goes wrong. That creates a different standard of trust than a volatile token.
Taxonomy, in practice, becomes a decision to treat stablecoin operations as payment infrastructurerisk controls, reserves governance, and compliance monitoring
not just another asset listing.

Finally, tax and accounting teams often bring the most sobering experience: classification affects data requirements. Once broker reporting and transaction
tracking expectations rise, organizations discover they need better recordscost basis inputs, transaction histories, wallet mappings, and consistent asset identifiers.
Taxonomy helps here by standardizing internal labels and workflows. The more consistent the internal classification, the easier it is to build systems that capture
the right information at the right time. In practice, taxonomy isn’t just policyit’s operational hygiene. It’s the difference between a company that can explain what
it built and one that has to shrug and say, “It’s complicated,” while everyone in the room quietly updates their risk assessment.