What Is the “Genesis to Functional” Theory in Crypto Regulation?

The "genesis to functional" theory describes the potential evolution of a digital asset's regulatory status. At its genesis (initial offering), a token may be considered a security because investors are relying on the efforts of the promoters to build the network.

As the network matures, becomes decentralized, and the token gains widespread consumptive use, it is argued that the token "graduates" to a non-security status (e.g. a commodity or a true utility token). This theory is based on the idea that the Howey Test must be applied dynamically over the life of the asset.