- SEC clarifies when crypto governance participants can be considered a central party.
- Networks can be functional and decentralized if no single party controls their operations.
- Crypto marketing and network maintenance do not automatically create investment contracts.
The U.S. SEC has released new guidance explaining how decentralization, governance, and functionality affect whether a crypto is considered a security under U.S. law.
On November 2, the SEC’s Division of Corporation Finance updated its FAQs to clarify how digital commodities, staking receipt tokens, and investment contracts are classified.
The update explains when people involved in managing a crypto network could be considered a central party and how much control they must have before a network is no longer considered decentralized.
The guidance comes as U.S. lawmakers continue working on the CLARITY Act to create clearer rules for crypto assets and define the roles of the SEC and the CFTC. However, the SEC clarified that the FAQs are only the views of its staff. They are not official rules or regulations and do not create new legal obligations.
When Can Crypto Governance Participants Be Considered a Central Party?
One clarification addresses whether people who participate in a crypto network’s governance can be considered a central party as a group. According to the SEC, this depends on the situation.
Generally, governance participants will not be treated as a single group if they are independent, have no formal or informal agreement to work together, and only interact through the network’s governance system.
This also applies to governance systems managed through organizations, associations, or foundations, as long as participation is based on holding the network’s native asset.
The SEC added that even if participants are considered a group, they must also have operational, financial, or voting control over the network to qualify as a central party.
In simple terms, the SEC is saying that people who vote on or participate in a crypto network’s decisions do not automatically make it centralized. What matters is whether they act together and have significant control over how the network operates.
SEC Explains What It Means to Control a Crypto Network
The SEC’s updated FAQs also explain when a central party is considered to control who can participate in a crypto network. According to the SEC, a central party has control when it can decide who gets access to the network, who can become a validator, or who can vote.
Examples include having the power to:
- Allow or block people from using the network.
- Decide how voting on software upgrades works.
- Control which validators can participate.
- Change the network’s code.
- Reverse transactions or remove users.
However, the SEC said a central party generally would not be considered in control when the network runs automatically through computer code without human intervention.
The same applies when decisions are made through a broad community voting system, as long as the participants do not collectively act as a central party.
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SEC Separates Functionality From Decentralization
The SEC also clarified that functionality and decentralization are different. A crypto network is considered functional when its native token can be used for its intended purpose within the network.
Decentralization, on the other hand, means no individual, company, or group controls how the network operates, including its finances or voting decisions.
The SEC explained that a crypto network can be both functional and decentralized. However, the level of decentralization can differ from one project to another.
SEC Clarifies Crypto Marketing and Investment Contracts
The updated guidance also explains when statements made by crypto projects could be considered promises that create an investment contract. According to the SEC, simply promoting what a crypto network can already do does not usually count as a promise to make efforts that will generate profits for investors.
Similarly, talking about future plans or features does not automatically create an investment contract. The SEC also explained that once a crypto network becomes functional and has no central party controlling it, statements from its creators do not create a new investment contract.
This is because the creators, or anyone else, would no longer have enough control to determine whether the network succeeds or fails.
The agency added that services that maintain, secure, improve, or expand an already functional crypto network generally do not count as essential managerial efforts under the Howey Test.
The updated FAQs also cover other areas, including crypto buybacks, staking receipt tokens, and trading platforms that allow users to trade crypto assets on secondary markets.
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