The U.S. Securities and Exchange Commission (SEC) has recently enhanced its FAQ section regarding crypto assets, introducing new insights on shared governance, network access control, and the concept of decentralization in token classification.
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On November 2, the SEC’s Division of Corporation Finance released three new entries—questions 1.4 through 1.6—into its FAQ for cryptocurrency dialogue. These updates build on an earlier interpretation of federal securities laws articulated in March, clarifying details regarding governance participants and the authority over network participation.
Industry analyst Miles Jennings expressed support for the updates, noting they illuminate the balance between decentralized governance and the use of formal organizations like DUNA. Eleanor Terrett, a journalist, highlighted these updates as a response to questions surrounding decentralization addressed within the CLARITY Act legislation.
Clarification on Shared Governance
Question 1.4 addresses concerns about whether governance participants in a system can be classified collectively as a central entity. According to SEC staff, individuals who engage in governance activities independently, without any formal or informal agreements to collaborate, typically do not constitute a centralized group. This assessment also considers various forms of arrangements and delegations.
This principle extends to situations where governance occurs through an association or foundation, and participation is contingent upon holding the network’s native tokens. Even if governance participants could be classified as a group, they must collectively possess operational, economic, and voting control for the central party definition to apply.
Jennings noted that these developments support the use of legal entities like DUNA while preserving decentralization. It is important to mention that the FAQ does not endorse any specific organizations.
The SEC’s staff further clarifies that governance eligibility is contingent upon transparency and established rules, with independent stakeholders contributing to decision-making processes. Public accessibility to proposals, discussions, and votes is mandatory, and no single group should dominate managerial decisions.
Centralized Monitoring and Control
The implications of a central party overseeing system participation are addressed in question 1.5, which discusses various privileges at the protocol, validator, and user levels.
Examples include the authority to allow or deny access, modify voting protocols, determine transaction validators, alter underlying codes, reverse transactions, or revoke user access—each demonstrating powers that can be unilaterally exercised by a central entity. The contrast is evident in scenarios where essential operations follow predetermined code rules without discretionary powers being exercised.
In cases where discretion persists, it must be managed through the governance process, unless participants form a centralized party themselves. A footnote elaborates on how legal organizations can control other cryptographic systems, especially by configuring operational parameters for applications on their underlying network.
Distinction Between Functionality and Decentralization
Question 1.6 establishes a distinction between the functioning of a network’s tokens and the potential control exerted over the network. The SEC’s guidance emphasizes that a system is deemed operational if its native assets can be utilized effectively as designed. Decentralization refers to the autonomous function of the system, indicating that no individual or organized group can exert operational, economic, or voting control.
According to SEC staff, functional systems tied to digital products are often identified by varying degrees of decentralization, contingent upon specific conditions. The established framework differentiates between types of digital goods such as collectibles, tools, stablecoins, and securities, thereby clarifying how the tokens are classified versus their transactional nature under investment contracts.
Legal Considerations Regarding Guidance
In response to Terrett’s insights, analyst Avi Lev pointed out that the SEC’s FAQs do not have legal standing and raised inquiries about whether these updates might influence legislators’ actions in relation to the CLARITY Act. Lev asserted that future revisions to the guidance by the SEC could be a potential scenario.
The FAQs reflect the perspectives of SEC staff and do not introduce new obligations nor are they subject to formal adoption or disapproval. In a March announcement, the SEC noted that their interpretations complement ongoing Congressional efforts to frame statutory market structures. Speaker Paul Atkins characterized this guidance as a significant link in legislative processes moving forward with the associated bill.
Furthermore, the guidance specifically limits question 1.4 to the classification of digital assets as outlined in Section III of its interpretation and does not extend to other securities law applications related to group definitions, including those under the Exchange Act.
