Staff at the U.S. Securities and Exchange Commission have said that token holders voting through a broad, open governance system generally will not be treated as a single controlling “central party” under the agency’s crypto classification framework. The Division of Corporation Finance added three answers to its SEC crypto FAQ on Monday. That matters because several existing SEC positions, including on buybacks, only apply where a network has no central party.
The new entries, numbered 1.4 to 1.6, were added to the division’s FAQ on crypto assets, which was first published on September 25 and now carries a November 2 update date. They build on the interpretive release the Commission issued on March 17, which sorts crypto assets into categories such as digital commodities. The SEC also logged the update on its Crypto@SEC page.
What the three answers say
The March release says a functional crypto system, the kind a digital commodity belongs to, has no central party that oversees participation or distributes rewards. It defines a central party as a person, entity or group with operational, economic or voting control. The open question was whether thousands of token holders voting on proposals could themselves count as that “group.”
Question 1.4 answers that it depends on the facts and circumstances, but sets a default. Governance participants generally will not be a group if they are not affiliated and have no agreement, arrangement or understanding, formal or informal, to act in concert outside the governance system itself. Staff list delegation as one form of acting in concert. The same applies when governance sits inside a foundation and voting rights come from holding the native token. Even if voters were treated as a group, staff said, they would still need operational, economic or voting control to meet the definition.
Question 1.5 explains what “overseeing participation” means. A central party does so when it has unilateral authority to grant or limit access, change voting processes for upgrades, decide who validates transactions, or modify code and reverse transactions. That oversight is generally absent when rules-based code runs the system, or when discretion is exercised only through broad-based governance whose voters are not a central party.
Question 1.6 separates two words the industry often blurs. “Functional” is about whether the native token can be used according to the system’s programmed utility. “Decentralized” is about whether anyone controls the system. Staff said a functional system with a native digital commodity has characteristics of decentralization, though the degree can vary.
The footnotes carry the conditions
The protection is narrower than the headline answer suggests. A footnote defines a broad-based governance system as transparent, rules-based and “wide and diverse,” with several types of stakeholders taking part, such as developers, validators and token holders. Proposals, votes and outcomes must be publicly documented in a timely way, and no stakeholder or coordinated group can change the rules outside set procedures. Decision-making power must not be concentrated, directly or through delegation, with one stakeholder or a group of affiliated ones.
That last test could matter for votes decided by a small number of large holders or delegates. When NEAR’s House of Stake approved an issuance cut on Monday, the result rested on 32 accounts voting for, as AltcoinReporter reported. The FAQ does not say whether any particular network passes, and staff stress that the answer turns on the facts.
Two other footnotes set limits. One says a foundation or association can itself be a central party if it controls another crypto system, for example by setting operating parameters for applications deployed on the network. Another says the answer to question 1.4 applies only to the digital commodity discussion in Section III of the release. It has no bearing on other securities law definitions that refer to groups, including the definition of an exchange.
Why “central party” now does so much work
The concept already sits underneath other answers in the same document. Question 2.4 says that once a functional system has no central party, issuer statements likely would not create a new investment contract. Question 2.5, revised on September 28 to add the words “and has no central party,” says that an issuer announcing a buyback of a non-security token would not be promising essential managerial efforts if the system is functional and has no central party. Monday’s additions give projects a clearer way to argue they meet that condition while still running votes through a foundation or similar legal wrapper.
Miles Jennings of a16z crypto welcomed the update, saying it clarifies how networks can keep decentralized governance while using legal entities such as DUNAs, crypto.news reported. The FAQ does not mention DUNAs.
Staff guidance, not law
The division is explicit about the limits. The answers are staff views that the Commission has neither approved nor disapproved, and they have no legal force. That is the gap a market structure law was meant to close. With the CLARITY Act stalled in the Senate, regulators have been filling parts of that gap with guidance, as AltcoinReporter noted in its look at how the CFTC is writing crypto market rules.
The next thing to watch is the SEC’s Regulation Crypto Assets proposal from August, which the FAQ cites and which could turn parts of this thinking into rules.
FAQ
What did the SEC add to its crypto FAQ on November 2?
Questions 1.4 to 1.6, covering when token governance participants count as a central party, what overseeing participation means, and how “functional” differs from “decentralized.”
Does this mean DAO governance tokens are not securities?
No. The answers address one part of the classification framework, carry no legal force, and each case depends on its facts.
Can a foundation still be a central party?
Yes. A footnote says it could be one if it controls another crypto system, for example by setting parameters for applications on the network.
Disclaimer: This article is for informational purposes only and does not constitute financial advice.
