SEC staff clarify independent governance voters generally do not form a central party
Updated SEC crypto FAQs indicate that unaffiliated token holders participating in decentralized governance generally do not constitute a controlling group or central party, though the staff guidance carries no legal force.
Staff in the Securities and Exchange Commission's Division of Corporation Finance updated their crypto FAQ on Nov. 2 to clarify how decentralized governance fits into the regulator's digital commodity framework. According to Unchained, the staff added three questions stating that token holders voting through a crypto network's governance system generally do not form a controlling "group" if they are unaffiliated and hold no formal or informal agreement to act in concert outside the system.[1][2]
The guidance builds on the SEC's March 17 Interpretive Release, which defines a central party as an entity or group with operational, economic, or voting control over a crypto system. Under Question 1.4, a broad-based governance system must remain transparent, rules-based, and wide and diverse without concentrated power. However, staff noted that a foundation housing the governance framework could still be considered a central party if it exerts control over another system, such as dictating operating parameters for deployed decentralized applications.[1]
Question 1.5 outlines examples of when a central party oversees participation, highlighting unilateral authority to grant or limit access, alter code, reverse transactions, or revoke access, according to posts by Cointelegraph and Laura Shin. Question 1.6 also notes that network functionality and decentralization are distinct concepts. The SEC FAQ explicitly notes that the staff views carry no legal force or effect, leaving determinations of whether a controlling group exists to individual facts and circumstances.[1][2][3]
Key facts
- SEC Corporation Finance staff added three answers to their crypto FAQ on Nov. 2 addressing decentralized governance participation.
- Under Question 1.4, governance participants generally do not form a controlling group if they are unaffiliated and have no agreement or understanding to act in concert outside the governance system.
- A governance foundation could still be deemed a central party if it controls another crypto system by setting operating parameters for applications.
- Staff cited unilateral authority to alter code, reverse transactions, or revoke access as examples of a central party overseeing participation in a network.
- The FAQ answers carry no legal force or effect and have not been formally approved or disapproved by the Commission.
Sources · 3 sources
- UN
UnchainedArticle ·
Unaffiliated Governance Voters Generally Aren’t a Controlling ‘Group,’ SEC Staff Say Token holders voting through a crypto network’s governance system generally are not a controlling “group” under the SEC’s digital commodity framework, staff of the Division of Corporation Finance said in three answers they added to their crypto FAQ on Nov. 2 . The answers turn on one term. The SEC’s March 17 Interpretive Release says digital commodities are not securities, and it says the functional crypto system behind one has no central party overseeing participation or handing out rewards. It defines that party as “a person, entity, or group of persons or entities having operational, economic, or voting control of a crypto system,” without saying what makes a group. That definition also governs the FAQ’s buyback answer. Staff cleared some token buybacks on Sept. 25, then revised that answer on Sept. 28 so its all-clear covers only a functional system that “has no central party.” Get Unchained’s crypto news in your inbox with the free Unchained Daily newsletter . What Staff Added Under Question 1.4 , governance participants generally are not a group if they “are not affiliated and do not have an agreement, arrangement, or understanding (whether formal or informal) to act in concert (including through delegation)” outside the governance system. That holds when the governance system sits within a foundation and votes come from holding the native token. Footnotes add conditions. A broad-based governance system must be transparent, rules-based and “wide and diverse,” with no concentration of power, including through delegation. Staff wrote that the foundation itself “could be a central party” if it controls another crypto system, such as by setting the operating parameters of applications deployed on the network. And the view covers only Section III of the release, not the Exchange Act’s definition of “exchange.” Question 1.5 says a central party oversees participation when, for example, it has “unilateral authority to” grant or limit access, change voting processes, pick who joins consensus, or alter code, though generally not when discretion runs solely through such a governance system whose participants are not themselves a central party. Question 1.6 treats functionality and decentralization as distinct concepts, though a functional system with a native digital commodity has some characteristics of decentralization. The Hyperliquid Policy Center flagged the undefined “group” in an Oct. 19 comment letter on the SEC’s proposed Regulation Crypto Assets , warning that, read without the proposal’s context, the release’s central-party definition “could be misconstrued to capture any crypto system with a governance token.” The FAQ does not cite the letter. Our Read: Emergency Councils Unilateral authority to modify a system’s code, “reverse transactions, or revoke access” fits what emergency bodies like Arbitrum’s Security Council can do; that council moved funds out of an address without its key on Oct. 30. In Unchained’s reading, the FAQ leaves open whether a council chosen through token-holder governance acts unilaterally or through that system, and names no project. What the FAQ Does Not Do The answers are staff views; the Commission “has neither approved nor disapproved their content,” and the FAQ states that they have “no legal force or effect.” Whether a group exists stays a facts-and-circumstances call, and the FAQ declares no token a commodity or a non-security. Related Listen: DAOs Are Supposed to Be Governed by Votes, Right? Proph3t Says It Doesn’t Work The post Unaffiliated Governance Voters Generally Aren’t a Controlling ‘Group,’ SEC Staff Say appeared first on Unchained .
Open source - CO
Cointelegraph@CointelegraphPost on X ·
🇺🇸 LATEST: SEC staff clarify that independent token holders participating in decentralized governance generally do not constitute a “central party,” according to updated crypto FAQs. The guidance provides regulatory clarity for DeFi governance but carries no legal force. https://t.co/2gSjJeMupY
Open source - LS
Laura Shin@laurashinPost on X ·
Unilateral authority to "reverse transactions, or revoke access" is one example SEC Corporation Finance staff give of a central party that "oversees participation" in a crypto system. The staff answers have "no legal force or effect," the FAQ says. https://t.co/INGGLn6XRz
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