A crypto project can invite thousands of token holders to vote on its future and still leave an awkward question unanswered: who has the power to make the system do what they want?
New answers posted by the Securities and Exchange Commission’s Division of Corporation Finance offer a framework for thinking about that question. The staff says participants in a crypto system’s broad-based governance generally do not count as a single “central party” simply because they take part in governance. But affiliation, coordination and actual control can change the analysis.
The distinction matters because the SEC’s March interpretive release describes digital commodities in relation to functional crypto systems without a central party overseeing participation or distributing rewards. In its November 2 update to the crypto FAQs, the Division explains what it means for a party to oversee participation and how a governance group might fit into that picture.
The staff’s starting point is that decentralized governance does not automatically turn a diverse group of participants into one controlling entity. Participants generally would not be treated as a “group of persons or entities” if they are unaffiliated and have no formal or informal agreement or understanding to act together outside their participation in the governance system itself.
That answer also applies when governance operates through an organization, association or foundation and voting is tied to ownership of the system’s native crypto asset. The organization itself could still be a central party if it exercises operational, economic or voting control over a crypto system.
The staff then gives a practical list of powers that may indicate a central party oversees participation. A party may have that authority if it can unilaterally grant or limit access, change voting processes, control who validates transactions, alter the system’s code, reverse transactions or revoke access.
On the other hand, the staff says a central party generally does not oversee participation when the system’s material operations run automatically under rules-based code, or when discretionary decisions are made solely through qualifying broad-based governance. The FAQ describes such governance as transparent, rules-based and wide and diverse, with decision-making authority not concentrated in one stakeholder or a coordinated group.
That creates a useful reporting question: does a project’s governance distribute authority in practice, or does it merely distribute the appearance of participation? A token vote may be public, but the SEC’s staff is pointing reporters toward the surrounding machinery: who can change the rules, steer the vote, validate transactions or shut someone out?
The update also separates “functional” from “decentralized.” A system is functional, the staff says, when its native asset can be used according to the system’s programmatic utility. Decentralization concerns whether any person or group has operational, economic or voting control. The two concepts are distinct, and the degree of decentralization can vary with the facts.
There is a substantial caveat. These FAQs are the views of Division of Corporation Finance staff. The SEC says they are not a rule or Commission statement, have not been approved or disapproved by the Commission, and have no legal force or effect. They do not decide whether any particular token or project is a security.
Still, agencies routinely tell their own staff how to apply broad legal concepts. That guidance can show where officials are drawing lines, even when it does not itself change the law. Here, the SEC staff’s line runs through coordination and control: participation alone may not make a central party, but the power to direct the system may.
