Staff at the U.S. Securities and Exchange Commission’s Division of Corporation Finance has expanded its guidance on crypto assets, clarifying how broad-based governance systems and control over blockchain networks factor into the classification of digital commodities.
The updated FAQs, published November 2, explain when participants in a crypto network’s governance structure may be treated as a “central party” and identify circumstances in which a central party oversees participation in a network. The staff also distinguished between a crypto system being functional and being decentralized.
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The guidance addresses how these concepts apply under the SEC’s March 17 interpretive release on the application of federal securities laws to certain crypto assets and transactions.
The division emphasized that the FAQs represent staff views, not rules or regulations approved by the Commission. They have no legal force or effect and do not create new obligations.
SEC staff clarifies when governance participants may constitute a central party
The new guidance says participants in a functional crypto system’s broad-based governance structure generally will not be considered a “group of persons or entities” for purposes of the central-party definition if they are unaffiliated and have no formal or informal agreement or understanding to act together outside their participation in the governance system.
The staff said the assessment depends on the facts and circumstances. Even if governance participants are considered a group, they must also have operational, economic, or voting control over the crypto system to meet the interpretive release’s definition of a central party.
The same approach applies when governance operates through an organization, association, or foundation and participation is based on ownership of the network’s native crypto asset. The FAQs define broad-based governance as a transparent, rules-based process that allows a wide and diverse range of stakeholders, including developers, validators, node operators, miners and token holders, to contribute to decisions.
For such a system to qualify, governance proposals, deliberations, voting processes, outcomes and implementation must be publicly documented and accessible. Decision-making authority also must not be concentrated in a single stakeholder or a coordinated group, including through delegation.
The staff cautioned that this interpretation is limited to the discussion of digital commodities in the March interpretive release. It does not apply to other statutory definitions involving groups of persons or entities, including the definition of an exchange under the Securities Exchange Act.
SEC also flags tokenization in fiscal 2027 examination priorities
The updated crypto guidance follows the SEC’s decision to include tokenization in its fiscal year 2027 examination priorities. In an October 23 announcement, the agency said its Division of Examinations would assess risks linked to evolving financial market infrastructure, including tokenization and Treasury clearing reforms.
The priorities will guide the division’s risk-based examinations of investment advisers, broker-dealers, private funds and other market participants. The SEC did not identify specific tokenized assets or platforms for scrutiny, and the announcement does not introduce new tokenization rules.
Guidance defines when a central party oversees network participation
The updated FAQs also explain what it means for a central party to oversee participation in a crypto system.
According to the staff, a central party exercises that oversight when it has authority to control access at the protocol, validator, or user level. This can include managing or regulating how users, nodes, validators, or organizations interact with the network.
The guidance identifies several examples of unilateral control that may amount to overseeing participation:
- Granting or restricting access to the network.
- Determining or changing voting processes for software upgrades, protocol changes or distributions of native tokens.
- Controlling who can participate in transaction validation.
- Modifying protocol code, reversing transactions or revoking network access.
The staff said a central party generally would not oversee participation when all material aspects of a network’s ongoing operation run automatically under rules-based code without human discretion.
The same may apply when discretionary decisions are made solely through a broad-based governance system, provided its participants do not themselves constitute a central party.
Functionality and decentralization are separate tests
The FAQs clarify that functionality and decentralization address different characteristics of a crypto system.
A system is functional, for purposes of the interpretive release, when its native crypto asset can be used according to the system’s programmatic utility. Decentralization, by contrast, concerns whether the system operates autonomously without a person, entity or group exercising operational, economic or voting control.
The staff said a functional system can have characteristics of decentralization, but the degree of decentralization may vary depending on the facts and circumstances. A system’s functionality therefore does not, by itself, establish that it is decentralized.
This distinction matters to the interpretive release’s treatment of digital commodities, which are described as crypto assets necessary to participate in or use certain features of an associated functional crypto system.
FAQs address staking receipts and promotional statements
The updated document also includes clarifications on other aspects of the interpretive release.
The staff said a staking receipt token representing ownership of an underlying digital commodity that is not subject to an investment contract may qualify as a digital tool. It may instead be classified as a digital commodity when issued by a protocol-based liquid staking provider and intrinsically linked to the programmatic operation of a functional crypto system.
The FAQs also distinguish receipts from other financial instruments. A receipt evidences ownership of an asset held by a custodian and, under the staff’s description, does not give the issuer control over or the right to transfer, lend, pledge, or otherwise use the underlying asset.
On marketing, the staff said communications promoting a crypto system’s existing utility and capabilities generally would not, without more, amount to promises to undertake essential managerial efforts. The same may apply to indefinite aspirational statements about potential features if they do not promote the prospect of profit.
The staff further said that, once a crypto system is functional, services to secure, maintain, improve or enhance the system, or support network effects, would not constitute essential managerial efforts under the circumstances described in the interpretive release.
The FAQs also address buybacks. For a functional crypto system with no central party, an issuer’s announcement of a non-security crypto asset buyback would not constitute a promise to undertake essential managerial efforts. For a system that is not functional, such an announcement could qualify if the issuer presents the buyback as generating yield or returns for token holders.
The SEC staff first issued the FAQs on September 25 and updated them on November 2. The latest changes add questions on governance, central-party oversight, and the distinction between functionality and decentralization, while retaining the staff’s nonbinding status.
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