SEC crypto FAQ clarifies governance in 3 new entries

The U.S. Securities and Exchange Commission has updated its crypto asset FAQ with three entries explaining how shared governance, control over network access, and decentralization fit into its token classification framework.

The SEC’s Division of Corporation Finance added questions 1.4 through 1.6 to its crypto FAQ on Nov. 2. The answers expand on the agency’s March interpretation of federal securities laws, addressing when governance participants constitute a central party and what powers amount to control over participation.

Miles Jennings welcomed the update in a post, saying it clarifies how systems can maintain decentralized governance while using legal entities such as DUNAs. Journalist Eleanor Terrett described the additions as an effort to answer some decentralization questions the CLARITY Act would address in law.

SEC says shared governance does not automatically mean control

Question 1.4 examines whether people participating in a system’s governance should be treated as a group under the interpretation’s definition of a central party.

According to the staff, participants generally will not be considered such a group if they are unaffiliated and have no separate agreement or understanding to act together outside their participation in governance. Formal arrangements, informal coordination and delegation all fall within that assessment.

The same approach applies when governance sits within an organization, association or foundation, and participation depends on holding the system’s native token. Even where participants qualify as a group, the staff says they must possess operational, economic or voting control to meet the central-party definition.

Jennings characterized this as support for using legal entities such as DUNAs without necessarily sacrificing decentralization. The FAQ itself does not name DUNAs or approve any particular organization.

In a footnote, the division describes qualifying governance as transparent and rules-based, with diverse stakeholders independently contributing to decisions. Proposals, deliberations, voting, and implementation must be publicly accessible, while decision-making authority cannot be concentrated through affiliated participants or delegation.

Unilateral access powers can establish central oversight

Question 1.5 explains what it means for a central party to oversee participation, covering authority at the protocol, validator, and user levels.

The staff identifies several examples: granting or limiting access, changing voting procedures, deciding who validates transactions, modifying code, reversing transactions or revoking access. Each example concerns powers a central party can exercise unilaterally.

By contrast, the answer describes circumstances where material operations run automatically through rules-based code without anyone exercising discretion.

Where discretion remains, it can be exercised solely through the system’s governance process, provided the participants themselves do not constitute a central party.

A separate footnote qualifies the treatment of legal organizations. An association or foundation could still control another crypto system, including by setting operating parameters for applications deployed on the underlying network.

Functionality and decentralization answer different questions

In question 1.6, the division distinguishes whether a network’s token works as intended from whether anyone controls the network.

A system is functional when its native asset can be used in accordance with its programmed utility, the answer explains. Decentralization concerns autonomous operation without a person, entity or coordinated group holding operational, economic or voting control.

The staff says functional systems associated with digital commodities have characteristics of decentralization, although the degree depends on their circumstances.

The underlying framework, which crypto.news previously reported in March, separates digital commodities, collectibles, tools, stablecoins and digital securities. It distinguishes a token’s classification from whether transactions involving it form an investment contract.

CLARITY discussion turns to guidance’s legal limits

Reacting to Terrett’s post, Avi Lev emphasized that an FAQ is not law and questioned whether the update reduces or adds pressure on lawmakers to pass CLARITY. He argued that a future SEC could rewrite the guidance.

The FAQ expressly represents staff views, carries no legal force, and creates no new obligations. The Commission has neither approved nor disapproved its contents.

In its March announcement, the SEC described the underlying interpretation as complementing congressional work on a statutory market structure framework. Chair Paul Atkins called it an “important bridge” while Congress advanced legislation.

The division further limits question 1.4 to digital-commodity classification under Section III of that interpretation. Its answer does not apply to other securities-law provisions addressing groups, including the Exchange Act definition of an exchange.