SEC Staff Expand Crypto FAQ on When a Network Has a ‘Central Party’ and What Counts as Decentralized Governance

Staff of the US Securities and Exchange Commission have expanded their crypto asset FAQ with guidance on when participants in a blockchain network count as a single central party, Crypto Insiders reported. The answers matter because the degree of control over a network shapes how its token may be treated under securities law.

According to the guidance, loose participants in a broad governance body, such as token holders voting on proposals, generally do not count as one central party. That changes if they are affiliated, make agreements or jointly hold actual control. Governance must be broad, transparent and rule-based: proposals, voting procedures and results must be public, and no single party or coordinated group may gain decision power through side agreements or delegated votes.

The SEC staff also look at access, validators, software changes and the ability to reverse transactions. A single party can be central if it can admit or exclude users, decide who validates transactions, change voting rules on its own or reverse transactions. A network is considered to function without a central authority when its key processes run automatically through code, with any human judgment exercised only through the broad governance body. A foundation can still be a central party if it controls the main institutions or applications.

The answers build on earlier staff guidance on token buybacks. The SEC stresses that they reflect staff views only, carry no force of law and were not formally approved by the Commission.

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Sources:

• SEC: Crypto asset FAQs, Division of Corporation Finance

• Crypto Insiders: SEC geeft cryptoprojecten meer duidelijkheid over decentralisatie