SEC Three new entries regarding governance and token attributes have been added FAQ

The U.S. Securities and Exchange Commission (SEC) updated its classification for crypto assets FAQ, adding three new entries that explain how shared governance, control over network access, and decentralization are incorporated into its token classification framework.

• Three new responses involve governance participation, control over network access, and the meaning of "functionality."
• Governing through a certain organization or foundation does not automatically constitute the participants as a controlling group.
• The staff provided guidance distinguishing between “usable encryption systems” and “systems that operate autonomously without centralized control.”
• This FAQ does not have legal effect, highlighting the difference between guidelines and legislation.

On November 2nd, the finance department of SEC added questions 1.4 to 1.6 to its encryption FAQ. The relevant responses expanded on the institution's interpretation of the federal securities law from March this year, explaining under what circumstances governance participants would constitute a central party, and which powers would be considered control over participation.

Miles Jennings welcomed this update in a post, stating that it clarified how the system maintains decentralized governance while utilizing legal entities such as DUNA. Journalist Eleanor Terrett noted that these new additions are an attempt to answer some questions regarding decentralization, whereas the CLARITY legislation was originally intended to address these issues through legislative means.

As stated by SEC, shared governance does not necessarily imply control.

Question 1.4 discusses whether those who participate in the governance of a system should be considered as a group, according to the definition of 'central party' provided in that explanation.

According to the staff at SEC, if the participants are not associated with each other and do not have any separate agreements or consensus to take action together, other than participating in governance, then they are generally not considered such a group. Formal arrangements, informal coordination, and acts of delegation are all within the scope of this assessment.

The same approach also applies to governance that is placed within an organization, association, or foundation, where participation eligibility depends on holding the native tokens of that system. Staff members indicate that even if participants can be identified as a group, they must still possess operational, economic, or voting control rights in order to meet the definition of a 'central party'.

Jennings interprets this as: it supports the use of legal entities such as DUNA without necessarily sacrificing decentralization. However, FAQ itself does not specifically mention DUNA, nor does it approve any particular form of organization.

In a footnote, the department described the governance in question as transparent, rule-based, and involving independent participation from multiple stakeholders. Proposals, deliberations, voting, and implementation must all be publicly accessible, and decision-making power must not be concentrated through associated participants or delegation.

Unilateral access rights may constitute centralized supervision.

Question 1.5 explains what “central party supervision and participation” means, covering the permissions at the protocol layer, verifier layer, and user layer.

The staff listed several examples: granting or restricting access, changing the voting process, deciding who will verify transactions, modifying code, canceling transactions, or revoking access rights. Each example involves powers that the central party can exercise unilaterally.

In contrast, the response also describes another scenario: important operations are automatically carried out through rule-based code, without any individual exercising discretionary power.

If discretionary power still exists, then such power can only be exercised through a system governance process, on the premise that the participants themselves do not constitute a central party.

Another separate footnote imposes limitations on the handling by legal organizations. A certain association or foundation may still control another encryption system, including setting operating parameters for applications deployed on the underlying network.

Functionality and decentralized answering address different issues.

In question 1.6, the department distinguished between two issues: whether network tokens are functioning as expected, and whether someone is in control of that network.

The response explained that when a system's native assets can be used for the purposes for which they are programmed, then the system is considered "functional." Decentralization, on the other hand, refers to whether the system can operate autonomously without any individual, entity, or coordinated group possessing control over its operations, economy, or voting rights.

Staff members stated that functional systems related to digital goods have decentralized characteristics, but the extent of this decentralization depends on their actual circumstances.

crypto.news Previously reported in March, this underlying framework distinguishes between digital goods, collectibles, tools, stablecoins, and digital securities. The framework also differentiates between the classification of tokens themselves and whether transactions involving those tokens constitute an investment contract.

The discussion surrounding the " CLARITY Act" has shifted towards the legal boundaries that guide it.

In responding to the post of Terrett, Avi Lev emphasized that FAQ is not a law, and questioned whether this update would actually reduce or increase the pressure on legislators to pass the CLARITY legislation. He believes that future SEC may rewrite these guidelines.

FAQ clearly states that its content merely represents the views of the staff and does not have legal effect, nor does it create any new obligations. The committee itself has neither approved nor rejected the content therein.

In the announcement in March, SEC stated that this underlying explanation is a complement to the work of Congress in establishing a statutory market structure framework. Chairman Paul Atkins referred to it as an “important bridge” during the legislative process in Congress.

The department further stipulated that question 1.4 only applies to the classification of digital goods under the third part of this explanation. Its response does not apply to other provisions in the Securities Law regarding 'groups', including the definition of exchanges in the Trading Law.