Unaffiliated Governance Voters Generally Aren’t a Controlling ‘Group,’ SEC Staff Say

Token holders voting through a crypto network’s governance system generally are not a controlling “group” under the SEC’s digital commodity framework, staff of the Division of Corporation Finance said in three answers they added to their crypto FAQ on Nov. 2.

The answers turn on one term. The SEC’s March 17 Interpretive Release says digital commodities are not securities, and it says the functional crypto system behind one has no central party overseeing participation or handing out rewards. It defines that party as “a person, entity, or group of persons or entities having operational, economic, or voting control of a crypto system,” without saying what makes a group.

That definition also governs the FAQ’s buyback answer. Staff cleared some token buybacks on Sept. 25, then revised that answer on Sept. 28 so its all-clear covers only a functional system that “has no central party.”

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Under Question 1.4, governance participants generally are not a group if they “are not affiliated and do not have an agreement, arrangement, or understanding (whether formal or informal) to act in concert (including through delegation)” outside the governance system. That holds when the governance system sits within a foundation and votes come from holding the native token.

Footnotes add conditions. A broad-based governance system must be transparent, rules-based and “wide and diverse,” with no concentration of power, including through delegation. Staff wrote that the foundation itself “could be a central party” if it controls another crypto system, such as by setting the operating parameters of applications deployed on the network. And the view covers only Section III of the release, not the Exchange Act’s definition of “exchange.”

Question 1.5 says a central party oversees participation when, for example, it has “unilateral authority to” grant or limit access, change voting processes, pick who joins consensus, or alter code, though generally not when discretion runs solely through such a governance system whose participants are not themselves a central party. Question 1.6 treats functionality and decentralization as distinct concepts, though a functional system with a native digital commodity has some characteristics of decentralization.

The Hyperliquid Policy Center flagged the undefined “group” in an Oct. 19 comment letter on the SEC’s proposed Regulation Crypto Assets, warning that, read without the proposal’s context, the release’s central-party definition “could be misconstrued to capture any crypto system with a governance token.” The FAQ does not cite the letter.

Unilateral authority to modify a system’s code, “reverse transactions, or revoke access” fits what emergency bodies like Arbitrum’s Security Council can do; that council moved funds out of an address without its key on Oct. 30. In Unchained’s reading, the FAQ leaves open whether a council chosen through token-holder governance acts unilaterally or through that system, and names no project.

The answers are staff views; the Commission “has neither approved nor disapproved their content,” and the FAQ states that they have “no legal force or effect.” Whether a group exists stays a facts-and-circumstances call, and the FAQ declares no token a commodity or a non-security.

Related Listen: DAOs Are Supposed to Be Governed by Votes, Right? Proph3t Says It Doesn’t Work

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