SEC Staff Say Token Voters Usually Aren't a 'Central Party'

People who vote with governance tokens generally do not count as a "central party" under SEC guidance, Corporation Finance staff said in three answers added Nov. 2 to their crypto FAQ.

That label matters. The SEC's March 17 interpretive release says a digital commodity is not itself a security and runs on a "functional" crypto system with no central party overseeing it. Find a central party, and that argument gets harder.

How the test works

The release defines a central party as a person or group with operational, economic or voting control of a system. The new answers say token voters generally aren't such a group if they are unaffiliated and have no deal, formal or informal, to act together. Delegating votes to one another counts as acting together. The same holds when voting runs through a foundation and is based on holding the native token.

Even a group needs real control to qualify, the staff wrote.

The answers also list what "overseeing participation" looks like. A central party has unilateral power to grant or limit access, change voting rules for upgrades or token distributions, pick who validates transactions, or rewrite code, reverse transactions and revoke access. Code that runs automatically, or choices made only through broad token voting, generally don't count.

A third answer separates "functional" from "decentralized." Functional means the token works on the system as designed. Decentralized means no one has control. A functional system has some traits of decentralization, but the degree can vary, the staff wrote.

There is a limit. The FAQ says it reflects staff views, is not an SEC rule, and has "no legal force or effect." CoinMarketCap also reported the update.

In our opinion: The SEC staff just wrote the bouncer's checklist, and an admin key with the power to reverse transactions is the fastest way to get turned away. The stake is every governance token that leans on the digital commodity label. Watch whether the Commission itself puts this test into a rule, because staff answers can be rewritten as easily as they were added.