The U.S. Securities and Exchange Commission is considering a softer path for crypto projects: a token would not need to wait for full decentralization to move beyond securities-law treatment. Under a new proposal, it could qualify once the underlying protocol is either decentralized or simply functional.
"The key is to create rules that good-faith actors can follow," SEC Commissioner Hester Peirce said.
A long-standing problem in token regulation
U.S. regulators have long said tokens tied to decentralized protocols do not fall under securities laws. The difficult part has always been how a project gets there.
Crypto protocols are products. Building products that people actually want to use usually involves centralized work at the start, including fundraising, software development, idea iteration and marketing.
That creates a basic tension. A project may need precisely the kind of managerial activity that can cause a token to be treated as a security in its early stage, even though the broader goal is community ownership and eventual independence from securities-law constraints.
Peirce made that point in 2020, saying, "It is difficult to demonstrate that a token is useful before it is widely distributed to users."
She described the issue as a dilemma: a potential network may be unable to put tokens into the hands of users, developers and participants because those tokens could be subject to securities laws. But without that distribution, and without transferability, the network may never grow into a functional or decentralized system that no longer depends on a person or group for essential managerial or entrepreneurial efforts.
The proposed safe harbor under the Regulatory Framework for Crypto Assets
Six years later, Peirce has put forward a proposed answer through the SEC-led crypto task force. The safe harbor in the Regulatory Framework for Crypto Assets would allow a token to move on once the issuer has "completed or otherwise permanently ceased" all critical managerial work related to the protocol it represents.
Before that point, tokens sold to investors would still be treated as investment contracts and therefore as securities. At the same time, the Regulatory Framework for Crypto Assets would offer temporary securities-law relief while the protocol remains under centralized management.
The proposal would give developers up to four years to do what a crypto protocol was supposed to do in the first place: operate without centralized control.
"Functional" becomes a key threshold
One of the most important shifts in the proposal is that full decentralization is not required for the token to stop being treated as an investment contract.
The text says a protocol can leave the regulatory framework once it has "matured into a decentralized or functional network" that no longer relies on a person or group to carry out critical managerial or entrepreneurial work.
The proposal does not fully define what counts as "functional." Still, that distinction marks a meaningful concession. It means developers could continue working on a project even after its token qualifies for securities-law relief.
The proposal states: "We believe services provided to secure, maintain, improve, or enhance such a network or application and its functionality, or to facilitate network effects, whether through sponsoring or funding development projects or similar activities, do not constitute critical managerial efforts."
In practical terms, securities-law relief would not require developers to walk away from their projects.
Community contribution, not Bitcoin-style perfection
The rule would not require every protocol to reach the level of decentralization associated with Bitcoin. Instead, it points to a broader community base.
The proposal says that once a network or application is functional, "the activities and contributions of many persons — including the issuer, other developers, validators and/or miners, liquidity providers, users, and holders of the crypto asset — impact the success or failure of the relevant crypto network or crypto application."
Read that way, "functional" looks like a pragmatic version of decentralization rather than a pure one.
The article argues that this is a generous concession to the crypto industry, and one that could also improve the industry itself.
Self-certification and the incentive it creates
The SEC's functional-network standard also appears to exclude projects that are decentralized mostly in name. The article points to a familiar setup in which a protocol is managed by a small group of developers controlling a multisig, able either to carry out DAO votes or ignore them outright.
On that point, the SEC appears to be taking the industry's own claims about community governance seriously, perhaps more seriously than the industry often does itself.
The article also notes that research has suggested the number of protocols genuinely governed by tokenholder communities is small.
Even so, the SEC has proposed letting crypto projects judge for themselves when they have reached functional decentralization. Their exit from the securities-law safe harbor test would rest on whether they can self-certify that their critical managerial work has successfully produced a decentralized or functional network.
That approach means the SEC would not need to act as referee and draw exact lines around what counts as decentralization or functionality. The article welcomes that part of the design.
But it also says the framework creates an unusual incentive: developers may choose to promise less, because the less they promise, the easier it becomes to say they have delivered.
That may make teams less transparent about what they are actually building. At the same time, for an industry with a long record of overpromising and underdelivering, a lower-key approach may not be entirely negative.
Can regulation push crypto toward its own stated model?
In the author's view, the most interesting part of the Regulatory Framework for Crypto Assets may be that it finally gives crypto a reason to become what it has long said it is: genuinely decentralized, or at least decentralized in functional terms.
For years, the industry has tried to persuade regulators that decentralization is the main issue. Now the dynamic may be reversing. Regulators may be the ones trying to persuade the crypto industry.