Decentralized or Just in Name? The SEC Clarifies Who Controls Crypto Networks

The U.S. Securities and Exchange Commission (SEC) has expanded its guidance on digital assets, addressing a key question for the crypto industry: when does a blockchain network qualify as decentralized, and when does decision-making power remain concentrated in the hands of a central authority?

On November 2, the SEC’s Division of Corporation Finance added three questions to its digital asset FAQs, numbered 1.4 through 1.6. The new guidance examines how shared governance structures, network access controls and operational authority affect the classification of digital assets under federal securities laws.

The additions build on the SEC’s broader interpretation issued in March, offering further detail on how the agency assesses decentralization and the role of participants who may influence a blockchain network’s operations.

The update has drawn attention from industry figures. Miles Jennings welcomed the clarification, arguing that it helps explain how blockchain networks can maintain decentralized governance while using legal entities such as Decentralized Unincorporated Nonprofit Associations (DUNAs). Journalist Eleanor Terrett also described the additions as an effort to address some of the unresolved questions surrounding decentralization, an issue expected to feature in discussions around the CLARITY Act.

SEC explains when collective governance becomes centralized control

The first new entry, Question 1.4, examines governance structures in which participants organize through an association, organization or foundation, with membership linked to ownership of a network’s native digital asset.

The SEC clarifies that bringing participants together under a single organizational structure does not automatically make them a centralized authority. The determining factor is whether those participants exercise operational, economic or voting control over the network.

The guidance describes qualifying decentralized governance as a transparent process based on clearly established rules, with a diverse range of stakeholders participating independently in decision-making.

It also emphasizes public access to governance proposals, discussions, voting procedures and implementation outcomes. Decision-making authority should not become concentrated among affiliated participants or be delegated to a coordinated group that effectively controls the process.

This interpretation is relevant to blockchain projects that use legal structures to organize governance while seeking to preserve decentralized decision-making. However, the SEC's FAQ does not specifically endorse DUNAs or grant any particular legal structure special regulatory recognition.

Network access and protocol permissions come under scrutiny

Question 1.5 addresses another important aspect of decentralization: whether a particular entity has the authority to control who can participate in a network and how that network operates.

The SEC identifies several examples of powers that could indicate centralized control. These include granting or restricting network access, changing voting mechanisms, deciding which participants can validate transactions, modifying protocol code, reversing transactions and revoking access permissions.

The common feature across these examples is that a single entity can exercise such authority independently.

By contrast, actions carried out automatically by software according to predefined rules do not, on their own, establish the existence of a central controlling authority, provided they do not require discretionary human intervention.

Where discretionary decision-making remains possible, the guidance states that such authority should be exercised exclusively through the network's governance mechanisms, provided the participants involved do not themselves constitute a centralized authority.

An additional note addresses the role of legal entities, explaining that an association or foundation may exercise control over another digital system, including by setting operational standards for applications deployed on an underlying network.

This distinction is important because decentralization is not determined simply by whether a project uses blockchain technology or distributes its infrastructure across multiple participants. The actual allocation of decision-making and operational powers also matters.

SEC distinguishes token functionality from network decentralization

The third addition, Question 1.6, separates two concepts that are often discussed together: whether a digital asset performs its intended function and whether the network supporting it operates without centralized control.

According to the guidance, a system is functional when its native digital asset can be used for the utility for which it was designed.

Decentralization, meanwhile, concerns the network's ability to operate independently without any individual, entity or coordinated group holding operational, economic or voting control.

The SEC staff indicates that functional systems associated with digital commodities possess characteristics of decentralization, while acknowledging that the degree of decentralization can vary depending on each network's specific structure and governance arrangements.

The distinction matters because an asset's functionality does not, by itself, establish that the network behind it is decentralized. The two assessments involve different considerations.

New FAQs build on SEC's broader digital asset classification framework

The latest additions expand on the framework the SEC published in March, which outlined how different categories of digital assets may be assessed under federal securities laws.

The framework distinguishes among several asset categories, including digital commodities, digital collectibles, digital tools, stablecoins and digital securities.

Importantly, the classification of a digital asset is not the only consideration in determining whether federal securities laws apply. The SEC's approach also distinguishes the nature of the asset from the circumstances surrounding its offer or sale, particularly whether a transaction meets the legal requirements of an investment contract.

The new questions add further detail to that analysis by focusing on the governance and operational structures behind digital asset networks.

Why the SEC's decentralization guidance matters

The latest update places greater emphasis on how control is exercised within blockchain networks, rather than relying solely on their technical design or organizational labels.

For crypto projects, the distinction could have implications for governance models, foundation structures and the allocation of protocol permissions. A network may involve numerous tokenholders and validators, but that alone does not establish decentralization if a single entity retains the authority to make critical operational decisions.

At the same time, the guidance recognizes that organized governance and the use of legal entities do not automatically undermine decentralization. What matters is whether those structures concentrate control or provide a transparent mechanism through which independent participants make decisions.

The additions therefore offer further clarity on the SEC staff's approach to decentralization, while leaving the assessment dependent on the specific facts and structure of each network. They also reinforce the distinction between classifying a digital asset and determining whether a particular transaction involving it falls within securities law.