Author: Byron Gilliam
Compiled by Deep潮 TechFlow
Shenchao Summary: The SEC’s newly proposed crypto asset safe harbor rule allows tokens to exit the scope of securities laws once the project becomes “functionally available,” without waiting for full decentralization. This provides project teams with room to continue development and offers a clearer compliance pathway for token issuance and exit, directly impacting both industry participants and investors.
“It’s important to create rules that even good people can follow.” — Hester Peirce
U.S. regulators have consistently stated that tokens representing decentralized protocols are not subject to securities laws.
The question is how to get to decentralization.
It’s not easy. At their core, crypto protocols are products, and building products people want to use typically requires significant centralized activities: fundraising, software development, iterating on ideas, and marketing.
Moving toward community ownership—thereby shedding securities law constraints—requires precisely the kind of active management that initially led the asset to be classified as a security.
As SEC Commissioner Hester Peirce said in 2020: "It is difficult to demonstrate that a token is useful before it is widely distributed to users."
She sees it as a dilemma:
A potential network cannot distribute tokens to people if those tokens may be subject to securities laws. Yet, without distributing tokens to potential users, developers, and network participants and allowing free transferability, the potential network cannot grow into a fully functional or decentralized network that no longer relies on any individual or group to perform critical management or entrepreneurial tasks.
Six years later, Peirce proposed a solution within the SEC-led crypto task force: allowing growing crypto assets to shed securities laws like a butterfly shedding its chrysalis.
The safe harbor rule in the Cryptocurrency Asset Regulatory Guidelines states that tokens will be released when the issuer has either "completed or otherwise permanently ceased" all key management activities related to the underlying protocol.
Before that, tokens sold to investors were considered investment contracts (and thus securities). However, the Regulatory Framework for Crypto-Assets (RCA) provides a temporary exemption from securities laws while the protocol remains centrally managed.
This will give developers up to four years to do what the crypto protocol was originally meant to do: operate without centralized control.
I phrased that awkwardly because the proposal doesn’t require the protocol to be decentralized for its token to no longer be an investment contract.
It can also just be "working normally."
Specifically, the proposal explains that the protocol will exit the regulatory framework when it "matures into a decentralized or fully operational network no longer reliant on any individual or group to perform critical management or entrepreneurial functions."
It hasn't been fully clarified what exactly constitutes "normal operation."
However, this distinction comes with a significant compromise: crypto developers can continue their projects even after their tokens qualify for a securities law exemption.
The proposal states: “We believe that services provided to ensure, maintain, improve, or enhance such networks or applications and their functionalities, or to promote network effects—whether through sponsoring or funding development projects or other similar activities—do not constitute key management functions.”
In short, a securities law exemption does not require developers to abandon their projects.
This rule does not require every protocol to be as perfectly decentralized as Bitcoin, but rather demands reliance on a broader community: “After a network or application is operational, the activities and contributions of many participants—including issuers, other developers, validators and/or miners, liquidity providers, users, and cryptocurrency holders—will influence the success or failure of the associated cryptocurrency network or application.”
In this sense, "functioning properly" reads like a very pragmatic version of "decentralization."
This is a generous concession to the crypto industry—and could make the industry better.
The SEC’s “normal operations” standard appears to exclude crypto projects that are only nominally decentralized—commonly, protocols managed by a small group of developers who control multisignature wallets and can either execute DAO votes or simply ignore them.
At this point, the SEC appears to take seriously the community governance principles claimed by the crypto industry—perhaps more seriously than the industry itself typically does.
How many protocols are truly governed by their token-holding communities? Various studies show that the number is quite small.
Despite a poor track record in this area, the SEC has proposed allowing crypto projects to determine for themselves when they have achieved functional decentralization.
They exit the securities law safe harbor test based on a commitment to fulfillment: the protocol must self-certify that its key management has successfully delivered a decentralized or fully functional network.
This allows the SEC to avoid acting as a referee in precisely determining what constitutes decentralization and what counts as normal operation—a welcome development.
But it also creates a strange incentive: developers tend to make fewer promises—the less they commit to, the easier it is to claim they’ve delivered.
That's a bit strange. It could make developers even more unclear about what they're actually doing.
But it might not be a bad thing to lower the hype a bit in an industry that has long overpromised and underdelivered.
Could the SEC ultimately enable cryptocurrency to fulfill its original promise?
The most interesting aspect of the Cryptocurrency Regulatory Rules may be that they finally give crypto a reason to become what it has always claimed to be: truly decentralized—or at least functionally decentralized.
The cryptocurrency industry has spent years trying to convince regulators that decentralization is the key focus.
Now, perhaps it’s up to regulators to convince the crypto industry.
— Byron Gilliam