Who Is a 'Central Party'? Open Questions in the SEC's Crypto FAQs
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Late last week, the SEC’s Division of Corporate Finance issued FAQs applying the Commission’s March 17 Interpretive Release on how federal securities laws apply to crypto assets.
The FAQs are explicitly the staff’s views, and do not represent a Commission rule or statement and do not carry legal force. But they give the market an understanding of how this current SEC staff intends to operate the Commission. The FAQs address three primary areas:
On classification, a “Staking Receipt Token” that is a receipt for a digital commodity not subject to an investment contract is itself a “digital tool” under the SEC’s five-prong token taxonomy (Q1.2), because it serves the practical function of evidencing a holder’s ownership of an underlying asset. A Staking Receipt Token may instead be classified as a digital commodity if issued by a protocol-based Liquid Staking Provider because its value is then linked to the programmatic operation of a “functional crypto system” and supply and demand dynamics. Q1.3 defined “receipt” (which also applies to Redeemable Wrapped Tokens) as “an instrument certifying that a stated amount of an asset has been deposited with a depository or custodian issuing the receipt and evidencing the depositor’s ownership of” it. A receipt 1) doesn’t change any rights, obligations, or benefits of the deposited asset; 2) gives the holder no additional financial incentives or benefits; and 3) doesn’t transfer ownership or control of the underlying asset to the issuer, so the issuer cannot transfer, lend, pledge, rehypothecate, or otherwise use the deposited asset for any reason.
On investment contracts, promoting a crypto system’s current utility or indefinite aspirational features without noting profit likely isn’t a promise of “essential managerial efforts,” and once a system is functional, services to secure, maintain, improve, or enhance it, or to facilitate network effects, would not involve essential managerial efforts would not satisfy the Howey test.
On buybacks, the most scrutinized part of the FAQ, Q2.5 asks whether an issuer's announcement of a buyback program for a non-security crypto asset (whether for treasury management, supply reduction, protocol-funded burns, or rebalancing) is itself a representation or promise to undertake essential managerial efforts, which is one way a token sale can become an investment contract under Howey. Staff answer that where a crypto system is functional and has no central party, such an announcement would not be that kind of promise. Staff added the phrase “and has no central party” on Sept. 28, 2026, three days after issuance of the FAQ and after industry criticism that the original wording, which required only functionality, was too broad. Where a system is not functional, an announcement could still be such a promise if the issuer presents the buyback as creating yield or return for token holders. The FAQ doesn't say how a buyback announcement is treated on a functional system that does have a central party. Since the answer no longer covers that case, it presumably falls back to a general facts-and-circumstances Howey analysis, though that is our inference as laypeople and not something the staff say.
The FAQs use terms defined in the March Interpretive Release:
Functional: a system is functional if its native crypto asset can be used on it in accordance with its programmatic utility.
Decentralized: a system is decentralized if it operates autonomously with no person, entity, or group holding operational, economic, or voting control.
Central party: defined by the same control test as decentralization, so the Q2.5 revision effectively conditions the buyback answer on decentralization, though the FAQ doesn't say this explicitly.
The publication builds on the seminal 2017 DAO report, the 2019 staff Framework, and 2025 statements on memecoins, mining, stablecoins, and staking, which the March 2026 Release superseded. FAQ2.3 cites the proposed Regulation Crypto Assets, which would create two offering exemptions ($5 million over four years; $75 million per 12 months for project fundraising) and a conditional safe harbor for when an investment contract no longer exists. The Sept. 17 Innovation Exemption, which covers exchange and dealer status for tokenized stock trading, falls under the same "Project Crypto" initiative but is a separate action that the FAQ doesn't mention.
Our take
The FAQ received pushback, most notably on the buyback portion (Q2.5) which was revised three days after initial publication to include language around the lack of a central party in control of the system conducting buybacks. Before the amendment, the answer centered on protocol functionality alone. Supporters read this as a clear path for functional projects to conduct buybacks without the announcement being an essential managerial effort, which was viewed as a big win since buybacks triggering securities laws have been a looming concern. Critics, however, read the definition as overly broad, a concern which ushered in an onslaught of questions. For example: a widget business can sell tokens to the public and use a portion of the revenue generated from selling its goods to buy back and burn said token. Because the smart contracts through which it receives payments works and no explicit promises were made, the FAQ’s logic would put the token outside of securities laws even though it functions similar to a profits interest. Technically, the argument could be made that the FAQ is limited to non-security digital assets, so a company’s token wouldn't qualify, but the critical interpretation of the language questioned where that limit appears in the text.
The disagreement between skeptics and proponents points to a deeper problem. Distinguishing a “business” from a “protocol” seems to require looking at control, which is close to decentralization, yet the SEC did not include decentralization as a factor in its prior investment contract analysis, which instead turns on issuer representations or promises to undertake essential managerial efforts. Staff revisions made a few days after publication addressed this concern by explicitly adding "and has no central party" to its answer around buyback programs, which now reads as: “Where a crypto system is functional and has no central party, an issuer’s announcement of a non-security crypto asset buyback program would not constitute a representation or promise to undertake essential managerial efforts.”
Even with the amended language, open questions remain. The buyback answer was narrowed to functional systems with no central party, but the FAQ doesn't say how buybacks by projects with a central party are treated, and it doesn't say how much influence counts as "control." The first is specific to the newly released FAQ, while the second is a longstanding question. The SEC has defined control in other releases, such as the Innovation Exemption, which defines it as the power to direct the management or policies of a trading venue, but it has not said whether that definition informs the "central party" standard in the FAQ. - Zack Pokorny
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