All views are my own and do not represent the views of my firm or my partners. These posts are for informational purposes only and do not constitute legal or financial advice.

Note: This interpretive release invites public comment. The SEC and CFTC intend to refine this guidance based on feedback. For support in drafting a submission, reach out: jwilliams@manatt.com.

The Institutionalization of DLT: a Critical Evaluation of the SEC’s Regulatory Reorientation (2025–2026)

The current Securities and Exchange Commission (SEC) has adopted a posture that is pro-innovation and pro-blockchain, a paradigm shift that marks a departure from the adversarial climate of the previous decade. This evolving narrative, supported by tactical concessions for decentralized utility, is fundamentally accurate. However, it often obscures a more narrowly focused development: the deliberate directionality of this innovation. Since early 2025, the Commission has constructed a regulatory scaffolding that welcomes blockchain technology, yet the welcome mat is laid primarily at the doorstep of the incumbent financial infrastructure. By issuing a steady stream of guidance and no-action relief (culminating in the March 2026 approval of a Nasdaq rule change to enable the trading of securities in tokenized form on a national exchange, just days ago) the SEC is not merely regulating a new asset class; it is architecting a blockchain future that functions as a high-velocity, frictionless reiteration of the legacy financial system. While narrow paths have emerged for reward-based utility in permissionless environments, the broader regulatory blueprint has favored centralized intermediaries, effectively marginalizing the radical potential of permissionless financial protocols.

The transition toward this institutionalized ledger economy was formalized through a series of landmark actions in late 2025 and early 2026. In December 2025, the Depository Trust Company (DTC) received a no-action letter authorizing a three-year tokenization pilot for securities held in its custody. Simultaneously, the Division of Trading and Markets issued definitive guidance regarding broker-dealer custody of crypto asset securities. While these actions demonstrate substantive engagement, they reveal a consistent pattern of beneficiary selection. The guidance is directed at those who already possess robust compliance programs, leaving the operational status of decentralized lending platforms, automated market makers, and decentralized network equity in a state of unresolved ambiguity.

In my previous two articles, I examined how the Commission redrew the regulatory map and the specific complications this creates for secondary market transactions. This third installment is a deep dive into the systematic dismantling of the 2019 Framework’s focus on technical decentralization in favor of a subjective, marketing-based inquiry.

The Wyoming Warning

Despite the surprise some are expressing in trying to square the general sense of euphoria the industry has had over the SEC’s new pro-innovation orientation with the now-apparent anti-decentralization undertones, Chair Atkins told us this was coming last year in Jackson Hole.

At the Wyoming Blockchain Symposium on August 19, 2025, seven months before the joint interpretation was released, Chairman Atkins said this in a fireside chat:

” Decentralization...frankly...[is] nowhere in the [‘33 or ‘34 Act] and it’s not in Howey. It’s kind of cropped up at the SEC staff level...and I’ll be going in a different direction...as far as the decentralization issue goes, I think that’s the wrong analysis with respect to the securities [laws].”

The room moved on. The statement received almost no coverage. The March 17, 2026 Interpretation is its execution.

What Progressive Decentralization Was

The term “progressive decentralization” was popularized in a 2020 a16z post by Jesse Walden. The concept was simple: build a product, achieve product-market fit, hand progressively more control to the community. The earlier 2019 SEC Staff Framework operationalized something close to this in law. An “Active Participant” driving the enterprise was the indicium of a security. A dispersed, unaffiliated community managing a functional network was the signal of a commodity. It was also an exit ramp from application of the securities laws.

But the Framework almost always raised more questions than it answered. Ultimately, it was a principles-based lens through which you were asked to view a principle-based precedent (Howey). Principles all the way down. It provided a checklist of factors, but no thresholds, no bright lines, and no formal mechanism to confirm when or whether a project had crossed the finish line.

The Ill-Fitting Decentralization Proxy

The 2026 Interpretation expressly supersedes and withdraws the 2019 Framework. The release does not, however, abolish decentralization as a legal concept.

Footnote 50: The Standard That Was Never Meant to Be Met

The Commission defines decentralization in Footnote 50 as a crypto system that “functions and operates autonomously with no person, entity, or group of persons or entities having operational, economic, or voting control.” This is a description of a theoretical ideal that almost no operating protocol meets.

Most protocols require some level of coordinated control for security upgrades, treasury management, or parameter adjustment. If a DAO has voting control, or a multi-sig has treasury control the system is not decentralized under Footnote 50. Any protocol where a coordinated group can exercise voting control over material protocol decisions (upgrades, treasury, parameter changes) does not satisfy the Footnote 50 standard. In practice, that describes most live governance systems.

Whether you view Footnote 50 as an offramp for the application securities laws (and there is nothing in the Release to suggest it is intended to be such) or you rely on the IC separation doctrine expressly set forth, network tokens/digital commodities primarily sold pursuant to an IC can only trade freely in secondary markets if the project is a rigid, unchangeable piece of software or it is actually abandoned by its creators (or constructively abandoned with its creators working in silence careful not to issue any public-facing utterances that can be construed as promises upon which purchasers may rely upon for profit). This feels like entropy, not innovation and I expect it will keep many disheartened defi projects offshore.

“Central Party” Absence as the Proxy for Decentralization

Under the release, a digital commodity derives value from programmatic operation and market dynamics, not from the promises of essential managerial efforts of a “centralized party.” Footnote 54 defines a centralized party as a person or coordinated group with the ability to materially affect the value or operation of the crypto system. Absent a centralized party (and assuming the asset has no intrinsic economic value), the asset is a commodity.

The proxy fails on two grounds. The first is addressed above: neither the Footnote 50 autonomy standard nor the Footnote 54 centralized party definition reflects how live networks operate in practice. The second failure is the more serious one. The proxy has no progression mechanism.

The 2019 Framework allowed (as CLARITY allows) networks to move through a centralized phase and exit the other side. The 2026 Interpretation has no equivalent accommodation. The Separation Doctrine’s secondary market constraints would have applied throughout the developmental periods of the very assets the Commission now names as digital commodities.

Consider ETH. The 2014 crowdsale created representations: build a programmable blockchain, deliver a functional mainnet, develop a developer ecosystem. Under this framework, secondary ETH sales during the developmental period would have been securities transactions until those representations were fulfilled. Exchange listings during that window would have been potentially unregistered brokerage activity. Market makers providing liquidity would have faced the same exposure. The window in which ETH’s network effects, liquidity, and developer adoption were established was precisely the window the Separation Doctrine would have constrained most severely. The same analysis applies to Solana, Avalanche, and most of the other named digital commodities. Ironically, these networks matured through legal ambiguity. That ambiguity was what, in part, made the maturation possible.

The Importance of CLARITY

The analysis is most acute for projects building toward the decentralized network equity model in pending market structure legislation. Both the CLARITY Act and the Senate market structure bill create a pathway for tokens to carry genuine economic rights (protocol fee distributions, governance-controlled treasury allocations) via the "decentralized governance system" (DGS) carveout, without becoming securities. The theory is that rights flowing from a DGS, not from promises by a centralized team, fall outside the securities analysis.

The 2026 Interpretation creates three problems for that path. First, under the separation doctrine, any project that publicly promised to build a qualifying DGS remains tethered to that promise as an investment contract until the specific representation is fulfilled. Progress toward the DGS is not the test. Fulfillment of the original representation is.

Second, the Footnote 50 autonomy standard is structurally in tension with the DGS model itself: a DGS grants token holders voting control over protocol decisions. Under Footnote 50, that voting mechanism means (or at least suggests) the system is not autonomous. The very governance structure the pending legislation treats as a safe harbor may be the feature that prevents separation from the investment contract regime under the 2026 Interpretation.

Third, and most fatal, even if a DGS were to achieve the level of autonomy contemplated by Footnotes 50 and 54, it would still be precluded from issuing or emitting network equity based on the release’s clear mandate:

“A digital commodity does not have intrinsic economic properties or rights, such as generating a passive yield or conveying rights to future income, profits, or assets of a business enterprise or other entity, promisor, or obligor...” (Section III.A)

There is no exception for dividend or yield-bearing tokens issued by a decentralized network. I would argue that a DGS should not be viewed as a “business enterprise or other entity, promisor, or obligor” consistent with the logic of CLARITY, but this carve out is not expressed in the release.

From Technical State to Promises Kept (or abandoned): The New Offramp

Under the 2019 Framework, you exited through a technical state: sufficient decentralization. Under the 2026 release, you exit through a contractual state: fulfillment (or abandonment) of promises. A project that is technically decentralized but has an unfulfilled marketing milestone may still be a security.

The Footnote 96 language compounds this. Until an issuer fulfills all prior representations, it is potentially “continuously offering or selling” an investment contract in connection with any subsequent sales. Note this also knocks out Regulation S (categories 2 and 3) as a distribution strategy. Tokens that have not separated from their investment contract cannot be sold offshore and flow back into the US after 1-year because the continuous offering indefinitely delays the commencement of the Reg S distribution compliance period.

For more information on the application of Reg S to token offerings see Clarifying Reg S Category 3 and US Flowback.

For more information on the secondary market mechanics related to the IC separation doctrine, see The Secondary Sale Complication.

Tactical Implications

The clock is already ticking

Most people I’ve spoken with are surprised to learn that the Release is already effective (as of March 23, 2026). No grace periods. Don’t put off updating your legal strategy.

Minimum Viable Disclosure

If you can launch without a detailed roadmap or pitch deck, the absence of “explicit and unambiguous” promises of future managerial effort provides less material upon which to build an expectation of profits. This is a tragic outcome for investor protection, but it is frankly the rational, if unfortunate, response to a framework that penalizes detailed planning.

Document fulfillment publicly and specifically.

Separation is not automatic. The Separation Doctrine requires a widely disseminated announcement that references your prior promises by name and explains how each has been met. If you do not signal separation in a form secondary purchasers can receive, purchasers may continue to reasonably expect the promises to remain active. The investment contract potentially persists.

The Foundation-Labs separation is under attack

This will probably be the subject of a separate post due to the ubiquity of this construct and the severity of the implication raised by the affiliation. The release defines “issuer” to include agents and affiliates. Footnote 83 is where this becomes a structural problem. Footnote 90 incorporates the Reg FD definition of “person acting on behalf of an issuer” to capture the agency relationship.

The bases for finding Labs is an agent of Foundation are more accessible than most teams appreciate. Material compensation flowing from Foundation to Labs, shared officers or directors, Labs operating under Foundation direction on product matters, or Foundation’s public communications characterizing Labs’ work as its own; any one of these makes the agency argument difficult to defeat, even if Labs itself makes no representations to token holders.

The authorization issue is more dangerous. If Labs (or a founder) makes public-facing statements about the ecosystem that form the basis for a reasonable holder’s expectation of profit, and Foundation endorses or is deemed to have authorized those statements, Labs is potentially an agent of the issuer even absent an alter ego relationship. The release creates a second-order problem here: Foundation’s own website, social channels, or official communications describing Labs’ work as “integral to the protocol’s growth” may be enough to support the authorization inference, even where Labs made no public statements and Foundation never explicitly endorsed anything. Purchasers reading Foundation communications as an endorsement of Labs’ ongoing efforts is all the inference requires.

The mitigants are clear in theory and operationally difficult in practice. Avoid the structural markers of alter ego: independent governance, no shared officers, commercial compensation at arm’s length. Labs should not make public-facing representations about efforts that materially affect the perceived market value of the token. Foundation’s communications about Labs must be carefully scoped and vetted. Where Foundation has previously characterized Labs’ work as its own, that record needs to be corrected in a form that reaches the same audience that received the original characterization.

The Ghost of Your Whitepaper

The 2019 Framework had a flaw: “sufficient decentralization” was never defined with precision. The solution to that flaw was to define it precisely, not to eliminate it entirely and substitute it with an unacheivable autonomy goal and a contractual standard rooted in social media posts.

Every project not expressley cleared in the release taxonomy that raised capital with a whitepaper (or other public representations) should run the separation analysis now. Map your promises against what has been fulfilled. Then decide whether your path is fulfillment or public abandonment.

Above all else

To those for whom decentralization remains a beacon, take the pen and submit a public comment to the SEC. Comments can be submitted HERE.