How Does Decentralization Affect a Token’s Classification under Howey?
A key factor in avoiding security classification is sufficient decentralization, as argued by the SEC's framework. If a network is truly decentralized, meaning no single person or group has control over the network's success, the "efforts of others" prong of the Howey Test may not be met.
This is often referred to as the 'Sufficient Decentralization' theory. The more decentralized a network becomes, the less likely its token is to be considered a security.
Full decentralization shifts the expectation of profit from the promoter's efforts to the network's overall success.
Glossar
Expectation of Profit
Projection ⎊ Expectation of profit, within cryptocurrency options and derivatives, represents a probabilistic assessment of future gains derived from a specific trading strategy, factoring in underlying asset volatility and time decay.
Avoiding Security Classification
Framework ⎊ The avoidance of security classification, within cryptocurrency derivatives, options trading, and related financial instruments, necessitates a nuanced understanding of regulatory frameworks across jurisdictions.
Howey Test
Test ⎊ The Howey Test is the seminal legal methodology, derived from a 1946 Supreme Court case, used to ascertain if a transaction involves an "investment contract," thereby classifying the underlying asset as a security.
Governance Tokens
Delegation ⎊ Governance tokens facilitate decentralized control over protocol parameters, enabling token holders to propose and vote on changes impacting the system’s functionality and future development.