Bad Legal Advice Broke Crypto Tokenomics. The SEC Just Gave Us a Chance to Fix It.
For most of the past decade, the crypto industry has operated under a strange interpretation of U.S. securities law.
Build a successful protocol? Fine.
Generate millions of dollars of revenue? Great.
Continue improving the product? Sure.
But whatever you do, don’t let the token holders benefit financially from any of it.
That was effectively the advice given to thousands of crypto founders. Don’t share revenues. Don’t buy back tokens. Don’t talk about the token increasing in value. Don’t connect the token too closely to the success of the underlying business. Don’t let the development team appear too important. And, if possible, create a decentralized governance structure so you can argue that no one is really in charge.
The result was predictable.
The industry created an entire generation of digital assets that were intentionally designed to have little or no economic value. And this week, the SEC staff effectively said that much of the legal reasoning that led the industry down this path was unnecessary and an incorrect interpretation of securities law.
On Thursday, the SEC’s Division of Corporation Finance published new FAQs explaining how staff views the Commission’s March 2026 interpretation of federal securities laws as applied to crypto assets. There are several important clarifications:
And the SEC staff provided additional clarity around liquid staking, indicating that staking receipt tokens representing digital commodities or digital tools may generally inherit the character of the underlying asset rather than magically becoming securities simply because they facilitate liquid staking.
These FAQs build on the much more important Commission-level interpretation released in March, which established something that should have been obvious years ago: a crypto asset itself and an investment contract involving that crypto asset are not necessarily the same thing.
A non-security crypto asset can be sold as part of an investment contract. But that doesn’t permanently transform the asset itself into a security. And once the promises constituting that investment contract have been fulfilled or otherwise cease to apply, the crypto asset can separate from that investment contract.
This week’s FAQs are staff guidance, not new legislation or a blanket safe harbor, and the analysis remains dependent on the facts and circumstances. But the direction is becoming increasingly difficult to misunderstand.
None of those activities, standing alone, automatically transforms the underlying crypto asset into a security. That is a very big deal.
I’ve spent most of my career analyzing securities. When I analyze a stock, I don’t start by asking whether the company has a good Twitter account, an enthusiastic community, or an interesting narrative. I want to know whether the company creates something valuable, whether customers are willing to pay for it, how much revenue it generates, how much cash flow it produces, and ultimately how much of that economic value accrues to me as an investor.
For years, applying this basic framework to digital assets has been unnecessarily difficult.
Crypto protocols increasingly became real businesses. Decentralized exchanges generated trading fees. Lending protocols generated net interest income. Blockchains generated transaction fees. Applications generated subscriptions and service revenues. But in many cases, the token attached to the protocol had almost no economic connection to the business itself. This is why we have constantly tried to separate “good project, bad token” from “good project, good token.” The token became an afterthought to many crypto businesses.
That wasn’t always because the founders were greedy or stupid. Often, it was intentional. Crypto lawyers repeatedly advised founders that creating an explicit connection between the success of the protocol and the value of the token increased the likelihood that the SEC would consider the token a security.
Instead of creating an asset with clear economic rights, projects issued “governance tokens.” This meant you could vote, but unfortunately, nobody cared.
Meanwhile, the most legally defensible token eventually became the most economically absurd one: the memecoin. A memecoin makes no promises. It has no cash flows. It has no management team promising to build anything. It doesn’t claim to represent ownership. In many cases, its creators explicitly tell you that it is worthless. The perfect asset for a Gensler-era defined by the stifling of innovation and growth. The regulatory regime that was supposedly designed to protect investors may have inadvertently created an incentive to issue assets with less investor protection and lower fundamental value.
And changing that incentive structure may be one of the most bullish developments the digital asset industry has ever experienced, because crypto finally has real businesses.
Hyperliquid, Aave, Uniswap, Maple, Aerodrome, Morpho, and dozens of other protocols now have real customers paying real money for real products.
The next step is connecting those economics to the assets investors actually own.
We’ve already seen the beginning of this transition through token buybacks, burns, fee distributions, and other mechanisms. The SEC’s evolving guidance gives founders, boards, investors, and (perhaps most importantly) lawyers significantly more room to continue moving in that direction.
The crypto industry spent years trying to create assets that couldn’t possibly look like stocks. Perhaps we can finally focus instead on creating good investments.
Forgive us for taking a small victory lap, but Arca has been arguing some version of this for years, and I wish more founders, VCs, exchanges, and lawyers had listened.
In April 2023, while discussing the collapse and dissolution of Rook DAO, we highlighted that the Rook team had declined token buybacks while citing legal concerns. At the time, we wrote:
“Though ‘legal risk’ is often used as a shield to avoid providing value to token holders, the ongoing lack of legal clarity in the U.S. has left the majority of governance tokens in limbo.”
Six months later, we went much further. We argued that governance rights alone weren’t sufficient to create sustainable token demand, and that revenue and profit sharing represented the most compelling demand-side tokenomics. But projects were reluctant to implement them because their lawyers believed doing so could turn their tokens into unregistered securities. We wrote:
“It is difficult to reconcile that the best way to design a token that benefits investors is in direct conflict with U.S. current securities law. This dynamic also affects NFTs greatly and has likely caused more value destruction in our space than the collapse of FTX. True investor protection is being held up by the abstract interpretation of a broad securities law created in 1946... a period of time when color television, the World Wide Web, cell phones, AI, and blockchains did not exist. Frankly, most of these technological revolutions were unthinkable for humans in that time period.”
That sounded extreme at the time. I’m not sure it does anymore.
In February 2024, Uniswap proposed turning on its fee switch, and I was even more explicit. We wrote:
“For years, token issuers have been (in our opinion erroneously) hiding behind bad legal advice. The belief was that if a token issuer gave explicit financial value to tokens, it would put their tokens in the regulatory crosshairs. We have consistently argued that Silicon Valley VCs, their lawyers, and the projects they have funded have been hurting token holders for no valid reason.”
Last year, I tried to explain why I believed the most lasting damage from the Gensler-era SEC’s regulatory approach wasn’t the lawsuits or enforcement actions. It was the products that never got built properly. We worked directly with dozens of crypto founders during this period. Many wanted their tokens to accrue value alongside the businesses they were building. But their lawyers repeatedly warned them against doing so because it might increase the likelihood of an SEC enforcement action.
So what happened?
“What resulted for 2.5 years was thousands of token launches where the asset was not designed to have underlying value correlated to the success of the project.”
That distorted the entire crypto market. Fundamental investors couldn’t value tokens because many were intentionally designed to capture no fundamentals. Founders became comfortable creating two separate capitalization tables—one for equity (themselves and VCs) and one for tokens (their customers). Centralized exchanges listed whatever generated trading volume, regardless of whether the token had sustainable value. VCs made money through private rounds and token unlocks, while secondary-market investors increasingly became exit liquidity.
And investors eventually learned the lesson the industry accidentally taught them: if fundamentals don’t matter, just trade narratives, or leave the industry altogether.
That contributed to the rise of memecoins, short-term speculation, and the endless carousel of crypto narratives that have dominated this market for years.
In March 2025, we published “The Case for Token Buybacks." By then, our view couldn’t have been clearer:
“Most investors are finally beginning to agree that value matters, and memecoins and useless governance tokens are going to take a backseat to cash-flow-generating assets with buybacks. Token buybacks are by far the best use of capital for protocols, full stop.”
This summer, I revisited eight years of writing this blog. The conclusion was pretty simple:
“For years, projects faced an impossible choice: issue a token with meaningful economic rights and risk being sued by the SEC, or issue a largely useless governance token and hope that vague promises of future utility would create value. Regulatory uncertainty did not protect investors. It actively encouraged worse token design.”
We wrote that two months ago. This week, SEC staff gave the industry significantly more clarity on the exact types of activities lawyers spent years telling projects to avoid.
There is a temptation to treat regulatory changes as if someone simply flipped a switch. Yesterday the rules were bad. Today the rules are better. Let’s move on. Unfortunately, markets don’t work that way.
We lost years. We lost founders who moved offshore. We lost institutional investors who looked at token structures and concluded that there was nothing to value. We lost retail investors who repeatedly bought governance tokens connected to successful businesses, only to discover that the success of the business had virtually no connection to the value of the assets they owned. We trained VCs to extract value through equity while distributing poorly designed tokens to the public. We trained exchanges to prioritize trading activity instead of asset quality.
And perhaps worst of all, we trained an entire generation of crypto investors to believe that fundamentals don’t matter, and convinced TradFi investors that nothing in crypto was worth investing in.
That last one may take the longest to fix. The frustrating part is that a lot of this was avoidable. The Howey test never said that an asset becomes a security simply because it has value. It never said that a company can’t continue improving a product after launching a token. It never said buybacks automatically make something a security. And it certainly never said that the safest way to protect investors is to make sure the asset they’re buying has no economic value.
Yet somewhere along the way, the industry’s interpretation of securities law became so defensive that avoiding theoretical regulatory risk became more important than creating a good financial product.
The irony is incredible. In trying so hard not to create securities, the crypto industry ended up creating worse investments.
Fortunately, none of this damage is permanent. The blockchain and crypto infrastructure is dramatically better than it was five years ago. Crypto applications have real users. Protocols have real revenues. Stablecoins have demonstrated product-market fit. DeFi has survived multiple market cycles. Traditional financial institutions are moving assets on-chain. And the SEC itself is now providing increasingly detailed guidance on which activities do and don’t create securities law issues.
So let’s stop fighting the last war. Founders can stop being afraid to create tokens that accrue value. VCs should stop funding projects in which the token is structurally subordinate to the equity. Exchanges should stop treating every new token as interchangeable inventory and start rewarding assets with strong fundamentals and sustainable tokenomics, and start educating their customers on the differences between tokens. Investors should stop accepting governance rights as a substitute for economic rights. And lawyers should stop giving advice designed exclusively to minimize theoretical regulatory risk while maximizing the probability that the financial product itself fails.
This doesn’t mean every protocol should immediately send 100% of its revenue to token holders. Capital allocation still matters. Young companies should reinvest when the expected return on that investment exceeds the return from distributing capital. We’ve written extensively about this distinction recently.
Nor does it mean every token is suddenly outside securities laws. The SEC’s analysis remains fact-specific, and tokens sold alongside explicit promises that a team will generate profits through future managerial efforts can still be part of an investment contract.
But we can finally have the right conversation.
Those are the questions investors could have been asking all along. For most of the past decade, regulation, bad legal advice, and poorly designed incentive structures made them unnecessarily difficult to answer. Now we have a chance to fix it.
The last generation of crypto tokens was built around fear of what regulators might do. The next generation can be built around something much simpler: Creating valuable products, generating real cash flows, and making sure the people who own the assets actually participate in the success.
We’ve spent long enough designing tokens around lawyers. Let’s start designing them for investors.
And That’s Our Two Satoshis!
