Today’s no-action letter from the Division of Corporation Finance concerning DoubleZero’s token distributions designed to facilitate the programmatic functioning of a decentralized physical infrastructure network (i.e., DePIN) offers an opportunity to reflect on how we, as regulators, can foster innovation without expanding our reach beyond what Congress has mandated. Congress created the Securities and Exchange Commission to oversee the securities markets, not to regulate all economic activity.
DePIN represents a novel way of organizing human behavior and capital resources. Rather than relying on centralized corporate structures to coordinate activity, DePIN projects enlist participants to provide real-world capabilities, such as storage, telecommunications bandwidth, mapping, or energy, through open and distributed peer-to-peer networks. To encourage participation, many of these projects distribute tokens tied to activity. The person who runs a node, provides storage, or shares bandwidth earns a reward. These tokens are neither shares of stock in a company, nor promises of profits from the managerial efforts of others. They are functional incentives designed to encourage infrastructure buildout.
DePIN projects are distinguishable from more traditional fundraising transactions where the now ubiquitous Howey Test may capture uncommon instruments that have the essential attributes of a security. These projects allocate tokens as compensation for work performed or services rendered, rather than as investments with an expectation of profit from the entrepreneurial or managerial efforts of others. Additionally, DePIN projects are not selling or distributing tokens to finance additional development from investors attracted solely by the prospect of investment returns. Rather, DePIN networks programmatically distribute such tokens to users who participate in the network in accordance with network rules. Accordingly, the Howey Test is not satisfied. The economic reality of DePIN projects differs fundamentally from the capital-raising transactions Congress charged this Commission with regulating. Treating such tokens as securities would suppress the growth of networks of distributed providers of services.
Blockchain technology cannot reach its full potential if we force all activities into existing financial market regulatory frameworks. Organizing disparate people to work together to build physical infrastructure is an interesting use for the technology. Markets, not financial regulators, should determine the success of such projects.
Our job is to engage with innovators in good faith, listen carefully as they explain how their models work, and apply our statutory mandate thoughtfully and with precision. Today’s no-action letter exemplifies how performing that role can help infrastructure providers spend their time deep in the weeds of building out infrastructure, not knee-deep in parsing the nuances of securities laws.
