Author: Lin Lin

Statement: This article is authored by the Web3 Compliance Research Group for the purpose of sharing personal research findings, intended for reader reference and discussion only. It does not constitute any investment advice or promotional endorsement of any virtual currency and its associated operators. The article was first published on Substack (dt42ai.substack.com).

Starting Point of the Issue:

Law always lags behind technology. But the lag itself is not the problem; the problem lies in the way the lag occurs.

In the past decade, the U.S. regulatory approach to crypto assets has adopted a specific lagging method: forcibly fitting new things into existing frameworks, substituting enforcement for legislation, and replacing rule-making with case-by-case judgments. The cost of this method is dual; it neither truly protects investors nor provides a predictable growth space for innovation.

The SEC interpretive rule published on March 17, 2026, is an explicit correction of this lagging method. However, its significance extends far beyond a policy shift; it touches upon a more fundamental legal philosophical question: what should the law regulate when the subject itself has multiple attributes?

The answer to this question has a clear six-year arc of thought. On February 6, 2020, then-SEC Commissioner Hester Peirce delivered a presentation titled “Running on Empty” at the Chicago Blockchain Summit, describing the regulatory dilemma as a self-reinforcing paradox: tokens cannot be widely distributed due to their potential securities attributes, while networks must achieve broad distribution to decentralize and thus escape those securities attributes — she termed it the “regulatory Catch-22.” This structural paradox was addressed in a different logical pathway in the 2026 framework: not by giving project parties time for technology to mature naturally, but by redefining the boundaries of “investment contracts,” shifting the regulatory focus from the technical status of assets to the specific behavior of issuers.

Atkins directly acknowledged at the summit that the intellectual lineage of this framework traces back to Peirce's 2020 Token Safe Harbor draft. This is a rare instance of intergenerational continuity in regulatory history: the originator failed to secure adoption opportunities, while the successor realized the same policy direction six years later through a different institutional form.

From Attribute Theory to Behavioral Theory:

The regulatory logic of traditional securities law is built on an implicit premise: legal objects have fixed attributes. A contract is either a security or it’s not; a tool is either a stock or it’s not. This binary judgment was effective in the industrial era because the attributes of financial instruments were relatively stable, the issuance structure was relatively clear, and the rights and obligations were relatively defined.

Cryptographic assets break this premise. The same token can present sharply different economic characteristics in different contexts: it can be a commodity, a collectible, a tool, it can be the subject of an investment contract, or it can circulate between different points in time of the same token. Attributes are no longer fixed but are context-dependent, time-sensitive, and relationship-determined.

The core legal contribution of this interpretive framework is that it establishes a clear principle of separation: non-security crypto assets becoming the subject of investment contracts do not equate to the asset itself becoming a security. The original articulation of this judgment first appeared in Peirce's 2020 critique — she explicitly pointed out that confusing the concepts of “tokens as subjects of investment contracts” and “the investment contract itself” led to disastrous consequences, hampering token networks from fulfilling their intended functions. The 2026 interpretive rule upgrades this recognition on an academic level to a formal institutional principle.

The establishment of this principle marks a fundamental shift in regulatory philosophy from attribute theory to behavioral theory. What is regulated is no longer the nature of the asset itself, but rather the specific behaviors occurring around the asset — issuer statements and commitments, the formation process of reasonable expectations by buyers, and the creation and termination of investment contracts. The law no longer asks “What is this?” but instead inquires, “In this specific context, who did what, and what reasonable expectations were created?”

However, the issue of separation is not one-dimensional. Peirce's identification was with the confusion at the level of legal analysis: tokens treated as investment contracts themselves rather than as subjects of investment contracts. This is the first layer of misalignment, a conceptual issue that can be corrected through hermeneutics. The 2026 framework completed an important legal clarification in this sense.

Yet beneath this, there exists a second layer of separation that is more common in practice and more difficult for the legal framework to capture: the economic decoupling between tokens and the actual business of the project parties. In a considerable number of crypto projects, tokens circulate on-chain, while the actual business of the project party — sources of revenue, user acquisition pathways, core operational decisions — operates entirely off-chain, with almost no real economic transmission mechanism existing between them. The financial fate of token holders does not truly depend on the operation of on-chain protocols but rather relies on the survival of a commercially operating entity off-chain. This separation is not a technical issue but a business model issue: issuing tokens is a financing tool, while establishing business is a separate independent operational logic, and the two are inherently designed to be separate. A white paper can describe an ecological vision, and a roadmap can list technical milestones, but there may never have existed any legally binding connection between those texts and the off-chain activities that actually generate revenue for the project parties.

The 2026 interpretive rule significantly delegates authority over the scope of “essential managerial efforts” to the issuers themselves: it explicitly states that whether an issuer has fulfilled its commitments depends on “how the issuer defines or describes the content of its commitments,” rather than an externally observable and verifiable objective technical standard. The internal logic of this design is understandable — the form of the commitment is the most easily verifiable point afterward. However, when the transmission mechanism between the commitment object itself (the on-chain value of the token) and the business reality (off-chain revenue of the project party) has never existed or is extremely thin, the formal integrity of the wording of the commitment cannot capture the essence of economic reality. Issuers can carefully design the boundaries of their commitments, and compliance forms can be fully met, yet the actual risk exposure for token holders remains vulnerable to a commercial entity operating outside the regulatory view. Behavioral theory changes the entry point of regulation, but for the issue of second-layer separation, the legal mechanisms it provides still rest on the premise of “statements aligning with reality,” an assumption that itself needs verification.

Winston & Strawn's in-depth analysis of the Howey test suggests that the core of investment contract analysis is “promotional emphasis”— whether issuers are objectively guiding purchasers to perceive the purchasing behavior as an investment rather than consumption, with the standard being an examination of “economic reality” rather than an examination of technical architecture. (Tcherepnin v. Knight, 389 U.S. 332, 336: “form should be disregarded for substance and the emphasis should be on economic reality.”)

This creates a profound dilemma within the behavioral theory logic of the 2026 framework. The economic reality test in instances of second-layer separation points directly to that off-chain commercial entity deliberately constructed outside of regulatory visibility. Behavioral theory offers the correct analytical starting point, but if the link between tokens and business is structurally absent rather than superficially fictitious, the technical challenges of regulatory penetration and the disparity between legal standards do not automatically disappear simply because the regulatory entry point has shifted.

New Forms of Power Asymmetry:

The historical starting point of securities law is a response to a specific power structure: issuers hold information, investors bear risks, leading to a structural asymmetry between the two. The core function of securities law has never been to regulate a specific financial instrument, but to correct this power asymmetry.
Cryptographic assets have not eliminated power asymmetry; they have merely altered its form. In traditional finance, power asymmetry manifests through equity structures, board control, and disclosure obligations; in the crypto world, the same asymmetry is realized through token distribution mechanisms, code control, narrative ability in roadmaps, and community discourse power. Early investors hold vast amounts of low-priced chips, while retail investors bear the role of liquidity exit, a structure that is essentially no different from traditional IPOs, merely wrapped in a narrative of decentralization.

This interpretive framework shifts regulatory focus to issuer statements and commitments, responding to new forms of power asymmetry using the core logic of old frameworks. This choice has its intrinsic rationality: it captures the most actionable nodes in the asymmetric relationship — information asymmetry. But it does not address the deeper structural power asymmetries. Decentralized technological forms do not inherently lead to decentralized power distribution. When regulators accept the narrative of decentralization without scrutinizing the economic realities behind it, regulation itself becomes a ratification mechanism for the existing power structure.

The 2026 framework accomplishes a conscious transformation of regulatory entry points: from attempting to measure and determine the technical attributes of tokens, transitioning to regulating issuer statements and project business disclosures. This transition is inevitable, yet it rests on a premise that is difficult to establish fully in reality: legal, token, and business layers can be clearly cut and addressed separately.

A comparative perspective may help to understand the depth of this dilemma. The design logic of regulatory sandboxes (initially proposed and experimented with by the UK's Financial Conduct Authority, followed by various Asian regulatory bodies like Singapore's Monetary Authority, Hong Kong's Securities and Futures Commission, and Thailand's Securities and Exchange Commission) is based on a clear judgment: regulation always lags behind technology, comprehensive regulation cannot exist prior to understanding; therefore, substitute limited exemptions for time, and replace closed control with controllable experiments. This logic embodies humility — it recognizes the limited ability of regulators to comprehend the essence of technology, opting for observation instead of prescriptive attribute judgments, delaying the judgment time until sufficient experimental data has accumulated. The cost of the sandbox framework is systemic; it exchanges the temporariness of exemptions for an honest attitude in facing uncertainty.

The U.S. framework of 2026, however, took a different path. It chose not the experimental nature of the sandbox but rather a structural reconstruction, shifting regulatory focus from token attributes to human behavior, from technical status to legal relationships. The deeper basis for this choice is a belated acknowledgment of technological reality: no matter how powerful the narrative of decentralization may be, there are always centralized nodes in virtually any sufficiently complex crypto system that regulators can reach. Smart contracts require teams to deploy and maintain them; cross-chain bridges in most practical forms rely on centralized entities for operation; core parameters in token economics require human design and adjustment, sometimes needing urgent human intervention. Peirce embedded this recognition in her 2020 draft. She used "essential managerial efforts" as the core judgment axis of the Howey analysis, rather than based on the systematic technical forms as the criteria. Six years later, this recognition is formally confirmed at the institutional level: the existence of behavior subjects is the premise for regulation to be implemented, not the degree of technological decentralization.

However, this transition still fails to address several fundamental issues. This is not merely an abstract theoretical omission; it is an institutional gap with direct legal consequences in specific situations. For projects operated by completely anonymous teams, the accountability logic of "statements and commitments" lacks identifiable subjects; for protocols governed in DAO form, the decentralized voting mechanism makes “who made the commitment” itself a question awaiting an answer; for networks where the original development teams have been dissolved following token issuance, the relational benchmarks for compliance have already been severed. Regulation has completed a shift in epistemology from attribute theory to behavioral theory, yet it faces the same profound uncertainties regarding the identification of the behavior subjects themselves. Changing entry points does not equate to resolving the issues being addressed; it simply replaces a set of old challenges with a set of new ones.

The Temporal Nature of Investment Contracts:

This interpretive framework's most original legal element is its systematic discussion of the “termination” of investment contracts.

Traditional legal thinking tends to view contractual relationships as static: once formed, rights and obligations exist fixed until the contract is explicitly terminated. The regulatory logic during Gensler's tenure was indeed such — once deemed a security, it will always be a security, and issuers must indefinitely bear compliance obligations.

This interpretation introduces a dynamic temporal dimension: investment contracts can terminate naturally because the issuer has fulfilled its commitments, or they can extinguish because the issuer is clearly unable or unwilling to fulfill them. Behind this lies an important legal philosophical judgment: the essence of investment contracts is not a formal contract but a relationship of reasonable expectation. When reasonable expectations no longer exist, the rationale for the existence of the investment contract disappears likewise.

This judgment deepens the spirit of the Howey test, rather than deviating from it. The original intent of Howey was never to permanently label a category of assets with a fixed label but to capture a specific economic relationship — investors entrust their money to others, expecting to benefit from the efforts of others. When this relationship no longer exists, the need for legal protection naturally diminishes.

The question is: who determines whether reasonable expectations “no longer exist”? This interpretation largely leaves this judgment power to the self-awareness of market participants, generating substantial uncertainty in practice. The tension between legal clarity and dynamic adaptability is not resolved here but merely acknowledged.

The differences between Peirce’s and Atkins' frameworks concerning termination standards are profound, and the direction of this divergence reveals a larger regulatory philosophical choice. Peirce's 2020 proposal used objective technical state as a trigger condition for termination — at the end of three years, evaluating whether the network achieved decentralization or functionality with standards that are externally observable and verifiable. Atkins' 2026 proposal abandons this objective technical testing, shifting towards a commitment-driven logic of contractual relationships: termination occurs upon "the fact that the issuer has completed its essential managerial efforts and publicly disclosed." The time point is no longer exogenous but endogenous, determined by the content of the commitments themselves.

This evolution’s regulatory logic is clear: determining technological maturity is practically extremely difficult, decentralization exists on a continuous spectrum rather than a binary state, and project parties can strategically delay meeting objective standards. The commitment performance standard shifts the focus of judgment to more observable dimensions. However, the cost is similarly clear: a significant portion of the authority to define the scope of “essential managerial efforts” is delegated to the issuers themselves. An issuer that skillfully designs the wording of commitments can to a considerable extent self-determine the continuity status of the investment contract — not by completing substantive work but by controlling the formal boundaries of the commitments. The operability of regulation has increased, yet its substantive penetrative capability may conversely decrease in some circumstances.

Constitutional Tension Between Rules and Enforcement:

The manner in which this interpretive framework was published itself carries significant constitutional implications.

It is an interpretive rule, not formal legislation. This means it does not require congressional deliberation and can take effect immediately, but it also implies that it can easily be rescinded by the next administration. The regulatory system established during the Gensler era based on enforcement precedents is now negated by an interpretive document; yet this interpretive document also faces the same instability.

This reveals a long-standing structural dilemma in American administrative law: when legislative bodies cannot timely respond to technological changes, administrative agencies' efforts to fill the void are inevitably fragile. Substituting enforcement for legislation is a distortion, and substituting interpretation for legislation is also a distortion, merely in the opposite direction.

Real stability in rules requires legislative authorization at the congressional level. This interpretive framework positions itself as a “bridge” to congressional legislation; this self-positioning is honest. But a bridge is not an endpoint; whether a truly predictable regulatory framework can be established over the bridge depends on whether the legislative process can keep pace with the speed of technological evolution. This has historically never been an optimistic proposition.

Atkins simultaneously announced that he would propose three draft rules in the coming weeks: a startup exemption providing up to four years of registration exemptions with a financing cap of about five million dollars; a financing exemption allowing raising about seventy-five million dollars within twelve months with additional financial disclosure requirements; and an investment contract safe harbor providing a regulatory exit from the definition of securities after an issuer completes or permanently ceases all core managerial efforts. These three proposed rules are the formal institutionalization pathway of Peirce's 2020 Token Safe Harbor proposal six years later. If passed through the formal rule-making process, their legal effect will supersede the current interpretive rules and serve as an institutional path for resolving constitutional fragility.

However, the achievement of institutional stability comes with a cost that is almost overlooked.

The three-tier exemption structure is designed to cover entrepreneurs of different scales: the five million dollar cap corresponds to the earliest-stage technological explorations, the seventy-five million dollar cap corresponds to those with a certain scale of financing needs, while the safe harbor exit is aimed at mature projects that are close to fulfilling their commitments. This layered intent aligns with the motivation of Peirce's 2020 draft. She criticized, in “Running on Empty,” the “mini-IPO” compliance costs of Regulation A that have an exclusionary effect on smaller projects, as well as the qualified investor limitations of Regulation D that hinder the widespread distribution of networks. The design motivation of the Token Safe Harbor is precisely to provide another path for grassroots entrepreneurs excluded from the current compliance system.

But the multi-layered exemption structure itself is a production machine for complexity, and complexity increases non-linearly with layers. Where are the boundary conditions for transitioning from the first layer to the second? How to manage the overlapping effects of multiple exemptions? How does the scope definition of “essential managerial efforts” affect the triggering time point of the safe harbor? The answers to these questions are often only accurately grasped by entities with adequate legal resources.

Here lies an institutional paradox that has repeatedly emerged in the history of institutional design. Regulatory clarity is intended to reduce uncertainty and encourage innovation, yet the more refined the rules, the more complex compliance becomes, leading the participants who can effectively navigate this system to be those institutional players with existing resources. Entrepreneurs need to understand the applicable boundaries of multi-layer exemption conditions, differentiate the specific differences in disclosure obligations under different financing scales, track the overlapping effects of triggering points for registration with state-level requirements, and identify with the help of lawyers which commitments fall under the “essential managerial efforts” that trigger the safe harbor and which are expressions of strategic intent that do not create legal obligations. This is a compliance system that requires considerable professional capability and resources to navigate effectively, and the cost of navigating it is precisely the cost that is most difficult for those participants who most need regulatory clarity to bear.

Ultimately, those who truly benefit from regulatory clarity may very well be precisely those participants who could already survive under the old framework: large crypto institutions, exchanges with compliance teams, and mature projects capable of bearing legal costs. True grassroots entrepreneurs, who suffered due to regulatory uncertainty during the Gensler era, may be excluded due to compliance complexities in the Atkins era. Regulatory clarity reduces overall market uncertainty, yet the benefits of this reduction are unevenly distributed among a group of participants that are already unequal. This issue is seldom candidly questioned in policy discussions, as it requires regulatory agencies to admit: the beneficiaries of regulatory reform are not always those whom the reform claims to serve.

Conclusion: The Humility and Arrogance of Law:

Legal philosophy has a classic proposition: the law should not attempt to regulate what it cannot understand. This is the humility of the law.

But the law also has another tradition: it must respond to the power asymmetries in reality, even if it knows little about technical details. This is the responsibility of the law.

This interpretive framework strikes a specific balance between the two: it acknowledges the technological uniqueness of most crypto assets, builds a dynamic categorization framework rather than forcibly fixing asset attributes, and shifts to focus on observable, accountable human behavior — statements, commitments, disclosures, fraud.

This choice is humble at the technical level and powerful at the normative level. It does not pretend to understand all the possibilities of blockchain, but it insists that regardless of how technological forms change, those who solicit trust and funds from others have an obligation to speak the truth.

However, this humility also has its specific limits. While the law acknowledges its inability to comprehend technology, it quietly assumes that it can understand expectations, assumes that reasonable expectations can be fully captured through written commitments, assumes that economic reality can be adequately presented through disclosure documents, and assumes that the termination of investment contracts can be clearly triggered through public declarations of fulfillment. However, reasonable expectations in the token market often arise from the interplay of community culture, opinion leader narratives, price trends, and exchange listing decisions, far exceeding what can be exhausted in a few lines of commitments in a white paper. The humility of law and the arrogance of law do not always point in different directions.

This may be the most basic and indispensable thing that law can do in the face of technological revolutions. But basic does not equal sufficient.

The 1946 Howey decision stated that the definition of investment contracts “embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

Thirty years later, this flexibility remains the best entry point for understanding the 2026 framework. Not because the answers have not changed, but because the very principle of flexibility, manipulated under varying political wills, can lead to entirely different institutional outcomes.

Peirce's contribution is asking the right questions; Atkins' contribution is providing a more operational answer for the present. The right questions do not always have correct answers, and operational answers do not always get closer to substantive justice. This dialogue continues. Who will write the next chapter is still unknown. Perhaps it will be neither the regulatory agencies nor the entrepreneurs, but a Congress that has yet to accomplish legislation.

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