When SEC Commissioner Hester Peirce issued her statement on February 21, 2025, titled “There Must Be Some Way Out of Here,” it didn’t come across as a routine regulatory announcement. The title, referencing Bob Dylan’s “All Along the Watchtower,” encapsulated a sentiment of frustration, urgency, and perhaps an underlying desire for clarity.
The SEC released a formal Request for Information, inviting public opinions on the classification and regulation of crypto assets as securities. This was a significant opening in years for the wider crypto community to influence potential regulatory frameworks.
In response, on March 13, a prominent venture capital firm submitted a proposal anchored in what it defines as a “control-based decentralization framework.” The core idea is that if a blockchain network operates in an open, autonomous manner without central oversight, then the tokens associated with it should not be classified as securities.
This concept is intriguing—organized, coherent, and seemingly rational. However, after examining it closely and consulting with experts like Alice Frei, Head of Security and Compliance at Outset PR, a more nuanced picture began to take shape.
While the proposed framework suggests a potential “way out,” not everyone is assured that it offers a pathway to positive outcomes.
The Appeal — and Challenge — of Technology-Neutral Regulation
A core tenet of the venture firm’s framework is the belief that crypto regulation should be “merit-neutral” and “technology-neutral.” If a crypto token operates similarly to a traditional asset—such as a stock or bond—then it ought to be governed under the same legal standards.
However, Frei points out a significant gap in this logic.
“A technology-neutral approach sounds justifiable in theory. But it doesn’t fit neatly within the blockchain landscape. Crypto is not just a revamped version of the traditional financial system; it’s a fundamentally distinct entity that consistently reshapes its own economic and functional characteristics.”
She highlighted how each major advancement in crypto introduced entirely new economic behaviors: Bitcoin brought decentralized digital scarcity, Ethereum introduced programmable governance, DAOs facilitated collective decision-making, NFTs revolutionized digital ownership, and DeFi unleashed permissionless financial markets.
“These developments are not merely new wrappings for familiar assets. They entail completely different risk models, incentive schemes, and governance issues. Ignoring this complexity in the name of ‘neutrality’ means we are defining what crypto should look like, not what it actually represents.”
Market Forces Extend Beyond Code
Another principal argument in the firm’s proposal asserts that if a token’s design is entirely embedded in code—meaning its economic functions are pre-set and autonomous—its valuation should not depend on the actions of external parties. If this holds true, the token would not meet the Howey test.
However, Frei contends that this reasoning falters in the current market environment.
“Just because staking rewards or token burns are automated doesn’t mean the market functions the same way. Values in crypto are influenced by a myriad of factors beyond code, including speculation, sentiment, and macroeconomic developments.”
She cited Bitcoin’s price dynamics as an example. While its code may be predictable—fixed supply and halving cycles—the market value can swing dramatically based on interest rates, institutional engagement, and even viral social media posts.
“Take Terra, for instance. Its entire value proposition was a self-correcting, algorithmic stablecoin—a system designed to maintain its peg to the U.S. dollar through code-driven incentives and automated supply adjustments. Yet, it couldn’t withstand a speculative surge. Once trust eroded, the algorithm spiraled out of control, leading to billions in losses within days. Code wasn’t its savior.”
The Paradox of ‘Control-Based Decentralization’
A contentious aspect of the firm’s proposal lies in the term itself: control-based decentralization. The framework suggests that a network should be deemed decentralized—and thus outside the SEC’s authority—if operational, economic, and governance controls have been sufficiently dispersed.
Yet, Frei challenges the notion that decentralization can be precisely quantifiable.
“Defining decentralization solely by the absence of control is problematic. When attempting to construct checklists for this definition, you risk equating superficial decentralization with genuine autonomy.”
In reality, she notes, most so-called decentralized systems still have central points of influence. Developers often wield control over upgrades, governance tokens can concentrate power among early stakeholders, and infrastructure like exchanges and custodians continue to serve as centralized chokepoints.
“True decentralization exists on a spectrum,” she asserts. “It’s not simply a binary option. Misrepresenting it as one simplifies the complexities that can lead to performance-driven decentralization, which may appear attractive but lacks substance.”
A Potential Regulatory Gap
Frei emphasizes a critical concern: the potential for the proposed framework to be exploited, particularly in the absence of stringent enforcement guidelines.
“It’s possible to have a project that seems decentralized at first glance but is actually being controlled by insiders behind the scenes.”
This could manifest as token distributions that look wide-reaching but are tightly orchestrated, governance structures that appear democratic yet funnel authority to a select few, or protocols that shift control just briefly to meet regulatory criteria before re-centralizing under new names.
“If we’re not diligent,” she cautioned, “this could turn into a manual for regulatory circumvention rather than one promoting transparency.”
What’s Next?
Frei doesn’t outright reject the intentions behind the firm’s proposal. Like many others in the sector, she acknowledges the importance of the discussion and the urgent need for regulatory precision. However, she is skeptical that a framework based on rigid decentralization criteria can adequately capture the intricacies of today’s crypto environment.
“We need a model that acknowledges the innovation occurring in this field,” she stated, “while not overlooking the human, economic, and governance factors that influence it.”
This entails recognizing that technology is not neutral; it shapes asset behavior. It also means understanding that markets are driven by emotions, not just mechanics. Moreover, it involves treating decentralization as a fluid objective rather than a checkbox to be marked.
As for the SEC, it now faces the challenging task of translating this feedback into actionable policies. Regardless of whether the proposed framework finds its way into the final regulations, one thing is clear: this conversation is only just beginning.
“The objective isn’t merely to regulate crypto,” she remarked as our discussion wrapped up. “It’s to do so in a manner that safeguards people—without pretending that this industry is something different than it is.”
And perhaps, just perhaps, there is indeed a pathway forward—if only we are truthful about our starting point.