A way out or a way around? Rethinking A16z’s crypto regulation Proposal

When SEC Commissioner Hester Peirce launched her assertion on February 21, 2025, entitled “There should be a technique out”, it didn’t learn as a typical piece of regulatory feedback. The title, a nod to Bob Dylan’s “All of the Watchtower”, set the tone: frustration, urgency and maybe even a relaxed plea for readability.

The SEC revealed a proper request for info – an open name for public entry on find out how to decide whether or not crypto belongings must be categorised and controlled as securities. It was the primary actual invitation in years earlier than the broader crypto ecosystem to assist form the principles.

In response, enterprise capital large Andreessen Horowitz (A16Z) submitted a proposal that’s constructed round what it calls a ‘management -based decentralization body’. The thought is that this: if a blockchain community is open, autonomous and is now not below the management of a central group, then the tokens that work on it shouldn’t be handled as results.

It’s a neat idea – clear, structured and apparently primarily based in logic. However whereas I spoke within the particulars and with specialists, together with Alice Frei, head of safety and compliance at first PR, a extra sophisticated picture started to appear.

As a result of though the proposal affords a possible ‘method out’, not everyone seems to be satisfied that it leads properly in all places.

The promise and downside of technology-neutral laws

One of many pillars of the A16Z framework is the concept crypto regulation must be each “benefit impartial” and “expertise impartial”. If a crypto -token capabilities as a conventional energetic – say, a share or band – it should be handled in the identical method below the legislation.

However Frei sees a disconnection.

“A technology-neutral strategy sounds trustworthy in principle. Nevertheless it merely doesn’t apply neatly to blockchain. Crypto will not be repeated of the normal monetary system-it is one thing essentially totally different. It continuously defines its personal financial and practical traits.”

She identified how each necessary innovation in Crypto launched utterly new financial conduct: Bitcoin with decentralized digital shortage, Ethereum with programmable administration, Daos with collective resolution -making, NFTs with digital property and Defi with permissionless monetary markets.

“These should not solely new wraps for outdated belongings. They provide you with utterly totally different danger fashions, stimulation buildings and board challenges. Ignoring that within the title of ‘neutrality’ implies that we regulate what crypto seems to be like – not what it’s like.”

Code will not be the one Pressure Driving Markets

One other necessary argument in A16Z’s proposal is that if the design of a token is totally embedded in code-what implies that the financial logic is pre-programmed and autonomous-this shouldn’t be seen as depending on exterior efforts. And if that’s true, it will not move the Howey take a look at.

However in accordance with Frei, that logic doesn’t stand within the present markets.

“Solely as a result of the discharge of rewards or token burns is automated doesn’t imply that the market is … Scores in crypto are pushed by far more than code. Hypothesis, sentiment, macro occasions – these shifting issues simply as a lot, if not anymore.”

She pointed to Bitcoin’s value actions for example. The code could be predictable – mounted supply, halve cycles – however the appreciation fluctuates wildlife primarily based on rates of interest, institutional acceptance and even viral tweets.

“Have a look at Terra. Your complete worth proposition was a self-correcting, algorithmic stablecoin-a system that’s designed to take care of his PEG on the US greenback by means of code-based stimuli and automatic provide changes. However even that would not resist speculative run. As quickly because the belief was cracked.

The distinction of ‘management -based decentralization’

One of many extra debated components of A16Z’s proposal is the expression itself: On verify -based decentralization. In response to the framework, if operational, financial and administrative management is enough diffuse, the community should be thought of decentralized – and due to this fact outdoors the jurisdiction of the SEC.

However Frei challenged the concept decentralization could be measured so neatly.

“Introding decentralization across the absence of management is already tough. However if you begin constructing checklists to outline it, you run the chance of decentralization at floor degree with actual autonomy.”

In follow, she defined, most so -called decentralized programs nonetheless have central influences. Builders keep management over upgrades. Governance -Tokens typically focus the ability within the palms of early buyers. And infrastructure resembling exchanges and preservators stay centralized choke factors.

“Actual decentralization is a spectrum,” she mentioned. “It isn’t a yes-or-no verify field. And pretending it opens the door to efficiency decentralization that appears good on paper, however doesn’t really final.”

A possible regulatory Maas within the legislation

The higher care, Frei warned, is how simply the proposed framework of A16Z can be utilized – particularly with out rigorous enforcement requirements.

“You possibly can have a venture that appears decentralized from outdoors, however nonetheless pull insiders on the strings.”

Which will imply that token distributions appear that appear vast, however are coordinated tightly behind the scenes. Or board buildings that appear democratic, however are designed to guide resolution -making to some portfolios. Or protocols that transfer the management simply lengthy sufficient to move on a regulatory take a look at, solely to centralize once more below totally different names later.

“If we’re not cautious,” she mentioned, “this will probably be a information to authorized arbitration. Not for transparency.”

The place are we going from right here?

For the sake of readability, Frei doesn’t reject the trouble behind the A16Z proposal. Like many in trade, she welcomes the dialogue and agrees that the readability of the laws is urgently wanted. However she is skeptical {that a} framework primarily based on inflexible decentralization checklists can actually replicate the complexity of at the moment’s crypto panorama.

“We’d like a mannequin that respects innovation on this area,” she mentioned, “however doesn’t ignore the human, financial and administrative dynamics that it drives.”

Which means acknowledging that expertise will not be impartial – it modifications how belongings behave. It means acknowledging that markets are emotional, not mechanical. And it implies that decentralization is handled as a shifting goal, not a field to faucet.

As for the SEC, that is now confronted with the tough process of changing all this suggestions into usable coverage. Whether or not the A16Z framework takes the final picture, one factor is obvious: the dialog has solely simply begun.

“The purpose isn’t just to control crypto,” Frei informed me whereas we end it. “It’s to do it in a method that protects folks – with out pretending that this area is one thing that’s not.”

And possibly, very maybe, there’s a method out right here – however provided that we’re trustworthy about the place we’re beginning.