What is a “Network Token”?

June 5, 2026

This carve-out is conditional. It is gated by an enumerated list of disqualifying financial rights in §4B(a)(7)(B). A “network token” includes only digital commodities that do *not* carry (i) any security, (ii) an investment contract or profit-sharing interest equivalent to specified debt, equity, or value-transfer rights, (iii) an interest in a §3(c)-excluded investment company, or (iv) an interest in a non-investment-company asset-holding entity. [1] CLARITY answers that question definitionally. If the rights traveling with the token are within an enumerated disqualifying category, the token is not a network token. If they are not, the token is.

This is a different move from the one FIT21 made. FIT21 introduced “investment contract asset,” a defined term for the underlying digital commodity sold pursuant to an investment contract, with the IC being the security and the asset being something else. That separated the wrapper from the thing being wrapped. CLARITY does something more aggressive. It says the *thing itself* is not a security if it lacks the enumerated rights. The §4B disclosure regime, which I will cover in Post #2 of this series, then attaches to the “ancillary asset” subset of network tokens (network tokens whose value depends on the entrepreneurial or managerial efforts of an “ancillary asset originator” or related person). Network tokens that lack ongoing founder-dependent value (a fully autonomous protocol) are not even ancillary assets and pick up no §4B disclosure burden.

Note that the non-security treatment of §4B(a)(7)(A) is “solely for purposes of the Federal securities laws.” The bill reinforces this in §4B(b)(2), which extends the non-security treatment to §2(a)(1) of the ‘33 Act, §3(a) of the ‘34 Act, §2(a) of the Investment Company Act, §202(a) of the Advisers Act, §16 of SIPA, and functionally-equivalent state law. It does not touch §7701 of the Internal Revenue Code, the §1234 character question for options on tokens, the §475 mark-to-market rules, or state common-law fraud. Tax counsel should not read this as a tax characterization. Litigation counsel should not read it as preemption of common-law fraud, breach of contract, or RICO. It is what it says: a federal securities law carve-out, plus a parallel state securities-law backstop.

The Four Disqualifying Rights

Clause (i) is tautological. “Any security” is a disqualifying right. The work is in (ii) through (iv).

Clause (ii) is the doctrinal core. The term “network token” excludes any “investment contract or a certificate of interest or participation in any profit-sharing agreement” that represents, gives, or is “substantially economically or functionally equivalent to” four enumerated rights, as the SEC shall establish by rule. The four sub-rights are: (I) a debt or equity interest, or an option on either, in a person; (II) liquidation rights with respect to a person; (III) an entitlement to, or reasonable expectation of, an interest, dividend, other payment, or direct or indirect transfer of value from a person (other than a decentralized governance system); and (IV) an express or implied financial interest in (including a limited partnership interest or interest in intellectual property of), or provided by, a person (other than a decentralized governance system).

Critically, clause (ii) does not say “any token whose value depends on the efforts of others is disqualified,” which would have been the Howey import. Howey’s “efforts of others” prong, as elaborated in SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476 (9th Cir. 1973), reaches any scheme in which “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” CLARITY does not adopt that test. It asks something narrower and structural: does the token carry an enumerated financial right? Tokenizing an LLC interest, a debt instrument, an option on stock, or a profit-share in a centralized operating company fails. Tokenizing a right to participate in the operation, governance, or fee-revenue of a distributed ledger system does not.

The sub-rights are themselves doctrinally precise.

• (I) (debt, equity, options on same) maps to the conventional security categories. A token that represents a share of an operating company, a note, or a call option on equity is out.
• (II) (liquidation rights) tracks corporate liquidation preferences and partnership distribution rights. If the token entitles the holder to a share of the proceeds of winding up a person, it is out. (III) and (IV) are the catch-alls, and they are where the structuring happens. (
• III) sweeps in any dividend, interest, payment, or transfer of value from a person, with the controlling parenthetical “other than a decentralized governance system.”
• (IV) sweeps in any financial interest in (or provided by) a person, again with the DGS parenthetical.

A “person” is undefined in CLARITY for these purposes, which means it carries its ‘33 Act default meaning under §2(a)(2): an individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government. The DGS parenthetical removes one specific kind of entity from that definition for purposes of clauses (II)(III) and (II)(IV). Everything else remains a “person.” This matters for token cap-table design. A token paying revenue out of a labs entity is disqualified. A token paying revenue out of a properly-structured DGS is not.

Clauses (iii) and (iv) are backstops against laundering economic exposure to a pool of assets through a token. Clause (iii) catches functional interests in entities excluded from investment company treatment by §3(c) of the Investment Company Act. Anyone who has structured a §3(c)(1) or §3(c)(7) private fund will recognize the move. Tokenizing a fractional interest in what would be a §3(c)-excluded private fund and calling the resulting token a “network token” does not work. Clause (iv) extends that backstop one step further to non-investment-company asset-holding vehicles. A token that represents an economic interest in an LLC holding real estate, gold, or any non-securities asset is out. The combined effect of (iii) and (iv) is that wrapper architectures used to securitize off-chain assets do not collapse into network-token status.

Clause (ii) ends with the language “as the Commission shall establish by rule.” That is a rulemaking directive. The substantive content of “substantially economically or functionally equivalent” sits with the Commission. §105(a) gives the SEC one year from enactment to put that flesh on the bone, and I will return to that timing point at the end.

The Parenthetical Does the Work

Four words sitting in parentheses in clauses (ii)(III) and (ii)(IV) do most of the practical structuring work in §4B(a)(7). “Other than a decentralized governance system” is the carve-out that preserves protocol-revenue tokens, fee-switch tokens, vote-escrow tokens, liquid-staking receipt tokens, and the other actually-existing economic primitives on which DeFi has been built. Read without that parenthetical, clause (ii)(III) would disqualify any token providing a “reasonable expectation of” any “payment” or “transfer of value” from any “person.” Every fee-accruing token would fail. With the parenthetical, the question becomes: from whom does the value flow?

§2(5) of CLARITY defines a “decentralized governance system” with care. It is “any transparent, rules-based system permitting persons to form consensus or reach agreement in the development, provision, publication, maintenance, or administration of the distributed ledger system, in which participation is not limited to, or under the control of, any person or group of persons under common control.” §2(5)(B) treats the DGS and the persons participating in it as separate legal persons unless they are under common control or acting under an agreement to act in concert. §2(5)(C) confirms that a DGS includes legal-entity wrappers (decentralized unincorporated nonprofit associations and “other entity created pursuant to State law” such as Wyoming DAO LLCs and Marshall Islands DAO foundations), provided the legal entity does not operate pursuant to centralized management. §2(5)(D), the rule of construction, states that a DGS shall not be deemed a person or a group of persons acting under common control for purposes of the Act.

This is a statutory separate-legal-personhood doctrine for properly-constituted on-chain governance systems. Payments flowing from a DGS to network token holders are not “transfers of value from a person” within clause (ii)(III). Equity-like interests “provided by” a DGS are not financial interests in a person within clause (ii)(IV). The DGS is a person, in some sense, but not the kind of person the disqualifying rights are targeting.

The rule of construction in §4B(a)(7)(C)(ii) reinforces the carve-out from a different angle. It says a digital commodity “shall not be disqualified from being deemed a network token due to the granting of economic interests or voting capabilities with respect to a distributed ledger system or its decentralized governance system.” Economic interests in a DLS or DGS, and voting capabilities over either, are not disqualifying. Read together with the parenthetical, the doctrinal posture is clear: a token can carry meaningful economic rights and meaningful governance rights, provided both run through (or are with respect to) the DLS or the DGS, and not through a related labs entity, foundation operating with centralized management, or other “person.”

The §2(5) DGS definition becomes the load-bearing wall. Anyone structuring a token cap table is now structuring a DGS. The substantive content of “transparent, rules-based,” “consensus or reach agreement,” “participation is not limited to, or under the control of” common-control persons, and “does not operate pursuant to centralized management” is what the bill leaves on the table for SEC and CFTC interpretive elaboration and, eventually, judicial gloss. The Wyoming DUNA framework and the Marshall Islands non-profit DAO foundation provide one set of structuring templates. Whether either, as deployed in any given protocol, satisfies §2(5) is a matter to be analyzed on the facts.

§105(a) and What to do Now

§105(a) is the rulemaking direction. The SEC must, within one year of enactment, adopt rules providing that a network token is not considered to provide a disqualifying right under §4B(a)(7)(B) if its market value is “primarily derived, or is reasonably expected to be primarily derived,” from a distributed ledger system or from the broader adoption and use of such a system. The rule must cover four explicit fact patterns: (A) DLS-internal mechanisms collecting, receiving, accruing, or distributing consideration from the functioning of the DLS; (B) governance capabilities with respect to a DLS or DGS; (C) value appreciation or depreciation in response to the use of, or efforts, operations, or financial performance of, the DLS or its DGS; and (D) for network tokens that also meet the ancillary-asset definition, value appreciation or depreciation due to the efforts of the ancillary asset originator or related person.

(D) is the bridge clause and worth dwelling on. It confirms that a single token can be both a network token and an ancillary asset. The “efforts of the ancillary asset originator” pathway preserves the network-token classification for tokens in protocols that still have meaningful contribution from a labs entity, foundation, or core dev team. The price of preservation is the §4B disclosure regime, which attaches to ancillary assets. But the token itself does not flip into security status because a labs entity is still doing work. That is the principal architectural improvement on FIT21’s “mature blockchain system” formulation.

For anyone structuring token cap tables in the year before §105(a) rules are final, the takeaways follow from the architecture.

• First, build the DGS. §2(5) is the load-bearing wall, and tokens whose economics depend on a DGS that does not satisfy §2(5) on close inspection will not survive the disqualifying-rights test.
• Second, route economics through the DLS or the DGS, not through the labs entity. Where the labs entity must receive value (treasury inflows, IP licensing fees, contribution payments), those flows should sit outside the token economics.
• Third, do not write LP-interest-equivalent terms into token whitepapers. Clause (ii)(IV) explicitly names limited partnership interests and IP-licensing economic interests.
• Fourth, separate the network token analysis from the ancillary-asset analysis. A network token that depends on ongoing founder efforts is a network token plus an ancillary asset, with §4B disclosures attaching to the latter. A network token whose value derives only from DLS adoption is a network token and nothing more, with no §4B disclosure burden.
• Fifth, watch the §105(a) rulemaking. The proposed rule will tell us how aggressively the SEC reads “substantially economically or functionally equivalent” in clause (ii), and how it intends to police the line between a DGS that satisfies §2(5) and a foundation operating with centralized management.

A final observation. The structural choice §4B(a)(7) embodies, a rights-based rather than activity-based or maturity-based test, is the right call. It puts the analysis where the analysis belongs, on what the token actually does for its holder, and it spares everyone the indeterminate fact-finding of “sufficiently decentralized” inquiries. It also concentrates enormous interpretive weight on the four enumerated disqualifying rights and on the DGS definition. Those will be the litigated provisions for the next decade.

[1] The list reads like a structured catalog of what the SEC has spent the last decade arguing tokens really are. SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020), SEC v. LBRY, Inc., 639 F. Supp. 3d 211 (D.N.H. 2022), SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020), and the now-dismissed SEC v. Coinbase, Inc. litigation, No. 23-cv-04738 (S.D.N.Y. June 6, 2023), all turned on whether the rights traveling with a token amounted to an investment contract enforced through software and protocol economics rather than through paper.

Written by David Lopez Kurtz