The Division of Corporation Finance of the U.S. SEC took a landmark step by issuing a "No-Action Letter" ("NAL") to DoubleZero regarding its proposed 2Z token offering, stating that "based on the facts presented, the Division will not recommend enforcement action."

This week, a crypto project sought prospective guidance on the legal status of a proposed token offering and received a productive response.

Previously, during Gary Gensler's tenure as Chairman of the U.S. Securities and Exchange Commission (SEC), the regulatory environment for crypto industry practitioners was characterized by the SEC's guidance being almost entirely "retrospective enforcement" – projects originally invited to "come in and register" ultimately received Wells Notices upon exit. Although this victory for cryptocurrency is largely attributed to a shift in the SEC's perspective and leadership, DoubleZero's legal team deserves credit for clearly outlining the token's design.

The SEC's no-action letter indicates that the staff has no intention to recommend enforcement action against the parties involved regarding the proposed activities, providing regulatory comfort to the requester without formally binding the SEC. While such letters are not legally precedent-setting, they are often influential, clarifying gray areas of securities law and guiding industry practices, thus serving as effective signals of regulatory tolerance and expectations.

Prior to this NAL, we recall the only other such forward-looking guidance issued by the SEC regarding a token offering was the NAL for TurnKey Jet in April 2019. In that NAL, the SEC staff stated that as long as the tokens were not traded on the secondary market, maintained a stable value of $1, and could only be used to purchase the issuer's services (essentially, it had to function like airline miles or other reward programs – a highly restrictive design), the SEC would not take enforcement action. The DoubleZero NAL reflects a positive view of tokens with significantly enhanced utility and tradability, thus representing major progress favorable to the crypto industry from the SEC.

DoubleZero's proposition is interesting: 2Z is not a speculative profit claim but a functional incentive token designed to coordinate Decentralized Physical Infrastructure (DePin). The project aims to build a global network of underutilized fiber optic bandwidth, creating a decentralized private internet for distributed systems like blockchain. The network is designed to incentivize fiber infrastructure owners (Network Providers) to fully utilize their idle fiber and to incentivize Operators (Network Participants) to coordinate traffic routing between Network Provider infrastructure to maintain network robustness and fault tolerance. Network Users accessing this private internet need to pay for network access; this fee will be programmatically distributed to efficient Network Providers and Participants in the form of 2Z tokens.

In its letter to the SEC, the DoubleZero team focused on the fourth prong of the Howey Test: whether holders can reasonably expect profits derived from the managerial efforts of others. DoubleZero effectively explained that the 2Z token merely serves to coordinate bandwidth suppliers and users. The profits (and losses) expected by Network Providers and Network Participants are directly attributable to their own contributions and operational actions to the Double Zero Network, not the actions of others. DoubleZero defined Network Providers and Participants as working within the operational rules of the incentivized network, for which the SEC has already given the green light (twice). An asset must pass all prongs of the Howey Test to be considered an investment contract (and thus a security); without the fourth prong (expectation of profit from others' efforts), the 2Z token falls outside SEC regulation.

Commissioner Hester Peirce publicly praised the letter and used it to reiterate one of her long-standing views: the SEC's securities analysis should be based on economic substance over form. Peirce has long been a check on SEC overreach under her predecessor Gary Gensler, dissenting from many of the SEC's crypto enforcement actions. After being appointed head of the SEC's newly formed Crypto Task Force, she delivered a "New Paradigm" speech, noting that many digital assets are not securities and advocating for a tailored safe harbor for tokens. This week's NAL is one of the first concrete actions taken by SEC staff in this direction. Under Peirce's leadership, the Crypto Task Force has hosted five industry roundtables and held over 150 meetings with crypto firms and other stakeholders.

Galaxy's View:

This move by the SEC is an encouraging development for the crypto industry. For years, crypto projects were presumed to be criminal enterprises and faced a choice among grim options: being enforcement targets; undergoing an opaque, slow registration process (only one project has successfully registered to date); or blocking US residents from services (though many managed to bypass geofencing).

Before this announcement, the only crypto project we knew of that found success with the SEC (if it can be called that) was Blockstack (later Stacks) and its STX token. Stacks issued its token as a registered securities offering via a Regulation A+ crowdfunding exemption, allowing for minimal disclosure. Two years later, Stacks self-certified that its network was sufficiently decentralized and no longer a security, ceasing its filings with the SEC. The SEC, after a three-year investigation, chose not to pursue action against Stacks. This was less an explicit endorsement than a tacit acquiescence to the project's position, unlike this week's clear acknowledgment for DoubleZero.

This is clearly a win for DoubleZero, but it could also be a boon for token designers globally. It provides a roadmap for building and developing functional utility tokens that the SEC will not view as investment contracts. Crucially, however, the NAL should only be viewed as interpretive guidance for tokens substantially similar in design to what DoubleZero described. While the SEC staff clearly stated it would not recommend enforcement against DoubleZero on the grounds that such a token offering is an investment contract, the NAL does not fully articulate the SEC's view on all token designs. The relief is conditional and fact-specific. It is relief at the staff level, not a broad rule change. It does not legitimize prior distributions or token flows outside the limited design. It does not preclude future enforcement if facts change or the SEC's view changes (e.g., under a different administration). For every token attempting to mimic the 2Z structure, legal teams will need to demonstrate discipline, documentation, and strict adherence to the "utility-first" structure described in the NAL.

While this is a bright spot for the crypto industry, it might be the last news we hear from regulators – good or bad – for some time. The federal government is shutting down over budget disputes, an unfortunate but common occurrence across administrations. Until the dispute is resolved, we have low expectations for regulators (markets are predicting a shutdown lasting more than two weeks).

As reported by The Information this week, this government shutdown could indeed delay other anticipated crypto actions from the SEC, such as a key "innovation exemption" allowing stocks to trade inside DeFi apps, which the SEC is working on delivering "as soon as possible."

Meanwhile, the Commodity Futures Trading Commission (CFTC) is hamstrung, with the withdrawal of Brian Quintenz's nomination for Chairman, leaving Acting Chairman Caroline Pham as the sole commissioner on what is typically a five-person commission. So, enjoy the good news from the DoubleZero fund, as the next win might be a while.