The Future of Layer 1 Tokens Under Securities Law Scrutiny

The SEC's core argument: L1 tokens are investment contracts because buyers expect profits from the managerial efforts of a core development team. This ignores decentralized governance.

• Key Risk: Post-launch development and marketing can be re-framed as "managerial efforts."
• Precedent: Cases against Solana (SOL), Cardano (ADA), and Algorand (ALGO) hinge on this interpretation.

Pre-launch fundraising and a clearly identifiable founding team create an indelible securities claim, even if the network later decentralizes.

• Key Risk: Ethereum's 2014 ICO remains its largest regulatory overhang, despite its current decentralization.
• Solution Path: Aptos (APT) and Sui (SUI) face scrutiny for similar structures; future L1s may need foundationless, fair-launch models.

The SEC alleges that token staking programs offered by centralized entities (e.g., Kraken, Coinbase) constitute an unregistered securities offering.

• Key Risk: This directly implicates the underlying token if staking is a primary utility. Ethereum's post-Merge shift to Proof-of-Stake increased this exposure.
• Defense: Truly decentralized staking pools or non-custodial protocols like Lido (LDO) present a more complex legal target.

The only credible defense is provable, functional decentralization that eliminates reliance on a single entity. This is a technical and legal benchmark.

• Requirement: Mature client diversity, on-chain governance with wide participation, and a self-sustaining developer ecosystem.
• Benchmark: Ethereum and Bitcoin are the high-water marks; newer L1s like Celestia (TIA) architect for this from day one.

Protocols like EigenLayer abstract the underlying L1's regulatory status by creating a new trust layer. Capital and security flow to the restaking protocol, not the base asset.

• Strategic Shift: Transforms Ethereum (ETH) from a potential security into a raw, commoditized cryptographic resource.
• Result: Regulatory risk is concentrated in the application layer (EigenLayer, Kelp DAO), insulating the L1.

The CFTC's opposing view—that many tokens are commodities—creates jurisdictional warfare. Legislative action (e.g., FIT21 Act) is the only permanent fix.

• Outcome: A clear, non-securities classification for sufficiently decentralized networks would unlock institutional capital.
• Timeline: A 2-5 year political battle, with Bitcoin (BTC) and possibly Ethereum (ETH) as the likely first designees.

The Problem: The SEC's case against Coinbase hinges on labeling ETH as a security. The Solution: Ethereum's core devs and the Ethereum Foundation accelerate protocol-level decentralization to pass the Howey Test.\n- Key Move: Finalize client diversity and proposer-builder separation (PBS) to eliminate any central points of control.\n- Key Benefit: Establishes a legal precedent for sufficiently decentralized networks, shielding Solana, Avalanche, and Cosmos.

The Problem: A token with pure speculation and staking rewards is a security. The Solution: Protocols engineer mandatory, consumptive burns for core operations, framing the token as a consumable resource.\n- Key Move: Redirect all sequencer/validator fees to a permanent burn, not to a treasury or stakers.\n- Key Benefit: Creates a direct fee-for-service model, mirroring AWS credits, and detaches token value from profit expectations from a common enterprise.

The Problem: The legal liability of maintaining a token outweighs its utility. The Solution: Core developers fork the chain, removing the native token entirely and transitioning to a fee-less base layer or multi-asset gas model.\n- Key Move: Airdrop remaining treasury to holders and re-launch as a public good protocol using ETH or USDC for gas.\n- Key Benefit: Eliminates securities risk completely, following the path of early internet protocols (TCP/IP). Surviving chains become infrastructure, not investments.

The Problem: Fighting classification is a losing, costly battle. The Solution: A major L1 proactively registers its token as a security, creating a fully compliant, on-chain capital markets platform.\n- Key Move: Integrates with registered transfer agents and builds KYC'd validator sets, attracting institutional capital barred from 'wild west' chains.\n- Key Benefit: Captures the trillion-dollar market for tokenized RWAs and funds, becoming the NASDAQ of DeFi while competitors are stuck in legal limbo.

The SEC applies a 1940s investment contract test to 21st-century network tokens. The core risk is that any token sale funding development is deemed a security offering, creating permanent liability for founders and chilling VC investment.\n- Key Risk: Retroactive enforcement on past token distributions.\n- Key Risk: Stifling of legitimate protocol-led growth and community building.

The only viable defense is a token whose primary, indispensable function is paying for a core, automated network service. Think gas for execution and data (Ethereum) or staking for security (Solana). The token must be useless for speculation without its network function.\n- Key Action: Architect token burns and sinks directly into consensus or execution.\n- Key Action: Eliminate treasury-controlled token distributions that resemble dividends.

Voting on treasury funds or protocol parameters is a securities regulator's dream—it looks like a common enterprise with profit expectation. Minimize or eliminate tokenholder governance over financial or core protocol decisions. Delegate technical upgrades to a credibly neutral foundation or expert committees.\n- Key Action: Separate social consensus (forks) from token-voted execution.\n- Key Action: Use non-transferable governance NFTs for participation, divorcing power from token price.

If a monolithic L1 token is untenable, the endgame is a modular stack where the settlement/DA layer token bears the regulatory burden. App-specific rollups (via Arbitrum Orbit, OP Stack, Celestia) use the base layer for security but issue their own purely utility-driven tokens for gas. This isolates application economics from securities law.\n- Key Action: Build as an L2/L3 with a custom gas token.\n- Key Action: Leverage shared security from Ethereum, Bitcoin, or Cosmos to bootstrap trust.

There is no bright-line legal test for decentralization. The SEC's stance suggests it's a spectrum where they hold the measuring stick. Concentrated VC/team holdings, centralized development, and promotional activity can invalidate decentralization claims long after launch.\n- Key Risk: Perpetual regulatory overhang prevents institutional adoption.\n- Key Risk: The goalpost for "decentralization" moves with each new enforcement action.

Compliance must be architected from genesis. This means: No pre-sales or SAFTs to US persons, a fully live network at token distribution, and a token with immediate, non-speculative utility. Document everything. The model is a functional network first, token distribution second—the inverse of the 2017 ICO model.\n- Key Action: Use airdrop-based distribution to verified network users, not investors.\n- Key Action: Engage legal counsel pre-launch for a Wells Submission to proactively argue the token's non-security status.