SEC’s DoubleZero No-Action Letter: A Potential Turning Point for Decentralized Infrastructure Networks
In a significant development that may reshape the regulatory landscape for decentralized physical infrastructure networks (DePIN), the Securities and Exchange Commission’s Division of Corporation Finance issued a groundbreaking no-action letter to DoubleZero Foundation on September 29, 2025. This decision represents one of the most comprehensive analyses of cryptocurrency token distributions under federal securities laws in recent years and could have far-reaching implications for blockchain-based infrastructure projects.
Understanding the DoubleZero Network
DoubleZero addresses a fundamental bottleneck in blockchain technology: communication infrastructure. While computing power supporting blockchain validators has dramatically improved since Bitcoin’s inception, the underlying network infrastructure—the fiber optic cables comprising the public internet—has remained largely unchanged. This creates performance limitations for consensus mechanisms, as validators must propose blocks and vote over public internet paths prone to bandwidth constraints, high jitter, and inconsistent routing.
The DoubleZero solution leverages existing underutilized private fiber networks. According to the FCC, approximately 65% of fiber installed in the United States remains unutilized. DoubleZero’s protocol enables a marketplace where enterprises can monetize this excess capacity by integrating their underutilized lit fiber and dark fiber into a unified mesh network optimized for distributed systems like blockchains.
The 2Z Token Ecosystem
Central to the DoubleZero Network is the 2Z token, which serves three primary functions:
1. User Payments: Users (such as blockchain validators, RPC node operators, and sequencers) acquire 2Z on secondary markets to pay fees for high-performance network connectivity. The token serves as the “currency” of the network, enabling value exchange between those needing fast communication channels and those providing infrastructure.
2. Provider Payments: Network Providers—enterprises that connect fiber optic links to the network—receive 2Z as compensation for providing connectivity services. Critically, payment amounts are determined algorithmically using Shapley value calculations that measure each provider’s contribution to overall network performance, not by token holdings or third-party discretion.
3. Computation Payments: Resource Providers, who maintain the DoubleZero Ledger and perform various monitoring duties, receive newly minted 2Z as compensation for their computational work supporting network operations.
The Legal Question: Are 2Z Tokens Securities?
The central question addressed in Cooley LLP’s no-action request was whether these “Programmatic Transfers”—the Provider Payments and Computation Payments—constitute securities transactions requiring registration under the Securities Act of 1933 and Securities Exchange Act of 1934.
This inquiry required careful analysis under the Supreme Court’s decision in SEC v. W.J. Howey Co., which established that an “investment contract” exists when there is:
- An investment of money
- In a common enterprise
- With a reasonable expectation of profits
- Derived from the entrepreneurial or managerial efforts of others
The fourth prong—whether profits derive from others’ managerial efforts—often proves dispositive in digital asset cases.
Why the SEC Granted No-Action Relief
The Division of Corporation Finance concluded that DoubleZero’s Programmatic Transfers do not satisfy the fourth prong of the Howey test. The reasoning centered on several key factors:
Active Participation Requirements
Network Providers must undertake substantial efforts to participate in the ecosystem. Connecting to the network requires:
- Conducting research into route topologies, latency requirements, and regulatory considerations
- Negotiating with external vendors for hardware, cable leases, and data center space
- Installing and operating specialized hardware (switches and FPGA devices) at both ends of fiber optic cables
- Committing teams of technical personnel (one provider estimated 12 days of concentrated effort by five-person teams for each new link)
- Continuous monitoring, preventive maintenance, and response to outages
These are not “nominal or limited” duties with “little direct effect upon receipt by the participant of the benefits promised by the promoters,” as contemplated in Lino v. City Investing Co. Rather, Network Providers’ own efforts constitute the “sine qua non” of their success, as described in SEC v. Glenn W. Turner Enters.
Algorithmic, Performance-Based Compensation
Unlike traditional DePIN projects that reward contributors with newly minted inflationary tokens regardless of contribution quality, DoubleZero employs a Shapley value algorithm that calculates each Network Provider’s incremental contribution to overall network performance. Providers who improve network performance through increased bandwidth and reduced latency earn larger fees; those who fail to improve performance relative to the public internet earn little or nothing.
This performance-based compensation model resembles Bitcoin mining rewards—directly proportional to hashpower contributed—rather than Proof of Stake rewards tied to token holdings. As noted in the Cooley letter, the SEC’s Statement on Certain Proof-of-Work Mining Activities recognized that such arrangements involve “payments to the [provider] in exchange for services it provides to the network rather than profits derived from the entrepreneurial or managerial efforts of others.
Minimal Foundation Involvement
The DoubleZero Foundation’s role is limited to:
- Community education and technical documentation
- Ecosystem coordination through roundtables and best practice sharing
- Regulatory liaison activities
- Assisting Network Providers with onboarding (subject to compliance with law and minimum technical requirements)
- Grant-making to support independent development teams
Critically, the Foundation does not:
- Install, operate, maintain, or repair fiber optic links
- Exercise discretion in calculating or distributing provider payments
- Manage day-to-day network operations
- Control activities that generate returns for participants
- Market the network or token as an investment opportunity
As Commissioner Hester Peirce noted in her statement supporting the no-action letter, “The Foundation’s role focuses on educating the industry, coordinating among stakeholders, and encouraging continued development… these activities are all fundamentally ancillary to the day-to-day services provided by the Network Providers.”
Educational, Not Promotional Marketing
The Foundation’s public communications have been exclusively “factual, developer-oriented communications” emphasizing technical specifications and utility. Marketing materials have never characterized 2Z as an investment or suggested passive returns. This contrasts sharply with cases like SEC v. Munchee Inc., where the Commission found securities violations based on marketing that “emphasiz[ed] the economic benefits to the purchaser to be derived from the managerial efforts of the promoter.”
Implications for Decentralized Infrastructure Projects
The DoubleZero no-action letter provides valuable guidance for entrepreneurs building decentralized infrastructure networks. Several design principles emerge:
1. Emphasize Active Participation Over Passive Investment
Projects should require substantial, ongoing efforts from participants rather than simple token purchases followed by passive reward accumulation. The distinction between active service provision and passive investment often determines regulatory treatment.
2. Implement Performance-Based Rewards
Compensation mechanisms should directly correlate with measurable contributions to network utility rather than token holdings or stake amounts. Algorithmic, objective calculation methods reduce concerns about managerial discretion by promoters.
3. Minimize Central Party Control
Decentralization isn’t merely a buzzword—it has real legal significance. Projects should ensure that:
- Network operation doesn’t depend on any single entity
- Payment distributions occur programmatically through smart contracts
- Upgrade authority is either decentralized from launch or subject to a credible decentralization roadmap
- Marketing emphasizes utility and technical capabilities rather than investment potential
4. Design Tokens for Consumptive Use
Tokens should serve clear functional purposes within the network rather than incorporating passive value accrual mechanisms like dividends, deflationary supply schedules, or programmatic buybacks. As the Supreme Court recognized in United Housing Foundation v. Forman, “purchas[ing] a commodity for personal consumption” differs fundamentally from “a security transaction… where one parts with his money in the hope of receiving profits from the efforts of others.”
5. Target Users, Not Speculators
Token distribution strategies should focus on actual network participants who need tokens for consumptive use. DoubleZero’s “Validator Sale” was restricted to active blockchain validators on specific networks, with purchase limits tied to stake weight to match usage profiles and discourage speculation.
Commissioner Peirce’s Perspective
In her statement accompanying the no-action letter, SEC Commissioner Hester Peirce emphasized several important points:
On Decentralization’s Legal Relevance: Commissioner Peirce noted that the DoubleZero structure demonstrates how thoughtful network design—where participants provide essential services and receive compensation based on their own measurable contributions—can fall outside the securities regulatory framework even when tokens are involved.
On the Foundation’s Role: As the Cooley letter explains, the Foundation’s coordination and educational activities, while valuable to the ecosystem, don’t constitute the “undeniably significant” managerial efforts contemplated by Howey because “the Network Providers and Resource Providers themselves provide the essential efforts for their own success.”
On Broader Implications: Commissioner Peirce’s statement highlighted the significance of this no-action letter for decentralized infrastructure projects, demonstrating that the SEC can apply securities laws appropriately to novel technologies that don’t fit traditional investment paradigms.
Potential Limitations and Cautions
While the DoubleZero no-action letter provides helpful guidance, several important limitations should be noted:
1. No-Action Relief is Fact-Specific
The Division emphasized that relief applies only to the specific Programmatic Transfers described—not to prior transactions (which were structured under Securities Act exemptions), Treasury Sales, secondary market transactions, or other distributions. Projects with different operational structures may reach different conclusions.
2. No-Action Letters Don’t Create Binding Precedent
Unlike court decisions or formal SEC rules, no-action letters represent staff positions that the Division will not recommend enforcement action under specific circumstances. While persuasive, they don’t bind the Commission or establish controlling legal standards.
3. Marketing Matters Enormously
The Foundation’s commitment to purely educational, utility-focused marketing was critical to the analysis. As Cooley’s letter notes, “We acknowledge that the relief requested in this letter would not apply to any party that acts in a manner inconsistent with the Foundation’s proposed public communications and marketing concerning the 2Z token or Network.”
4. The Foundation Retains Some Centralized Functions
At launch, the Foundation will control smart contract upgrade authority (though it intends to decentralize this over time) and will assist with Network Provider onboarding. The letter emphasizes these roles are ministerial and subject to objective technical criteria, not discretionary business judgments.
5. Secondary Market Speculation Remains Possible
The letter acknowledges that speculators may buy and sell 2Z despite the token’s consumptive design and the Foundation’s anti-speculation messaging. While such speculation wouldn’t be based on reasonable expectations of profit from others’ efforts, it could complicate the regulatory picture if it becomes the predominant use case.
Comparison to Other Digital Asset Frameworks
The DoubleZero analysis can be contrasted with other significant SEC positions on digital assets:
Ethereum’s Transition
In 2018, then-Director of Corporation Finance William Hinman suggested that Ethereum’s evolution toward sufficient decentralization meant Ether transactions might no longer constitute securities offerings. DoubleZero provides more specific guidance on what “sufficient decentralization” actually requires from an operational and legal perspective.
SEC v. Ripple Labs
In SEC v. Ripple Labs, the Southern District of New York found that XRP sales to institutional investors constituted securities transactions, while programmatic sales on exchanges did not, based on purchaser expectations. DoubleZero advances this analysis by focusing more explicitly on the service provider’s own efforts as the source of any returns.
The DAO Report
The Commission’s 2017 DAO Report emphasized that distributed ledger technology doesn’t automatically preclude securities law application. DoubleZero shows the flip side: when properly structured with active participant contributions and minimal central party control, digital asset distributions can fall outside securities regulations even when sophisticated technology is involved.
Practical Considerations for Entrepreneurs
Founders building decentralized infrastructure projects should consider several practical steps:
Early Legal Consultation: Engage experienced cryptocurrency regulatory attorneys during the project design phase, not after token launch. Structural decisions made early can significantly impact regulatory treatment.
Document the Decentralization Plan: Create and maintain clear documentation showing how network operations, governance, and economic decisions are distributed among participants rather than controlled by the founding team or any central entity.
Measure and Publicize Real Usage: Demonstrate that token demand derives from actual network utility rather than speculative trading. Metrics showing Users acquiring tokens for consumptive purposes strengthen arguments against securities classification.
Consider Hybrid Approaches: Initial token sales might utilize Securities Act exemptions (Regulation D, Regulation S) while designing the network so that ongoing operational token distributions fall outside securities laws entirely.
Monitor Marketing Scrupulously: Every public statement about the project and token should emphasize utility and technical capabilities. Avoid language suggesting investment returns, passive income, or appreciation based on team efforts.
The Broader Regulatory Landscape
The DoubleZero no-action letter arrives amid broader developments in cryptocurrency regulation:
Congressional Action: Multiple bills addressing digital asset regulation have been introduced in the 119th Congress, potentially providing clearer statutory frameworks than case-by-case analysis under 1930s-era securities laws.
Agency Coordination: The Commodity Futures Trading Commission has also asserted jurisdiction over certain digital assets as commodities. Projects may need to navigate both SEC and CFTC requirements depending on their specific characteristics.
State-Level Activity: States are increasingly implementing their own digital asset regulations, creating a patchwork that requires careful navigation.
International Considerations: For projects with global operations like DoubleZero, compliance with foreign regulatory regimes—including the EU’s Markets in Crypto-Assets Regulation (MiCA) and various Asian frameworks—adds additional complexity.
Looking Forward
The DoubleZero no-action letter represents a maturation in the SEC’s approach to digital assets. Rather than applying securities laws mechanically to any project involving tokens, the Division demonstrated willingness to recognize that certain decentralized infrastructure networks operate fundamentally differently from traditional investment vehicles.
However, the letter also underscores that regulatory compliance requires thoughtful design choices and operational discipline. The Foundation’s commitments regarding marketing, limited central control, and utility-focused token design were essential to obtaining relief.
For the emerging DePIN sector—encompassing decentralized wireless networks, storage systems, computing resources, and now telecommunications infrastructure—DoubleZero provides a potential roadmap. Projects that genuinely distribute operational responsibilities among participants who provide essential services through their own substantial efforts, compensate those participants based on measurable performance contributions, and maintain arms-length relationships with any coordinating foundations may be able to structure tokens that fall outside securities regulations.
Conclusion
The SEC’s DoubleZero no-action letter marks a significant development for decentralized infrastructure projects and the broader digital asset ecosystem. By carefully analyzing the economic reality of the DoubleZero Network under established securities law principles, the Division provided meaningful guidance on when token distributions avoid securities classification.
The key takeaways are clear: emphasize active participation over passive investment, implement objective performance-based rewards, minimize central party control, design tokens for consumptive use, and maintain educational rather than promotional marketing. Projects that follow these principles—with support from experienced legal counsel—may successfully navigate the complex regulatory landscape.
Sources:
- Cooley LLP’s No-Action Request and Related Press Release
- SEC DoubleZero No-Action Letter
- Commissioner Peirce Statement on DoubleZero
- Axios Coverage: SEC DoubleZero Crypto No-Action
- CoinDesk Analysis: SEC’s Bow to DoubleZero
Disclaimer: This article is for informational purposes only and does not constitute legal advice. The application of securities laws to digital assets depends on specific facts and circumstances. Consult with qualified legal counsel before making decisions regarding cryptocurrency projects or token offerings.
