Beyond Gary Gensler's Crackdown: Why Token Buybacks Can't Replace Real Equity

The crypto industry has spent years navigating a regulatory minefield, and the pressure finally reached a turning point with a shift away from Gary Gensler’s aggressive enforcement approach. For years, projects faced an impossible choice: the SEC refused to clarify whether tokens qualified as securities, yet simultaneously pursued litigation against those attempting to operate anyway. This regulatory vacuum forced the industry into structural contortions that persist today, creating fundamental problems that no amount of tokenomics engineering can truly solve.

The Regulatory Squeeze That Fractured Crypto’s Capital Structure

When regulatory clarity became impossible to achieve, projects like Uniswap pioneered a workaround: separate the equity-holding legal entity from the governance token infrastructure. In practice, this meant creating organizational firewalls that technically satisfied regulators while leaving token holders in legal limbo. Tokens became divorced from actual ownership claims—they were governance tools in name only, often with minimal real utility.

This structural separation wasn’t a strategic choice; it was forced necessity born from Gary Gensler’s litigation-first philosophy. Projects had no compliant pathway to explore. The result? A proliferation of tokens designed purely for speculation, lacking any substantive connection to company ownership or cash flows. These “hollow tokens” flooded the market precisely because they were unrestricted alternatives to traditional equity. For token holders, this meant accepting assets with no legal claim to profits, assets, or company direction.

How Buyback Culture Became a Band-Aid for Missing Equity Rights

As the regulatory environment tightened under enforcement pressure, projects and investors grew desperate. With tokens stripped of genuine equity characteristics, buyback mechanisms became the psychological substitute—a way to manufacture equity-like benefits where none existed legally.

Hyperliquid crystallized this trend by committing 100% of exchange revenue to programmatic token buybacks regardless of market conditions. On the surface, this seems generous: the company returns all profits to token holders via supply reduction. But this reveals a fundamental misunderstanding of capital allocation.

In traditional corporate finance, profit distribution follows a hierarchical logic: companies earn revenue, pay operational costs to generate net profit, then decide how to allocate that profit. The choices are reinvest in growth, strengthen the balance sheet, or return cash to shareholders. For mature companies with limited growth opportunities, returning cash via dividends or buybacks makes sense. But for a 99.9% of crypto projects—essentially early-stage venture-backed operations—this logic inverts entirely.

An early-stage company that commits most of its revenue to buybacks rather than reinvestment is essentially betting against its own growth potential. If management believes the company will generate superior returns for equity holders through expansion, why would they accelerate cash returns now? The decision only makes sense if management has given up on future growth prospects.

Revenue-Generating Tokens: The Real Divide Reshaping Crypto Markets

The market has begun bifurcating into two categories: roughly 90% of tokens experiencing sustained pressure, and an emerging 10% that capture consistent buying support. The difference isn’t price action or marketing budgets. The 10% succeed because they typically share two characteristics: first, their token supply structure isn’t being destroyed by VC and investor selling pressure, and second, the underlying projects actually generate measurable revenue and profit.

This represents a seismic shift in investor psychology. For the first time, significant capital is flowing to projects that treat profitability as a core metric. The market is finally grappling with the notion that crypto projects can and should operate like businesses, not just asset accumulation vehicles.

The Corporate Finance Playbook: Why Early-Stage Projects Shouldn’t Prioritize Returns

When crypto projects begin generating real revenue, they enter unfamiliar territory: actual corporate finance decisions. This is where fundamental misalignments emerge.

Consider the Return on Invested Capital (ROIC) versus Weighted Average Cost of Capital (WACC) framework used in corporate strategy. When ROIC exceeds WACC, reinvesting profits generates more shareholder value than returning cash today. Conversely, when internal reinvestment opportunities deliver negative net present value, distributions to shareholders become rational.

Early-stage companies almost universally face situations where ROIC far exceeds WACC—their opportunity costs are enormous. A five-year-old fintech startup, or a three-year-old crypto protocol, typically has dozens of high-impact investment opportunities: building new features, expanding markets, strengthening security infrastructure, acquiring talent. Consuming capital for buybacks in these contexts is strategically myopic.

Yet many projects feel pressured to adopt aggressive buyback programs precisely because their tokens lack genuine equity rights. Investors, feeling unprotected by legal claims to company value, demand visible “returns.” Projects, interpreting this anxiety, commit to mechanical buyback commitments. Both parties are working without a safety net, so they clutch whatever appears tangible.

The Path Forward: Clear Token Equity as the Industry’s Missing Link

The fundamental problem isn’t buybacks themselves—it’s that they’ve become a substitute for the missing piece: enforceable token equity rights.

If token holders possessed legitimate legal claims to company profits and assets (like traditional equity), investor confidence would shift dramatically. Founders could focus entirely on building and reinvesting, knowing token holders have contractual claims to long-term value. Buybacks would return to their appropriate role: a tactical tool for returning excess capital when growth opportunities have genuinely dried up, not a permanent revenue allocation mechanism.

With regulatory frameworks like the CLARITY Act moving toward passage, the industry finally has a chance to establish this foundation. Clear legal guidance on how to structure compliant token offerings with genuine equity attributes would resolve years of architectural compromises. Projects could rebuild around sustainable capital structures rather than regulatory workarounds.

The crypto industry’s maturation depends less on new technologies and more on importing proven corporate finance principles. The 10% of tokens thriving today suggest the market is ready for this transition. Real equity rights, not revenue commitments, represent the genuine breakthrough the industry requires.