Ethereum’s DeFi token could be securities

  • SEC commissioner Hester Peirce warns of a potential classification of Ethereum-based DeFi governance tokens as securities.
  • According to Peirce, tokens distributed by airdrop could also be classified as securities under US law.

Hester Peirce, one of four commissioners at the US Securities and Exchange Commission, explained during the LA Blockchain Summit that Ethereum-based DeFi tokens could be treated as securities-like financial instruments. During her speech at the conference, the SEC representative, also known as “crypto mom”, explained that “governance tokens” introduced as part of the DeFi movement fall within a space of regulatory uncertainty.

Specifically referring to the Uniswap token (UNI) and also SushiSwap (SUSHI), Peirce explained that each individual case must be investigated. Peirce avoided giving a specific assessment but suggested that “people should come and talk to the SEC about how they intend to distribute tokens”, although she warned that “there are other people in the Commission who might consider the same facts and circumstances differently” from her.

Instead of imposing heavy fines for the unregistered sale of securities, Peirce also repeated the “safe harbor” approach she proposed for token issuers several months ago. According to this, companies could have three years to transfer power to their communities before the SEC takes action for the alleged violations of securities laws.

Nevertheless, Peirce warned that governance tokens distributed via airdrop could be classified as securities even if they were given away rather than sold.

This does not necessarily mean that you are outside the scope of securities law. So even if you don’t sell it, you are basically issuing the token. In the end, it might still fit into the securities classification. So people have to be careful, and again, this is one more reason why the SEC has to be out there to provide guidance, because people are trying to figure out how to issue the tokens so that users can use the tokens, and we are not really active in providing the guidance that people need to feel comfortable.

In particular, she also pointed out that her “safe harbour” proposal has not yet received the support it needs within the SEC, which is why she is working on a 2.0 release. At the same time Peirce pointed out the enormous potential, which is why she repeatedly called for more regulatory clarity. With regard to the issuance of governance tokens and whether they should be classified as securities, she explained:

I think when you have the people who are actually using something deciding its future, then the changes that happen are decided by the community together. And that’s a sort of regulatory function. It’s not a government regulatory function, but it’s a regulatory function by the people who are actually using it. So someone can launch one of these projects and say, ‘I have this great vision for what’s gonna happen with this project.’

But if you really launch it and put it in the hands of your community, it could end up doing and being something very different than what you initially imagined it to be. It could ultimately be very different. So you have to have a little bit of willingness to be hands-off and see what happens. And that’s probably a little bit scary for some developers to do that, but I think it’s kind of an interesting thing to watch.

With her comments, Peirce joins an ongoing debate that started a few weeks ago and may have had an impact on the current flattening hype about Ethereum DeFi.