A new report by financial services firm Arca has delved into the possibility of Uniswap’s UNI token being treated as a security by regulators.
In recent months Uniswap’s popularity and growth have exploded to the extent that it actually surpassed Coinbase for trading volume recently. Its total value locked currently stands just below $2 billion and it is the most popular DEX in the DeFi sector.
A new report has revealed that there were suggestions among U.S. legal and financial commentators that UNI tokens could be considered a security, and that the huge airdrop was an illegal distribution.
What Defines a Security?
The report, written by Chief Legal Officer at Arca Phil Liu, added that it should also be noted that Uniswap has been backed by some large venture capital firms which are likely to have lent their legal, regulatory, technical, and other expertise to the platform.
The U.S. Securities and Exchange Commission has a strict definition of what it considers a security, referencing the Howey Test which was created by the Supreme Court for determining whether certain transactions qualify as ‘investment contracts’.
Essentially a token offering would be considered a securities offering if there was an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others.
A Framework for ‘Investment Contract’ Analysis of Digital Assets was released in April 2019 to tackle the ICO market by providing a deeper set of regulatory requirements. However, the Director in the SEC Division of Corporation Finance, William Hinman, made an important remark the previous year suggesting that;
“certain token offerings that may have started out as a securities offering could become sufficiently decentralized so that no entity, person, or group, provides essential managerial or entrepreneurial efforts, controls the network’s existence, development or, essentially, its profit potential,”
He added that there is little value in having a decentralized network and associated token be subject to a securities law disclosure regime. The actions that the SEC took during the years following the ICO boom were primarily based upon the control that issuers and sponsors had over the networks which made them obvious securities.
UNI Tokens Unlikely to be Considered Securities
The Uniswap situation is different the report continued as the team never raised money through a token offering to create a network. It was only after the network was fully functioning that the team distributed the UNI governance tokens to all previous users and protocol liquidity providers. Liu concluded that;
“Based on my review of existing guidance, precedent and enforcement actions, I believe the Uni tokens do not meet the SEC’s tests for concluding they are securities and/or are subject to enforcement action under existing U.S. securities framework.”
It seems then that Uniswap’s decentralization, tokenomics, and governance mechanisms are likely to keep it out of the clutches of heavy handed U.S. regulators.