- The DeFi Education Fund and the Uniswap Foundation have probed SEC’s DAO regulation
- They argue that DAOs aren’t securities and thus the SEC shouldn’t regulate them
- The two believe that DAOs are “sufficiently decentralized,” and neither part of their operation fulfils the Howey test
The DeFi Education Fund (DEF) and the Uniswap Foundation (UF) have asked why DAOs fall under the SEC’s purview, and they don’t fulfil the Howey test. In a joint letter to Hester Pierce, SEC’s Crypto Task Force head, they noted that DAOs are decentralized in a way that “neither the network token for that DAO, nor transactions in which that network token is the object, should be considered a security.” The two, however, said they support Pierce’s priorities and a transparent approach to digital asset regulations, which is geared towards making the United States a crypto-friendly country.
DAOs Are “Sufficiently Decentralized”
In the letter, they said they believe DAOs are “sufficiently decentralized,” putting them outside the definition of a security.
They based their argument on the SEC’s former director, Bill Hinman, who said that tokens of sufficiently decentralized networks aren’t securities because “in such cases, purchasers no longer [expect] profits to be derived from the efforts of a central third party.”
According to the DEF and the UF, the securities watchdog should treat DAOs “as nothing more than disparate people or groups of people.” They, however, noted that this treatment shouldn’t be accorded to formations claiming to be DAOs, but their operations resemble those of traditional corporations.
The two defined a true DAO as one without a central authority and largely governed by a smart contract. They added that the members of a true DAO don’t have a common business purpose, agreements to share profits and losses, or the “ability to admit or block new members.”
A True DAO Doesn’t Have Entry Barriers
According to the DEF and the UF, the barriers to joining a true DAO are extremely low since buying a token automatically makes one a member, something that distinguishes a DAO from a centralized corporate entity and also provides a difference between DAO tokens and “traditional equity or debt securities.”
The joint letter comes two months after the SEC Crypto Task Force announced public roundtables to discuss virtual asset regulation with industry participants.
With the DEF and the UF presenting their case, it remains to be seen whether the SEC will exempt DAOs from the securities laws.
