Exemption

In brief

• Several Ethereum DeFi governance tokens rose after SEC Chair Paul Atkins said the agency would establish an “innovation exemption” for entities engaged in the crypto subsector.
• A DeFi-focused roundtable on Monday inspired “optimism,” a spokesperson for a research and advocacy group said.
• Uniswap, Aave, and Sky saw “unusually heavy” trading volume, potentially lifting Ethereum’s price, according to one analyst.

The price of several tokens tied to Ethereum-based projects in decentralized finance, or DeFi, spiked on Tuesday after the Securities and Exchange Commission signaled that it’s taking steps internally to become more accommodative of the emergent subsector.

Ethereum was recently changing hands around $2,700, an 7.2% increase over the past day, according to crypto data provider CoinGecko. Uniswap, Aave, and Sky, were up 23%, 16%, and 15% respectively, rising to $8, $305, and $0.90.

On Monday, SEC Chairman Paul Atkins said during a DeFi-focused roundtable in Washington, D.C., that the agency was working on an “innovation exemption” allowing companies to introduce on-chain products more easily. The agency is also looking at rule changes to “provide needed accommodation” for entities seeking “to administer on-chain financial systems,” he said.

“The American values of economic liberty, private property rights, and innovation are in the DNA of the DeFi, or decentralized finance, movement,” Atkins added.

As governance tokens, Uniswap, Aave, and Sky allow holders to participate in determining their associated project’s direction, namely through voting on proposed software changes. In the past, projects like Uniswap have mulled changes to share protocol fees with token holders.
Although the Securities and Exchange Commission once argued that Uniswap’s governance should be classified as a security (in an enforcement threat last year), the agency’s current leadership is trying to forge a more collaborative path.

“Many industry participants came away from the roundtable optimistic about what’s ahead,”Jennifer Rosenthal, a spokesperson for the DeFi Education Fund, a research and advocacy group, told Decrypt. “It’s encouraging that there is an emphasis on listening and learning from industry participants.” 

The tokens fall under the umbrella of decentralized finance because their associated projects seek to offer financial services, whether that’s lending or trading, without relying on traditional intermediaries like banks. They use smart contracts instead.

According to Danny Nelson, a research analyst at asset manager Bitwise, trading volumes among Ethereum-based governance tokens were “unusually heavy” on Tuesday, adding that Ethereum’s strength “often trickles down” to other assets on the network.

“Today we’re seeing something closer to a tsunami,” he said. “The rally is also giving traders who borrow against their ETH [positions] more collateral to draw from.” 

Aave, a decentralized lending protocol, lets users lend or borrow cryptocurrency. The project, which initially debuted on Ethereum as ETHLend, currently holds around $26.166 billion in assets, representing an all-time high on Tuesday, DefiLlama data showed.

Uniswap, a decentralized exchange, operates across 36 blockchains. However, among $5 billion worth of assets held on the protocol, $3.5 billion exist on Ethereum. In May, Uniswap facilitated $92 billion worth of trading volume, its fourth best month since 2020.

Sky Protocol, formerly Maker, is designed primarily around stablecoin issuance. Users are able to deposit Ethereum and other assets as collateral to mint Sky’s USDS stablecoin, and the project currently holds $5.3 billion in assets.

Although Ethereum’s performance can influence the price of governance tokens, Nelson posited that the dynamic could be flipped following Atkins’ comments.

“Instead of ETH leading its DeFi ecosystem higher, today we’re seeing the DeFi ecosystem power ETH,” Nelson said. “Traders are trying to price in a future where the common rails of Ethereum’s on-chain economy balloon into something truly powerful.”

Seth Oranburg, a professor of law at the University of New Hampshire, told Decrypt that legislation being weighed on Capitol Hill, such as the Clarity Act, could also become a factor. If the bill is passed with rules determining what regulations governance tokens are subject to, that could drive further participation, he said.

“That kind of clarity is going to open up the possibility for legitimate business,” he said. “I expect we’ll see an explosion of the use of these tokens.”

Edited by James Rubin

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