DeFi Ahead of Clarity Act…Will Token Purchases Trigger Securities Regulation?

▲ DeFi / AI-generated image ©

The decentralized finance (DeFi) industry invested $638 million in token purchases over one month, but an analysis suggests it's hard to view this as an unconditional positive development, given that 90% of the total volume was concentrated in just two protocols, and lockup releases and regulatory risks still remain.

According to investment media FXStreet on September 4 (local time), DeFi protocols spent $638 million on their own token purchases in August, a 17% increase compared to the same period last year. Hyperliquid (HYPE) accounted for approximately $370 million and PumpFun (PUMP) for about $200 million, bringing the proportion of these two protocols to about 90% of the total purchase amount. This indicates a concentration in a few projects rather than widespread adoption across the industry.

Token purchases can create a deflationary effect by reducing circulating supply or through burning, but they cannot eliminate dilution from lockup releases and new issuances. Hyperliquid's market capitalization based on circulating supply is approximately $18.51 billion, but its Fully Diluted Valuation (FDV) reaches $77.97 billion, with 53.51% of the total supply locked. An additional 433,000 HYPE tokens, representing 0.19% of the circulating supply, are set to be released on Saturday, raising concerns that purchases using protocol fees paid by retail investors could merely serve as liquidity for early investors' sell-offs.

Ethena (ENA) pursued a strategy to eliminate monthly recurring lockup releases by having the Ethena Foundation acquire unvested tokens held by early seed investors through over-the-counter (OTC) transactions. Subsequently, it plans to allocate 95% of the protocol's net profit generated from staking rewards and funding rate arbitrage to token purchases. In contrast, Chainlink (LINK) accumulated a reserve of 5.77 million tokens through continuous purchases but did not burn them, leaving a potential secondary supply burden. Jupiter (JUP) and Thorchain (RUNE) also purchased their own tokens, but their prices recorded double-digit declines.

It was also confirmed that token purchases do not guarantee a price floor. Hyperliquid saw a 70% increase over the past year, driven by protocol fee-based purchases and expectations of overall exchange growth, but the same strategy did not lead to price defense in other projects. The explanation is that the scale of purchases depends on protocol profits, and unburnt tokens can be released back into the market in the future, making the reduction in net supply more important than the purchases themselves.

The Clarity Act, a U.S. cryptocurrency market structure bill, is also a variable. With the U.S. Senate potentially voting on it in mid-September, if DeFi platforms use more than half of their profits for token purchases, it could be seen as similar to the dividend structure of companies returning profits to shareholders. In such a case, the risk of tokens being classified as securities under the Howey Test increases, and they could be strictly regulated by the U.S. Securities and Exchange Commission (SEC) instead of the relatively flexible oversight of the U.S. Commodity Futures Trading Commission (CFTC). It is pointed out that for token purchases to lead to sustained value appreciation, they must demonstrate supply reduction and real value accumulation effects, going beyond merely absorbing sell-offs from existing holders.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses incurred based on it. The content should be interpreted for informational purposes only.*