On April 10, 2024, Uniswap Labs received a Wells Notice from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC), informing them of potential regulatory enforcement actions against Uniswap Labs. Uniswap Labs is the creator of the decentralized trading protocol, Uniswap Protocol, which has dominated the decentralized exchange market with a trading volume exceeding $20 trillion and accounting for 55.5% of the total trading volume in the Crypto and DeFi markets.
This action by the SEC is seen as a direct challenge to decentralized DeFi projects and will have a significant impact on the Crypto market. While we have seen a strong reaction from $UNI, we have also witnessed a greater sense of unity in the market.
Firstly, it is important to clarify that a Wells Notice is not a formal lawsuit or regulatory enforcement document, but rather a formal warning or notification from the SEC that enforcement actions against a suspicious project are imminent.
Furthermore, a Wells Notice does not specify the specific reasons for regulatory enforcement, which puts Uniswap Labs in a defensive position, requiring them to fully prove their innocence.
The process for initiating a Wells Notice is as follows: 1. After an internal investigation by the SEC into a suspicious company (regarding potential violations of securities laws), a recommendation is made to take action against the company. 2. After receiving the Wells Notice, the company in question has a 30-day window to refute the allegations and present arguments to prove its innocence. 3. The SEC then evaluates and assesses the situation to determine whether to pursue regulatory enforcement.
One of the most well-known recent cases is the SEC vs. Ripple case. Ripple received a Wells Notice from the SEC in December 2020, which immediately led to its delisting from Coinbase. Although Ripple successfully argued that it was not informed that XRP would be considered a security, the three-year legal process took a toll on the company’s reputation.
Uniswap Labs has presented its defense in the article “Fighting for DeFi” that it published. From the continuous regulatory enforcement actions by the SEC against the most compliant and law-abiding market participants (Coinbase, Uniswap), as well as the lack of clear regulatory pathways for the past six years, it is clear that this action is more of a political demand (combined with recent criticisms of DeFi by lawmakers).
Uniswap Labs, a U.S.-based company, created the Uniswap Protocol, which has brought unprecedented innovation to the market. These innovations, based on open-source code, allow users to directly participate in market transactions without any intermediaries while retaining control over their assets. Uniswap Labs believes that its product is not only legal but also transformative. By establishing transparent and verifiable markets with fewer gatekeepers, they empower people worldwide to participate in the global economy affordably and conveniently.
If the SEC continues to protect traditional opaque financial systems and attack innovations and openly transparent technologies that create opportunities for Americans and reduce costs, then Uniswap Labs will have to fight against U.S. government agencies to protect innovation and economic freedom.
Regardless of what the SEC decides, the law is clear on several points:
1. SEC regulatory enforcement has no authorization from Congress – The SEC only has jurisdiction over “securities.”
The SEC Chairman has previously stated to Congress that determining whether crypto assets are “securities” requires legislative confirmation.
In the case of Risley vs. Uniswap Labs, the judge stated that transactions on Uniswap are not subject to securities laws (neutral and do not require permission), emphasizing that “the determination of whether something is a security is best left to Congress.”
Furthermore, in the SEC vs. Ripple case, the judge explicitly stated that secondary market transactions of crypto assets generally do not constitute investment contracts.
Therefore, it is evident that there is no issue of “securities” in secondary market transactions on Uniswap.
2. Does not meet the definition of a securities exchange or broker
Even if most cryptocurrencies were deemed “securities,” the Uniswap protocol, applications, and wallets do not meet the legal definition of a securities exchange or broker.
This was evident in the recent ruling in the SEC vs. Coinbase case, where the court rejected the SEC’s claim that non-custodial crypto wallets were brokers, even if they charged fees.
3. No issuance of “securities”
The $UNI token is not a security because it does not meet any legal definition of a security, including the definition of an “investment contract.” According to U.S. securities laws and the Howey test, an investment contract involves a monetary investment in a common enterprise with an expectation of profits solely from the efforts of others. There is no contract or commitment between Uniswap Labs and the more than 300,000 token holders, nor is there a common enterprise. The value of the token does not depend solely on the efforts of Uniswap Labs.
Although the SEC recently investigated the Ethereum Foundation, the CFTC has made it clear that both Bitcoin and Ethereum are not securities. The Uniswap technical ecosystem is decentralized enough, just like Bitcoin and Ethereum.
Uniswap has established a compliant governance structure:
– Decentralized + Non-security tokens: The Uniswap protocol operates autonomously on-chain and is governed by the Uniswap DAO. The governance token, UNI, avoids SEC securities classification and has achieved legal victories in court.
– DAO legal structure + Limited liability for members: The Uniswap DAO establishes the Uniswap Foundation as a legal entity to provide legal protection for DAO members’ limited liability and enable interaction with the Web2 world to expand its influence.
– Independent operation of Labs + Flexible frontend development: The Uniswap Labs team, which previously developed and maintained the protocol, operates as a separate legal entity and becomes the main contributors to the protocol. This allows them to overcome limitations imposed by the protocol and build and maintain frontend products by calling the backend protocol, ensuring sustainability, as seen with the introduction of the fee model for Uniswap DApp.
– Regulatory compliance of applications, not the protocol: As advocated by a16z, decentralized on-chain protocols are difficult to regulate, but frontend applications can fully comply with regulatory requirements, allowing teams and products to mitigate potential regulatory risks. Like any other app, frontend applications can incorporate KYC/AML/CTF verification as required by regulations, delist tokens flagged by regulators, and apply for licenses.
If SEC pursues regulatory enforcement even within this compliant framework, it may indicate other motives beyond completing political tasks.
The most likely target would be Uniswap’s Automated Market Maker (AMM) mechanism. While we won’t delve into the specifics of the mechanism, the AMM is operated by the decentralized Uniswap Protocol, not Uniswap Labs. If the SEC challenges the Uniswap Protocol, it would be challenging the freedom of speech and code publication based on the principles of decentralization, which would open up a new and even less likely winnable area for the SEC.
Regardless of the defense presented in Uniswap Labs’ article or recent cases of crypto regulation, the SEC’s attack on Uniswap Labs appears relatively weak and has little chance of success. Although $UNI may face short-term pressure, we believe this is a political move.
Such actions by the SEC will only further unite the people in the crypto world, as stated by Hayden Adams, the founder of Uniswap Labs:
“I work in cryptocurrency because I believe it can have a massively positive impact on the world by eliminating gatekeepers, increasing opportunities for value and ownership, and enabling seamless access to information, just like the internet. I’m incredibly proud of all the versions of Uniswap, the thousands of projects built on top, the networked applications with millions of users, and the wallets with hundreds of thousands of downloads, and the way they’ve changed the lives of tens of millions of people around the world. We’re still early, and this technology and revolution will play out over the next few decades. I hope as an industry we can come together more. The more united we are, the stronger we are, and the harder we are to kill. So let’s be friends.”
Tags:
Coinbase
DeFi
SEC
Uniswap
Uniswap Labs
Wells Notice