Defiant Uniswap goes public with SEC Wells notice details, legal response

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Uniswap Labs has revealed why America’s securities regulator targeted the decentralized finance (DeFi) platform for disciplinary action.

On May 20, Uniswap shared details regarding the Wells notice issued against the company by the U.S. Securities and Exchange Commission (SEC) last month. A Wells notice advises an individual/entity that the SEC is conducting a probe and an enforcement action is likely, while allowing the target of that notice to file a response detailing why they shouldn’t be prosecuted.

At the time it confirmed receiving the Wells notice, Uniswap offered no specifics on what aspect of its operations might have triggered the SEC’s probe. Uniswap, which operates primarily on the Ethereum blockchain, is the leading decentralized exchange (DEX) by trading volume, and its Uniswap Protocol is utilized by numerous other DEXes. The SEC has recently begun targeting DeFi platforms and suspicion was high that Uniswap’s UNI token might also be viewed as an unregistered security.

According to Uniswap, the SEC “asserts that the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, that the Uniswap interface is an unregistered securities broker-dealer, and that the UNI token is an investment contract.”

Uniswap says the SEC believes “value represented in a specific digital file format is a security—and that the SEC can unilaterally extend the definitions of exchanges, brokers and contracts to the point of meaninglessness.”

By contrast, Uniswap claims “a token is a file format, like a PDF. The Protocol is a general purpose computer program that anyone can use and integrate, like TCP/IP. And the hundreds of thousands of users who received UNI tokens for their participation in the protocol’s early days received the token for free, with no contract, and without expectations of profit solely from the efforts of Uniswap Labs.”

Uniswap expressed confidence that it will prevail in any legal fight with the SEC, having hired two attorneys with SEC v Crypto experience: former SEC Enforcement Chief Andrew Ceresney, who represented Ripple Labs in its fight over unregistered security sales, and former U.S. Solicitor General Don Verrilli, who represented Digital Currency Group’s (DCG) Grayscale Investments in its fight over exchange traded funds (ETFs).

Uniswap’s chief legal officer, Marvin Ammori, held an online press conference on Tuesday, saying “the SEC’s entire case rests on the false assumption that all tokens are securities.” Ammori warned the SEC that Uniswap “will litigate if we have to. And if we litigate, we will win.”

Protocol off the dogs

Uniswap also shared its formal legal response to the Wells notice, laying out its arguments against the SEC’s assertions. These include the bold claim that “secondary market trading does not constitute an investment contract, and the vast majority of volume traded on the Protocol is [BTC], Ethereum, and stablecoins, or foreign transactions, none of which are subject to SEC jurisdiction.” Ahem.

Uniswap’s attorneys also maintain that the Uniswap Protocol wasn’t designed “for the purpose” of securities trading, and thus the law defining a ‘securities exchange’ doesn’t apply. Rather, the Protocol is “a passive, internet-based communications protocol that enables users to post their interest in trading items online.”

Uniswap denies that the Protocol is “controlled by, or comprised of, any ‘group of persons,’” let alone Uniswap. Given that the Protocol is “open source and fully autonomous,” Uniswap claims it’s powerless to alter the Protocol’s code. Uniswap further claims that the Protocol doesn’t meet other exchange requirements, in that it “does not match orders, bring together buyers and sellers, or constitute a market place.”

Uniswap also states that the SEC believes Liquidity Provider (LP) tokens—issued automatically by the Protocol when users put assets into a pool—are investment contracts. Uniswap maintains that LP Tokens aren’t issued “for investment purposes” but serve as “accounting tools” to track assets a user provides to the smart contract and fees earned on the user’s liquidity.

And what ‘crypto’ legal argument would be complete without dire warnings of regulatory enforcement leading to evil foreigners usurping U.S. companies’ technological supremacy, thereby eroding U.S. security (or something)? There are also concerns that said foreigners might take unfair advantage of U.S. consumers, when everyone knows that’s a job reserved for ‘Murican companies.

UNIversal knowledge

As for the in-house UNI token, Uniswap insists UNI is a ‘governance’ token, although it allocated some of the UNI supply to “certain Labs investors and advisors” and also retained “a portion” of the overall supply “for current and future employees.”

Uniswap also sold UNI “in a handful of private transactions to sophisticated institutional investors,” but these investors were “sophisticated venture capital firms that often specialized in the blockchain space and were well positioned to ‘fend for themselves.’”

These sales “were made as part of fundraising for Labs’ products, but were not specifically intended to fund development of the UNI token.” For what it’s worth, since its introduction in 2020, UNI’s fiat value has soared from below $3 to as high as $43 and currently trades around $9. In other words, UNI’s ‘value’ to Uniswap insiders goes well beyond mere ‘governance.’

Major questions over (de)centralization

Uniswap’s legal response also raised the so-called ‘major questions’ doctrine, the manufactured belief that ‘crypto’ is such a revolutionary development that agencies such as the SEC dare not take any action until Congress enacts bespoke legislation. But just to be safe, Uniswap also claims that the SEC failed to give fair notice that what Uniswap was doing was against the rules the SEC allegedly has no power to enforce.

The current session of Congress, the least productive of the modern era, saw a rare boost of productivity on Wednesday as the House of Representatives approved the FIT21 bill. FIT21 aims to radically reshuffle the regulatory decks in terms of oversight, robbing the SEC of much of its authority in favor of the Commodity Futures Trading Commission (CFTC) and its perceived greater affinity for all things ‘crypto.’

Professor Hilary Allen, who previously testified before Congress as to the centralization issues plaguing so-called decentralized finance, tweeted her lengthy criticism of the “terrible” FIT21 last week. Allen said the ‘crypto’ sector “does not make its money from technology; it profits by avoiding regulations that apply to others. This bill will permanently grant the crypto industry exemptions from laws that protect retail investors from harm.”

Allen took particular exception regarding FIT21’s approach to ‘decentralized’ systems, noting a CFTC DeFi report issued in January that made the following observation: “Beyond the theory and inevitable marketing hype, there is also the question of how decentralized these projects, enterprises, and ecosystems actually are in practice.”

Now that’s a major question that needs answering.

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