Uniswap talks tough as SEC warns of imminent DeFi enforcement action

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Decentralized finance (DeFi) bros are crying foul after the U.S. Securities and Exchange Commission (SEC) informed Uniswap Labs that it was the next ‘crypto’ operator in its sights.

On April 10, Uniswap founder/CEO Hayden Adams tweeted that his company had “received a Wells notice from the SEC.” A Wells notice is a formal indication that the SEC has concluded an investigation into an entity/individual and found cause to proceed with an enforcement action. Uniswap now has 30 days in which to respond to the SEC with arguments for why it shouldn’t face such an action.

The specifics of the SEC’s investigation remain unknown. The SEC’s interest in Uniswap reportedly began in September 2021 and reportedly focused on how users traded on the decentralized exchange (DEX). The probe was also reportedly interested in how Uniswap marketed its wares, including its native token UNI (which shed around 20% of its fiat price following Adams’ tweet).

Uniswap primarily operates on the Ethereum blockchain and is by far the top DEX by trading volume. The Uniswap Protocol is also used by other Ethereum-based DEXes, to the point that Uniswap claims its protocol uses 25% of Ethereum’s total block space. (The SEC recently signaled that it was probing the Ethereum Foundation in an apparent bid to declare the network’s native ETH token an unregistered security.)

It could be some time before we learn what problems the SEC identified with Uniswap’s operations. It was about three months between Coinbase (NASDAQ: COIN) announcing
that it had received its own Wells notice before the SEC actually filed its civil complaint
against the digital asset exchange for failing to register as a national securities exchange, broker, and clearing agency, or register its staking-as-a-service program.

Adams claimed to be “not surprised” by the Wells notice, “just annoyed, disappointed, and ready to fight.” Adams said he was “confident that the products we offer are legal and that our work is on the right side of history.” Adams also predicted that “this fight will take years, may go all the way to the Supreme Court.”

Uniswap’s chief legal officer Marvin Ammori tweeted his own response to the Wells notice, calling it “another abuse of power” by the SEC. Like Adams, Ammori claimed Uniswap was “prepared to fight against this abuse. And we’re confident we’ll win.”

Similarly impacted members of the You’re Not The Boss of Me™ club were quick to weigh in. Coinbase legal eagle Paul Grewal cited the recent federal court ruling in which the judge dismissed the SEC’s argument that Coinbase’s Wallet application was ‘effecting transactions in securities for the account of others.’ (Grewal neglected to mention that the same judge upheld the SEC’s claim that Coinbase operated as an unregistered intermediary of securities.)

Other supporters suggested an SEC attempt to define Uniswap as a securities exchange would fail, but the regulator was on firmer legal ground in going after UNI as an unregistered security. Still, others claimed the SEC “has continued to embarrass itself in courts with political cases that it cannot win, time and time again.”

Meanwhile, crypto critics like former SEC enforcement director John Reed Stark expressed amazement that “Wells notice recipients fight back by throwing stones at the SEC with obnoxious/insulting PR campaigns … such futile attempts to rally the mob pretty much always backfire.”

The SEC’s current enforcement director, Gurbir Grewal, gave a speech earlier this month in which he claimed that the crypto sector’s constant pleas for ‘regulatory clarity’ are, in reality, “just a backhanded way of saying, ‘we want a different set of rules than those that apply to everyone else.’” The crypto sector’s “continued noncompliance” has led to a broad menu of “elevated investor risk: fraud, lack of transparency, commingling of assets, conflicts of interest, and lack of oversight, to mention just a few.”

Speaking of Justin Sun…

SEC v. Sun/Tron

Uniswap and Coinbase are hardly the only entities currently feeling the SEC’s wrath. Late last month, Justin Sun filed a motion to dismiss the March 2023 complaint filed against him and entities linked to his Tron blockchain. The SEC accused Sun/Tron et al of selling and promoting unregistered securities, while fraudulently manipulating the tokens’ value via “extensive” wash trading on exchanges.

Among the arguments made by Sun’s attorneys in their motion is that the SEC has no jurisdiction over their client, given that Sun’s not a U.S. resident (and who hasn’t come to the States since before the pandemic, around the time he learned the Department of Justice (DOJ) had opened a criminal probe into his activities).

Sun’s team further argues that the SEC failed to identify any U.S. residents harmed by his antics and that the tokens in question don’t qualify as securities under the Howey test.

As for the wash trading allegations, Sun’s team claims the SEC failed to offer specifics, including whether any individual trade actually impacted the token price. Sun’s attorneys also claim the SEC failed to prove the wash trades were “done with scienter,” aka Sun understanding both what he was doing and that what he was doing is frowned upon.

The SEC is expected to file its reply brief any day now.

SEC v. Heart/Hex

A similar motion to dismiss was filed on April 8 by lawyers representing Richard Heart, the crypto bro who enjoys performative luxury shopping sprees to promote his Hex scam. Last August, the SEC charged Heart, Hex, and his other entities with offering unregistered securities and fraudulently “misappropriating at least $12 million” of the funds raised from gullible investors.

Heart’s attorneys signaled their intention to file this motion in January, and the resulting document offers similar arguments to Sun’s, including that U.S. authorities lack jurisdiction over their client, who’s been hiding out in Helsinki trying (unsuccessfully) to avoid being served with the SEC’s summons. Like Sun, Heart thinks he should skate because the SEC failed to prove that any U.S. citizen had been directly harmed by his actions, the tokens aren’t investment contracts, etc.

But Heart’s team goes one better by claiming that the SEC complaint “unconstitutionally infringes on his first amendment rights.” This infringement allegedly occurred via the SEC using Heart’s online videos as evidence of his crimes. Heart’s team accuses the SEC of arguing that Heart’s “speech—what Mr. Heart said, not what he did—transformed the Hex, PulseChain, and PulseX software programs into investment contracts.”

Furthermore, the SEC cherry-picked “a handful of Mr. Heart’s statements” and presented them “out of context.” The SEC also allegedly erred by “dismissing as ‘tongue-in-cheek’ Mr. Heart’s repeated disclaimers about the status of his offerings under the securities laws.”

Should the SEC prove victorious in its campaign to use Heart’s words against him, his attorneys believe it “would permanently infringe on Mr. Heart’s constitutional right to express his opinions about the state of cryptocurrency.” (One can only hope.)

The day Heart’s attorneys filed his motion to dismiss, Heart tweeted a link to the motion and urged other “crypto projects” to file amicus curiae briefs in support of his case. Heart claimed that he was “fighting for your rights,” not just his own desire to continue buying hideous Gucci gear with other people’s money.

On March 28, Heart’s team filed a request for a stay of discovery in the suit pending a ruling on his upcoming motion to dismiss. On April 9, the SEC filed its response to this request, accusing Heart of failing to respond to subpoenas dating back to August 2022 and “stalling” to avoid turning over the documentation that will likely cook his overstuffed goose.

SEC v. Kraken

Finally, on April 9, the SEC filed a motion opposing the motion to dismiss the complaint filed against Payward Inc. and Payward Ventures Inc., the parent companies of the Kraken
exchange. Last November, the SEC accused the San Francisco-based Kraken of making “hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities.”

Kraken’s motion to dismiss argued that the SEC failed to prove that the tokens Kraken sold to the public triggered any of the Howey test’s individual planks. Kraken further argued that the alleged regulatory void vis-à-vis digital assets meant this matter fell under the ‘major questions’ doctrine (which was shot down cold in the recent Coinbase ruling, as the judge found that ‘crypto’ transactions “fall comfortably within the framework that courts have used to identify securities for nearly eighty years”).

The SEC’s opposition to dismiss echoes that judge’s view, arguing that “the circumstances warranting application of the major questions doctrine are absent here.” The SEC’s complaint “lacks the vast economic or political significance” that the U.S. Supreme Court has routinely cited when referencing the major questions doctrine. All the SEC is attempting to do is force Kraken “to comply with the federal securities laws.”

Elsewhere, the SEC rejects Kraken’s assertion that the Howey test requires a “written agreement” between seller and buyer to trigger Howey’s definition of an ‘investment contract.’ Similarly, investment contracts don’t require contractual post-sale obligations, as Kraken argued.

Kraken appears intent on seeing this legal fight through to the end, unlike its February 2023 settlement of the SEC’s complaint regarding Kraken’s staking services/programs. That settlement cost Kraken $30 million, but it’s anyone’s guess what Kraken’s legal bill will be by the time this current brouhaha is decided.

While we’re on the subject, be sure to check out the recent Politico article detailing Kraken co-founder/chairman Jesse Powell’s lawsuit seeking to reclaim $1 million he (more or less) accidentally donated to a doomed 2021 campaign to recall California Gov. Gavin Newsom.

It seems Powell was desperate to keep his name from being publicly linked to the donation but failed to read the fine print of a campaign donation form that indicated he had no choice in the matter (given his preferred method of contributing). Powell is now accusing campaign organizers of not only pulling the wool over his eyes regarding his privacy but also refusing to return the sum he wired them (via traditional banks… oh, the irony).

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