Uniswap’s Defense Against SEC Regulatory Actions

Forward the Original Title‘SEC 打算向 Uniswap Labs 提起一个不可能赢的诉讼？’

On April 10, 2024, Uniswap Labs received a Wells Notice from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC), indicating that the SEC might take regulatory enforcement actions such as lawsuits against Uniswap Labs.

Uniswap Labs is the initiator of the decentralized trading protocol Uniswap Protocol. Since its launch five and a half years ago, its trading volume has exceeded $2 trillion, leading the decentralized exchange market and accounting for 55.5% of the total transaction volume. It is a bellwether in the Crypto and DeFi markets.

The SEC’s action is seen as an open challenge to decentralized DeFi projects and will have a significant impact on the Crypto market. Although there was a strong reaction from $UNI, what we see more is the unity of the market.

This article will combine Uniswap Labs’ response to the SEC and its relatively compliant governance structure to discuss why the SEC has filed a lawsuit it cannot win.

1. What is a Wells Notice

Firstly, it’s important to clarify that a Wells Notice is not an official charge or regulatory enforcement document, but a formal warning or notice. It represents a warning by the SEC that they may be about to take enforcement action against a suspicious project.

Secondly, the Wells Notice does not specify the exact reasons for taking regulatory enforcement. This puts Uniswap Labs in a reactive position, having to comprehensively prove its innocence.

The Wells Notice process begins with: 1. The SEC internally investigating a suspicious company (whether they have violated securities laws) and recommending action against the suspicious company; 2. Once the suspicious company receives a Wells Notice, they have a 30-day window to rebut the accusations and present arguments proving their innocence; 3. The SEC subsequently evaluates and decides whether to take regulatory enforcement.

One of the most widely 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 proved that the company’s reputation paid a high price as a result.

2. How Uniswap Labs Proves its Innocence

（blog.uniswap.org/fighting-for-defi）

Let’s take a look at the article Fighting for DeFi published by Uniswap Labs:

The SEC’s ongoing regulatory enforcement against the most compliant and lawful market participants (Coinbase, Uniswap), and its unwillingness to provide a clear regulatory path over the past six years, suggests this action is more of a political demand, especially when combined with recent legislative attacks on DeFi by Congress.

Uniswap Labs, a US-based company, created the Uniswap Protocol, bringing unprecedented innovation to the market. These innovations, based on open-source code, allow users to participate in market transactions directly, without any intermediaries, while self-custodying their assets. Uniswap Labs believes that its products are not only legal but transformative. They establish transparent, verifiable markets with fewer gatekeepers, giving the global public the ability to participate in the global economy affordably and conveniently.

If the SEC continues to protect traditional, opaque financial systems and attacks innovative, openly transparent technologies that can create opportunities and reduce costs for Americans, then Uniswap Labs will have to struggle against US government agencies to protect innovation and economic freedom.

Regardless of what the SEC decides to do, the law is clear on several points:

1. No authority from Congress - the SEC only has jurisdiction over “securities”

The SEC Chairman previously clarified to Congress that whether a cryptocurrency is a “security” needs to be confirmed by Congressional legislation.

In the Risley vs. Uniswap Labs case, the judge stated that trades on Uniswap do not apply to securities law (neutral, no permission required), and explicitly emphasized that “the determination of whether something is a security or not is best resolved by Congress.”

Furthermore, in the SEC vs. Ripple case, the judge clearly stated that secondary market trading of crypto assets generally does not constitute an investment contract.

From this, it can be seen that there is no “securities” issue with secondary market trading on Uniswap.

Related Reading:

DeFi regulatory woe, Uniswap is in heaven, Tornado Cash is in hell

Interpret the SEC v. Ripple case to further clear up regulatory fog

1. No securities exchange or broker claim

Even if most cryptocurrencies are classified as “securities,” the Uniswap protocol, applications, and wallets still do not meet the legal definition of a securities exchange or broker.

This was clearly demonstrated in the recent SEC vs. Coinbase ruling, where the court rejected the SEC’s claim that non-custodial crypto wallets are brokers, even if they charge fees, at the very initial stage of the case.

1. There is no issuance of “securities”

The $UNI token is not a security, as it does not meet the legal definition of any type of security, including that of an “investment contract”. According to U.S. securities law and the Howey Test, an investment contract is an investment of money in a common enterprise, expecting profits, fully reliant on the efforts of others. Uniswap Labs has no contract or promise with the more than 300,000 holders of this token, there is no common enterprise, and the value of the token is not entirely dependent on the efforts of Uniswap Labs.

Although the SEC recently investigated the Ethereum Foundation, the CFTC has made it very clear that both Bitcoin and Ethereum are not securities. The Uniswap technology ecosystem is sufficiently decentralized, much like Bitcoin and Ethereum.

3. Uniswap’s Regulatory Compliance Structure

Previously, we sorted out the compliance path of Uniswap Labs after separating from the protocol, which corresponds well with Uniswap’s legal defense in the article. Under such a structure, the SEC doesn’t really stand a good chance of winning.

This pathway provides a regulatory-friendly example for Web3 decentralized projects. The purpose of such separation is, on one hand, to achieve progressive decentralization, and on the other hand, to obtain more room for maneuver in regard to regulatory compliance.

Decentralization + Non-securities tokens: The Uniswap Protocol operates independently on-chain and is governed by Uniswap DAO, achieving decentralization. The single-function token UNI serves as its governance token. This model avoids the SEC’s securities designation and has won in court.

DAO Legal Packaging + Limited Liability for Members: Uniswap DAO has established a legal entity, the Uniswap Foundation, as the legal packaging for the DAO. On the one hand, it protects the limited liability of DAO members, and on the other hand, it can interact with the Web2 world to expand its influence.

Independent operation of Labs + flexible front-end development: The Uniswap Labs team, which previously developed and maintained the protocol, became a separate legal entity and a major contributor to the protocol. On the one hand, it is free from the restrictions of the protocol, and on the other hand, it can build and maintain front-end products by calling the back-end protocol, achieving sustainability, such as the previously opened fee-based Uniswap DApp.

Regulate application, not protocol: As advocated by a16 z regulatory principles, decentralized on-chain protocols are difficult to comply with regulation, but front-end applications can fully comply with regulatory requirements, freeing the team and products themselves from potential regulatory risks. Just like any other app, front-end applications can include KYC/AML/CTF verification according to regulatory requirements, delist tokens warned by regulators at any time, and apply for license qualifications, etc.

If under such a compliance path, the SEC still enforces regulation, it’s either because the SEC is “stubborn” to complete political tasks, or it may be something else.

The most likely scenario is Uniswap’s Automated Market Maker (AMM) mechanism. The specific mechanism won’t be delved into for now, but the AMM mechanism is operated by the decentralized Uniswap Protocol, not Uniswap Labs. If the SEC challenges the Uniswap Protocol, it equals challenging the freedom to publish code under free speech, which means the SEC is opening up a brand new, even more unwinnable field.

4. Impact on the market

Whether it’s Uniswap Labs’ defense in the article or recent cases of crypto regulation, the SEC’s attack on Uniswap Labs seems relatively weak, and basically has little chance of winning, even though $UNI is under pressure in the short term.

We are more inclined to believe that this is a move driven by political demands.

The SEC’s actions will only make people in the crypto world more united, just as Uniswap Labs founder hayden.eth said:

“I work in crypto because of the immense positive impact I believe it can have on the world by removing gatekeepers, and increasing access to value and ownership, the same way the internet has for information..。

I’m incredibly proud of Uniswap v1, v2, v3, v4, the thousands of projects building on top of it, the web app with millions of users, the wallet with hundreds of thousands of downloads, and the airdrop that changes thousands of lives around the world。We’re still in the early days - this technology and revolution will play out over decades…

Hope that we can come together more as an industry, and see past minor disagreements. The more uni-fied we are, the stronger we are, the harder we are to kill. So lets be frens.”

Disclaimer：

1. This article is reprinted from [Web3小律]. Forward the Original Title‘SEC 打算向 Uniswap Labs 提起一个不可能赢的诉讼？’. All copyrights belong to the original author [Will 阿望]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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