Well, it happened. We’ve known for a year the Securities and Exchange Commission was conducting an investigation of the Uniswap protocol (UNI). Now the SEC is preparing to sue Uniswap after delivering a Wells notice to Uniswap Labs. Wells notices are the SEC’s required declaration of war before suing a company.
This is not happening because anyone building the Uniswap protocol committed fraud or stole money or manipulated markets. This is happening because the Uniswap model is a threat to the traditional centralized securities markets that the SEC regulates.
Uniswap is a decentralized protocol built on top of immutable code. Uniswap Labs does provide a portal for users to connect to the trading protocol. In that way it is more like the taxi cab driver that drives a user to a stock exchange or a broker and completely unlike the stock exchange or the broker themselves.
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This is happening because Uniswap’s existence can demonstrate that billions of dollars can trade on decentralized protocols that have no individual or institution acting as the intermediary. In that future the SEC intermediary focused regulatory model will not endure.
The SEC’s odds in this litigation are very low. Unlike other crypto cases in which the SEC can leverage the amorphous Howey test to make allegations of crypto tokens as securities, here the SEC has to go a step further. They have to show this protocol is either an unregistered broker or unregistered exchange, that's precisely what the SEC was unable to do with its allegation in its case against Coinbase Wallet. It is also precisely what a private plaintiff was unable to do in private securities litigation against Uniswap last year.
Today @Uniswap Labs received a Wells notice from the SEC.
— hayden.eth (@haydenzadams) April 10, 2024
I’m not surprised. Just annoyed, disappointed, and ready to fight.
I am confident that the products we offer are legal and that our work is on the right side of history. But it’s been clear for a while that rather than…
The SEC will attempt to distinguish that strong precedent against their position by making bold claims that Uniswap Labs — along with its relayer operation, its liquidity providers, its front-end applications and its coders — are all part of the same operation or entity. But they are not.
That’s a hard hill to climb and a position that would risk designating software developers writ large as unlicensed brokers, a worry that led Judge Katherine Polk Failla to throw out the SEC’s similar allegation against the Coinbase Wallet.
The SEC will also likely claim that Uni is a security, and that the airdrop of Uni tokens was a distribution of securities. This will provide an opportunity to test the SEC theory about airdrops in a court of law.
The issue was also front and center in a well crafted suit brought against the SEC by the DeFi Education Fund. (An entity itself funded by the Uni token. It’s a small world after all.)
The SEC will argue that airdrops are an offer or sale of securities using very old precedent which found that free stock dividends to shareholders are deemed an offer or sale of securities, because the company distributing them hoped the distribution would increase the price of the securities that company kept.
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This is the best precedent the SEC has in it aggressive war against airdrops, but ultimately it’s pretty weak sauce. It involves items that are already securities by virtue of the fact that they are stock already publicly traded. It’s precedent tailored to apply to a type of distribution well-known in financial markets.
By contrast, the SEC efforts to describe airdrops as an offer of securities risks expanding its jurisdiction to regulate customer reward points, airline miles, prepaid arcade cards, all manner of ridiculous examples.
However, Uni does not operate like a stock. It doesn’t provide a binding right to vote, and it doesn’t provide shareholder standing in litigation. And the token’s fee-sharing option was never activated. It’s more like a meme coin than an investment contract.
It would be better for the SEC to focus their time on real scams that call themselves decentralized finance (DeFi) but are not true DeFi. However, in this case, it’s for the best that the matter will be litigated against Uniswap. They are a well-funded defendant, a virtuous actor, and involve a sincerely decentralized product of the type that prior guidance from the SEC suggested might avoid investment contract determination.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.