Regulation
Uniswap Labs Urges SEC to Drop Pending Enforcement Actions in Wells Response
Uniswap Labs moved Tuesday to call off a looming regulatory battle over Ethereum’s dominant decentralized crypto exchange, imploring the Securities and Exchange Commission in legal filings that the planned lawsuit was not worth it.
The company received a Wells Notice – essentially a warning from the SEC informing the recipient that the regulator believes they violated the law – in April. The notice accused the Uniswap protocol as an unregistered securities exchange and the interface and wallet as unregistered securities brokers.
In their response to the SEC’s Wells Notice, Uniswap Labs objected to this assertion, arguing that the protocol does not meet the definition of an exchange and is therefore not subject to SEC regulation. Although Uniswap Labs said it invented the protocol, it said the protocol is now a “passive” technology that people use to trade cryptocurrencies.
Martin Ammori, chief legal officer of Uniswap Labs, told reporters on Tuesday that the SEC would have to redefine what an exchange is in order to have jurisdiction over Uniswap. Under the current definition, Ammori said, Uniswap should have been specifically designed for securities trading.
“It is general purpose, and the majority of its volume is obviously non-securities like Ethereum, Bitcoin and stablecoins,” Ammani said, adding that bitcoin, ether and stablecoins represent 65% of the protocol’s trading volume.
Ammori said the SEC knows that the current definition of an exchange does not cover any of Uniswap Labs’ products.
“That is why, as we speak, there is a awaiting regulation where the SEC is trying to redefine about a half dozen words in its own regulations to try to capture us. This won’t work,” Ammori said. “This goes beyond their authority granted by Congress.”
Ammori also said that the SEC’s accusation that Uniswap’s interface and wallet are brokers will also fail, emphasizing a recent decision by a federal judge rejecting the SEC’s claims that Coinbase Wallet constituted an unregistered securities broker-dealer.
Because the SEC should expand its authority to regulate Uniswap, the protocol’s lawyers argued, the agency “should not assume these significant litigation risks.” The lawyers added that filing suit against Uniswap would push U.S. crypto investors to use foreign trading protocols and discourage “future innovators from attempting to promote new ideas that bring much-needed competition and innovation to financial and trading markets.”
“We will sue if we have to, and if we sue, we will win,” Ammori said. “But we hope the SEC realizes that its current strategy protects no one and does not benefit Americans.”
Tuesday’s filing shed additional light on the arguments the SEC appears poised to make in its yet-to-be-filed enforcement action against Uniswap Labs. The regulatory agency is targeting Uniswap’s native UNI token as well as liquidity provider (LP) tokens.
LP tokens are central to the operation of so-called “automated market makers” such as Uniswap. Users who deposit their assets into the protocol’s trading pools receive LP tokens as a receipt for their contribution. They can exchange their LP tokens for the value of their deposits. Meanwhile, the protocol uses these deposits to ensure that other traders can make the trades they want.
According to the response from Wells of Uniswap Labs, the SEC alleges that LP tokens are investment contracts whose distribution violates securities law. Uniswap Labs rejects this argument on the grounds that LP tokens do not fall within the regulator’s framework and are instead “accounting devices”.
Last December, the SEC hinted at increased scrutiny of LP tokens in its settlement with BarnBridge DAO, according to at the law firm of K&L Gates. If it moves forward with the allegations presented by Uniswap Labs on Tuesday, the regulator’s coercive measures could outline a coming fight with broad implications for the operation of DeFi.