The US Securities and Exchange Commission (SEC) enforcement division has issued a Wells Notice to Uniswap Labs, indicating the possibility of regulatory enforcement action against Uniswap Labs. This article will take you through how Uniswap can respond and the potential impact on the market.
Summary:
Uniswap Labs has received a Wells Notice from the SEC enforcement division, which could lead to legal action against the company. Uniswap Labs is the creator of the decentralized trading protocol, Uniswap Protocol, which has dominated the decentralized exchange market with over $2 trillion in trading volume, accounting for 55.5% of the total trading volume in the Crypto and DeFi markets.
The SEC’s actions are seen as a direct challenge to decentralized DeFi projects and will have a significant impact on the Crypto market. Although there has been a strong reaction from $UNI, what we see more is market unity.
This article will combine Uniswap Labs’ response to the SEC and its relatively compliant governance structure to explain why the SEC has initiated a lawsuit that is unlikely to win.
Firstly, it should be clarified that a Wells Notice is not a formal indictment or regulatory enforcement document, but a formal warning or notice that the SEC may take enforcement action against a suspicious project.
Secondly, the Wells Notice does not specify the specific reasons for regulatory enforcement, which puts Uniswap Labs in a passive position and requires them to fully prove their innocence.
Wells Notice Process:
1. After conducting an internal investigation into a suspicious company (whether it has violated securities laws), the SEC recommends taking action against the company.
2. After receiving a Wells Notice, the company has a 30-day window to refute the allegations and present arguments to prove its innocence.
3. The SEC then evaluates and decides whether to take regulatory enforcement action.
One of the most well-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. Despite successfully arguing that it was not informed that XRP would be considered a security, the company’s reputation suffered greatly from the three-year legal process.
Let’s take a look at the article released by Uniswap Labs titled “Fighting for DeFi”:
From the SEC’s continuous regulatory enforcement actions against the most compliant market participants (Coinbase, Uniswap) and its unwillingness to provide a clear regulatory path for the past six years, this action is more of a political appeal (combined with recent congressional criticism of DeFi).
Uniswap Labs, a US-based company, has created the Uniswap Protocol, which has brought unprecedented innovation to the market. These innovations, based on open-source code, allow users to directly participate in market transactions while self-custodying their assets, without the need for any intermediaries.
Uniswap Labs believes that its product is not only legal but also transformative. They have built a transparent and verifiable market with fewer gatekeepers, empowering the global population to participate in the global economy at a low cost and convenience.
If the SEC continues to protect the opaque traditional financial system and attack innovations and openly transparent technologies that can create opportunities and reduce costs for Americans, then Uniswap Labs will have to fight against US government agencies to protect innovation and economic freedom.
Regardless of what the SEC decides to do, the law is clear on the following points:
1. SEC regulatory enforcement has no congressional authorization – the SEC only has jurisdiction over “securities.”
The SEC chairman has previously made it clear to Congress that determining whether cryptocurrencies are “securities” requires legislative confirmation.
Furthermore, in the case of Risley vs. Uniswap Labs, the judge stated that the transactions on Uniswap are not subject to securities laws (neutral and do not require permission), emphasizing that “the determination of whether it is a security is best resolved by Congress.”
In addition, in the SEC vs. Ripple case, the judge clearly stated that secondary market trading of cryptocurrencies generally does not constitute investment contracts.
Therefore, there is no issue of “securities” in the secondary market transactions on Uniswap.
2. Does not meet the definition of a securities exchange or broker
Even if most cryptocurrencies are classified as “securities,” the Uniswap protocol, applications, and wallets do not meet the legal definition of a securities exchange or broker.
This was evident in the recent SEC vs. Coinbase ruling, where the court rejected the SEC’s claim that non-custodial cryptocurrency wallets were brokers, even if they charge fees.
3. No issuance of “securities”
The $UNI token is not a security because it does not meet the legal definition of any type of security, including the definition of an “investment contract.” According to US securities laws and the Howey test, an investment contract involves a monetary investment in a common enterprise with an expectation of profits solely from the efforts of others.
There is no contract or commitment between Uniswap Labs and the more than 300,000 token holders, and there is no common enterprise. The value of the token does not solely depend 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 technical ecosystem is decentralized enough, just like Bitcoin and Ethereum.
Previously, we outlined the compliance path for Uniswap Labs after separating from the protocol, which aligns with the legal defense presented in the Uniswap Labs article. In this framework, the SEC’s chances of winning are quite slim.
This path also provides a regulatory-friendly example for Web3 decentralized projects. The purpose of such separation is to achieve progressive decentralization and to gain more flexibility in regulatory compliance.
Decentralized + Non-Security Tokens: Uniswap protocol operates autonomously on the chain, governed by the Uniswap DAO, achieving decentralization, and the UNI token serves as its governance token. This model avoids the SEC’s securities determination and has won court judgments.
DAO Legal Structure + Limited Liability of Members: Uniswap DAO establishes the Uniswap Foundation as a legal entity to provide legal protection for DAO members’ limited liability and to interact with the Web2 world to expand its influence.
Labs Independent Execution + Flexible Front-end Development: The Uniswap Labs team, which previously developed and maintained the protocol, has become the primary contributors to the protocol as a separate legal entity. They are no longer restricted by the protocol and can build and maintain front-end products by calling the backend protocol, ensuring sustainability, as shown by the previously introduced fee model for the Uniswap DApp.
Regulated Application, not Protocol: As advocated by a16z, decentralized on-chain protocols are difficult to reconcile with regulations, while front-end applications can fully comply with regulatory requirements, enabling teams and products to mitigate potential regulatory risks. Like any other app, front-end applications can incorporate KYC/AML/CTF verification according to regulatory requirements, delist tokens under regulatory warnings, and apply for licensing qualifications.
If even under this compliance path, Uniswap Labs faces regulatory enforcement from the SEC, it is likely due to something other than the SEC’s mission fulfillment, possibly some other agenda.
The most likely target is the Automated Market Maker (AMM) mechanism of Uniswap. Although we won’t delve into the specific mechanism, the AMM mechanism is executed by the decentralized Uniswap Protocol, not Uniswap Labs.
If the SEC challenges the Uniswap Protocol, it is equivalent to challenging the release of code based on freedom of speech, opening up a whole new and even less likely to win domain.
Both Uniswap Labs’ defense in the article and recent cases of crypto regulation show that the SEC’s attack on Uniswap Labs appears weak and has little chance of winning. Although $UNI may be under pressure in the short term.
We believe this is a political move. Such actions by the SEC will only unite people in the crypto world, as stated by the founder of Uniswap Labs, hayden.eth:
“I work in cryptocurrency because I believe it can have a hugely positive impact on the world by eliminating gatekeepers, increasing opportunities to access value and ownership seamlessly, just as the internet does for accessing information. I’m incredibly proud of the various versions of Uniswap, the thousands of projects built on top of it, the millions of users of its web applications, the hundreds of thousands of downloads of its wallets, and the change in lifestyle for tens of millions of people worldwide. We are still in the early stages—this technology and revolution will play out over decades. I hope we as an industry can come together more. The more united we are, the stronger we are, and the harder we are to kill. So let’s be friends.”
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