Regulation
Uniswap Labs Urges SEC to Drop Pending Enforcement Actions in Wells Response
Uniswap Labs moved Tuesday to quell a looming regulatory battle over Ethereum’s dominant decentralized cryptocurrency exchange, pleading with the Securities and Exchange Commission in legal documents that its planned lawsuit wasn’t worth it.
The company received a notice from Wells – essentially a warning from the SEC informing the recipient that the regulator believes he or she broke the law – in April. The warning accused the Uniswap protocol of being an unregistered securities exchange and the interface and wallet as an unregistered securities brokerage.
In their response to the SEC’s Wells notice, Uniswap Labs rejected this claim, arguing that the protocol does not meet the definition of an exchange and is therefore not subject to SEC regulation. Although Uniswap Labs claimed to have invented the protocol, it said it is now a “passive” technology that people use to trade cryptocurrencies.
Uniswap Labs chief legal officer Martin Ammori told reporters on Tuesday that the SEC would have to redefine what an exchange is to have jurisdiction over Uniswap. Under the current definition, Ammori said, Uniswap should have been designed specifically for securities trading.
“It is general purpose and most of its volume is obviously non-stocks like Ethereum, Bitcoin and stablecoins,” Ammani said, adding that bitcoin, ether and stablecoins account for 65% of the protocol’s trading volume.
Ammori said the SEC knows that the current definition of exchange does not cover any of Uniswap Labs’ products.
“That’s why, as we speak, there is a awaiting regulation where the SEC is trying to redefine a half dozen words in their regulations to try to catch us. It won’t work,” Ammori said. “It goes beyond their authority given by Congress.”
Ammori also said that the SEC’s accusation that Uniswap’s interface and wallet are brokers will also fail, pointing out a recent ruling by a federal judge rejecting SEC claims that Coinbase Wallet constituted an unregistered securities brokerage.
Because the SEC should extend its authority to regulate Uniswap, the protocol’s lawyers argued, the agency “should not assume these significant litigation risks.” The lawyers added that filing a lawsuit against Uniswap would push American cryptocurrency investors to use foreign trading protocols and discourage “future innovators from attempting to promote new ideas that bring much-needed competition and innovation to the financial and commercial markets.” .
“We will sue if necessary, and if we fight we will win,” Ammori said. “But we hope the SEC realizes that their current strategy protects no one and does not benefit Americans.”
Tuesday’s filings shed further 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 and liquidity provider (LP) tokens.
LP tokens are critical to the functioning of so-called “automated market makers” like 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 those deposits to ensure that other traders can make the trades they want.
According to Uniswap Labs’ Wells response, the SEC argues 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 under regulatory frameworks and are rather “accounting devices”.
Last December the SEC hinted at increased scrutiny of LP tokens in its deal with BarnBridge DAO, second to the K&L Gates law firm. If they move forward with the charges outlined by Uniswap Labs on Tuesday, the regulator’s enforcement action could outline an impending battle with broad implications for how DeFi works.