The U.S. Securities and Exchange Commission (SEC) issued a warning to UniSwap Labs on Wednesday, saying that it may file an enforcement lawsuit against the company. UniSwap Labs is the initiator of the decentralized trading protocol UniSwap Protocol, and UniSwap is the leading protocol in the DeFi field. Since its launch five and a half years ago, its trading volume has exceeded 2 trillion US dollars, accounting for 55.5% of the total trading volume of the decentralized trading market.
The warning was issued in the form of a Wells notice, which represents an informal reminder issued by the SEC to the companies involved before formally filing a lawsuit, providing the companies with the last chance to refute the allegations. Of course, receiving a Wells notice does not mean that the SEC will definitely file a lawsuit. In short, this is the last chance to defend, and the recipient can provide evidence and arguments to the SEC in an attempt to persuade the SEC not to take action. If the SEC decides to proceed, it will file a formal lawsuit and issue a "civil complaint." But in general, Wells's process is just a formality. Rumor has it that the agency has been investigating UniSwap for quite some time, and the SEC is seeking to crack down on the cryptocurrency industry in general.
The SEC spokesperson said in an interview: "The SEC does not comment on whether there is a possible investigation."
At present, the specific nature of the SEC's allegations against UniSwap Labs is not yet known-although the company built the eponymous protocol UniSwap Protocol, it is not the core controller of the protocol. Judging from the SEC's previous lawsuits against high-profile cryptocurrency companies such as Coinbase, the nature of the lawsuits is likely to be illegal offering of unregistered securities to the public, or failure to register as a broker or compliant exchange.
The facts have also been confirmed to a certain extent. At a press conference on Wednesday afternoon, UniSwap COO Mary-Katherine Read and Chief Legal Officer Marvin Amory told reporters that the content of the Wells notice focused on UniSwap as an unregistered securities broker and an unregistered securities exchange, but it was unclear whether UniSwap's native token UNI was implicated as a potential security in the SEC notice.
The timing of the lawsuit faced by UniSwap is quite delicate, just when the cryptocurrency industry is complaining about the SEC. The industry generally believes that the SEC is overly arbitrary in dealing with issues in the crypto field, taking enforcement actions without clear rules, and not taking into account the uniqueness of cryptocurrencies based on blockchain and decentralization. SEC Chairman Gary Gensler countered that the current securities laws are clear, and the cryptocurrency industry seeks special treatment but does not comply with the law-a view shared by the White House, especially Gensler's powerful ally, Democratic Senator Elizabeth Warren.
Of course, historically, the SEC has been at odds with the cryptocurrency industry, with several high-profile lawsuits, Coinbase and Ripple being the case, focusing on the SEC’s jurisdiction over digital assets and how the Supreme Court’s 1946 test for the definition of securities should apply to cryptocurrencies.
These lawsuits are ongoing, with mixed results, with both sides having the upper hand at one point, though rulings in recent years have shown that the SEC as a regulator still has a relatively leading advantage in the law. But in this case, given the uniqueness of DeFi technology and UniSwap Labs’ legal victory in a class action lawsuit last year, the outcome of the UniSwap case remains unpredictable.
In terms of significance, since the outbreak of DeFi in the summer of 2020, DeFi has become a crucial segment of the crypto market, and the top UniSwap protocol has completed more than $2 trillion in transactions. The mainstream financial community is paying more and more attention to its underlying technology, so the outcome of the lawsuit between the US SEC and UniSwap Labs has far-reaching impact.
Unlike traditional brokers or cryptocurrency exchanges, DeFi platforms do not have central institutions as counterparties, nor do they match buyers and sellers for transactions. In contrast, they rely on automated protocols that are purely supervised by code, which set basic requirements such as trading rules and collateral.
In the case of UniSwap Labs, founder Hayden Adams wrote the original underlying code that provided the basis for the protocol, and the company provided users with an interface for trading certain crypto tokens. The protocol itself is open source and has been cited by many other projects in the DeFi field. Based on the open source Uniswap code, users can directly participate in market transactions without any middlemen under the premise of self-custody of their property.
This particularity is particularly important for UniSwap Labs' defense. In fact, UniSwap has relatively rich experience in responding to lawsuits. As early as April 9, 2022, the US law firm Kim &Serritella and Barton announced the initiation of a securities class action lawsuit, accusing Uniswap Labs and defendants such as Paradigm and a16z of violating securities laws and issuing and selling unregistered securities in the form of digital tokens on the UniSwap platform, including Uniswap's governance token UNI.
The lawsuit holds that UniSwap should be held liable for the injured investors. In the case, the plaintiff used a car as an analogy, arguing that Adams' mechanism actually created a dangerous self-driving vehicle that was out of control.
UniSwap Labs also responded to this, arguing that the technology it developed is neutral-other third parties use the technology to perform operations, and the company has no control.
The judge obviously agreed with this view. On August 29, 2023, the case came to an end. Court documents from the United States District Court for the Southern District of New York show that the UniSwap platform is capable and in many cases operates legally; there is no transaction between the plaintiff and the UniSwap platform and protocol; current securities laws do not seem to cover the liability of the DeFi protocol itself for using it to defraud others.
The judge believes that the plaintiff was harmed by the fraudulent token issuer, who used UniSwap's core contract to grab the funds, and UniSwap created this platform, in which the fraudulent token issuer committed fraud, at least according to US securities law. This does not mean that Uniswap is responsible for the fraud and the resulting damages.
In the SEC's lawsuit against Coinbase last month, although the judge refused to dismiss the company's allegations of providing illegal securities, he ruled that the decentralized wallet provided by Coinbase could not be regarded as a broker under the jurisdiction of the Securities and Exchange Commission. This ruling also provides a strong example for UniSwap, because it also mainly operates through wallets and DAPPs. But it is worth noting that the ruling did not include the display interface that the company has permission to control, which has highlighted tokens that were later identified as securities by the US SEC in the past.
Overall, citing the views of Web3 lawyers, the SEC's lawsuit against the company still faces many challenges. First, transactions based on the UniSwap protocol are difficult to apply to securities laws. In the previous Risley and UniSwap Labs case, the presiding judge had clearly stated that due to the neutrality of the company, transactions on Uniswap were not subject to securities laws, and proposed that "the determination of whether it is a security or not is best determined by Congress."
Secondly, compared with many cryptocurrencies that can be traded directly, UniSwap is based on open source protocols, and the applications and wallets involved do not meet the legal definition of securities exchanges or brokers according to the original rules.
Finally, UniSwap's own token UNI is a governance token, which is only a single-function token and does not meet the legal definition of any type of securities, including the definition of "investment contract".
In addition, since the developer of TornadoCash was jailed, UniSwap itself has been walking on thin ice. According to BlockBeats, UniSwap has adopted a fully compliant route in team operations: all American executives, employee recruitment and welfare policies that fully comply with US laws, and a legal route of divesting open source protocols from development entities.
Perhaps because of this, UniSwap is confident in its own compliance. In an open letter, the founder of UniSwap clearly stated that he believed in the legality of the products provided by the company and believed that the company was on the right side of history. At the same time, he also expressed dissatisfaction with the unclear rules of the SEC. Taking FTX as an example, he questioned the relevant regulatory capabilities of the SEC. At the end of the letter, he even stated that he would not give up the lawsuit and might appeal to the Supreme Court. His determination to fight can be seen.
People familiar with UniSwap Labs said that the company is ready to fight a "valuable fight" in court, and said that the company's choice to take root in New York City instead of operating overseas in broad daylight directly reflects the company's legitimacy.
Although it seems to be arguing on its own merits, UNI is still under severe pressure under the influence of the lawsuit. According to market data, under the influence of the news, the price of UNI fell from US$14 to the current US$9.38, a 24-hour plunge of more than 16.88%. Coincidentally, just one day before the SEC issued a warning, the UniSwap team/early investor-related wallet sold 15,000 UNIs on the chain at an average price of US$11.18. Even though this is a drop in the bucket for the market value, it still caused uneasiness among some concerned people.
From the SEC's perspective, it is also doubtful why a lawsuit was filed without sufficient certainty. In this regard, some people believe that this is just a display of confrontational attitude. After all, the conflict between the SEC and the industry has already broken out. With the election approaching, the SEC may also be under more political pressure. The passage of the Bitcoin ETF has been criticized by many opponents, so it is eager to prove its professional position through a targeted event. With the top centralized trading platforms all locked up, it will extend its tentacles to the decentralized field.
But on the other hand, according to industry analysts, the two new rules adopted by the SEC on February 6 this year seem to make this lawsuit confusing again.
The rules state that market participants who play certain roles as dealers, especially those who play an important role in providing liquidity in the market, must register with the SEC, become members of a self-regulatory organization (SRO), and comply with federal securities laws and regulatory obligations. According to the final rule, "any person who engages in the activities described in the rule is a "dealer" or "government securities dealer" and, absent exceptions or exemptions, is required to: register with the Commission under Section 15(a) or Section 15C, as applicable; become a member of an SRO; and comply with federal securities laws and regulatory obligations and applicable SRO and Treasury rules and requirements."
Based on this content, it is still worth discussing whether the automatic market makers in Defi and the largest liquidity providers in a certain trading pair are included. If so, it means that UniSwap and even Defi will face challenges in new directions. But on the positive side, if UniSwap wins this time, it will clear key obstacles for Defi and become the cornerstone of the crypto field's move towards large-scale application.
Success or failure, perhaps, depends on this one move.
References:
Fortune: SEC moves to sue Uniswap in bid to hobble fast-growing DeFi sector;
Web3 Lawyer: SEC plans to file an unwinnable lawsuit against UniswapLabs?
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