The SEC is planning to file an unwinnable lawsuit against Uniswap Labs?

Source: Web3 Lawyer

On April 10, 2024, Uniswap Labs received a Wells Notice from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC), informing the SEC that it may take regulatory enforcement actions such as litigation against Uniswap Labs.

Uniswap Labs is the initiator of the decentralized trading protocol Uniswap Protocol. Since its launch five and a half years ago, its trading volume has exceeded 2 trillion U.S. dollars, dominating the decentralized exchange market, accounting for 55.5% of the total trading volume, and is the leader in the Crypto and DeFi markets.

This behavior of the SEC is seen as a blatant provocation to decentralized DeFi projects and will have a huge impact on the Crypto market. Although we have seen a strong reaction from $UNI, we have seen more market solidarity.

This article will combine Uniswap Labs' SEC response article and its relatively compliant governance structure to see why the SEC filed a lawsuit that is impossible to win?

1. What is a Wells Notice

First of all, it is clear that the Wells Notice is not a formal prosecution or regulatory enforcement document, but a formal warning or notification, which is a warning that the SEC is about to take enforcement action against suspicious projects.

Secondly, the Wells Notice does not explain the specific reasons for taking regulatory enforcement, which makes Uniswap Labs passive and has to prove its innocence comprehensively.

Wells Notice initiation process: 1. After the SEC conducts an internal investigation on the suspicious company (whether it violates the securities law), it is recommended to take action against the suspicious company; 2. After receiving the Wells Notice, the suspicious company will be given a 30-day window to refute the allegations and put forward arguments to prove its innocence; 3. The SEC will then evaluate and decide whether to take regulatory enforcement.

One of the most well-known recent cases includes the SEC vs. Ripple case.

Ripple received a Wells Notice from the SEC in December 2020, which immediately led to its delisting from Coinbase. Although Ripple successfully argued that it was not informed that XRP would be considered a security, the three-year legal process proved to be costly to the company’s reputation.

2. How Uniswap Labs proves its innocence

（blog.uniswap.org/fighting-for-defi）

Let’s take a look at the article Fighting for DeFi published by Uniswap Labs:

From the SEC’s continued regulatory enforcement of the most compliant and law-abiding market participants (Coinbase, Uniswap), and its unwillingness to provide a clear regulatory path for 6 years, this action is more of a political appeal (combined with the recent crusade against DeFi by congressional lawmakers).

Uniswap Labs, a US-based company, created the Uniswap Protocol, bringing unprecedented innovation to the market. These innovations are based on open source code, allowing users to participate directly in market transactions without any middlemen under the premise of self-custody. Uniswap Labs believes that its products are not only legal, but also transformative. They build transparent and verifiable markets with fewer gatekeepers, thereby empowering the global public to participate in the global economy cheaply and conveniently.

If the SEC continues to protect the opaque system of traditional finance and attack innovative, open and transparent technologies that can create opportunities and reduce costs for Americans, then Uniswap Labs will have to fight with US government agencies to protect innovation and economic freedom.

Whatever 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 previously made it clear to Congress that whether a crypto asset can be determined to be a "security" requires congressional legislation to confirm.

And in the case of Risley vs. Uniswap Labs, the judge stated that transactions on Uniswap are not subject to securities law (neutrality does not require a license), and clearly emphasized: "The determination of whether it is a security or not is best resolved by Congress."

In addition, in the case of SEC vs. Ripple, the judge made it clear that secondary market transactions of crypto assets generally do not constitute investment contracts.

It can be seen that there is no "securities" problem in the secondary market transactions on Uniswap.

2. Not meeting the definition of a securities exchange or broker

Even if most cryptocurrencies are identified as "securities", the Uniswap protocol, application and wallet still do not meet the legal definition of a securities exchange or broker.

This is evident in the recent ruling of SEC vs. Coinbase, where the court rejected the SEC's claim that non-custodial crypto wallets are brokers at the earliest stages of the case, even if they charge fees.

3. No "Securities" are Issued

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." Under U.S. securities law and the Howey test, an investment contract is an investment of money into a common enterprise with the expectation of profit, entirely dependent on the efforts of others. Uniswap Labs has no contract or commitment with the more than 300,000 holders of the token, nor does it have a common cause, and the value of the token does not depend entirely on the efforts of Uniswap Labs.

Despite the SEC's recent investigation into the Ethereum Foundation, the CFTC has made it very clear that neither Bitcoin nor Ethereum are securities. The Uniswap technology ecosystem is sufficiently decentralized, just like Bitcoin and Ethereum.

III. Uniswap's Compliance Governance Agency

Previously, we sorted out the compliance path of Uniswap Labs after the divestiture of the agreement, which coincided with Uniswap's legal defense of self-innocence in the article. Under such a structure, the SEC really has little chance of winning.

This path also provides a regulatory-friendly sample for Web3 decentralized projects. The purpose of such a divestiture is to achieve progressive decentralization on the one hand, and to gain more room for maneuver at the regulatory compliance level on the other.

Decentralization + Non-Securities Tokens: The Uniswap protocol runs autonomously on the chain, and is governed by the Uniswap DAO to achieve decentralization. The single-functional token UNI is its governance token. This model avoids the SEC's securities determination and brings a successful court ruling;

DAO legal packaging + limited liability of members: Uniswap DAO established the legal entity of Uniswap Foundation as the legal packaging of DAO, which not only guarantees the limited liability of DAO members, but also enables interaction with the Web2 world and expands its influence;

Labs independent operation + flexible front-end development: The Uniswap Labs team, which previously developed and maintained the protocol, has become a major contributor to the protocol as a separate legal entity. On the one hand, it has gotten rid of the restrictions from the protocol, and on the other hand, it can build and maintain front-end products by calling back-end protocols to achieve sustainability, such as the Uniswap DApp that previously started a fee-based model.

Regulate applications rather than protocols: As the regulatory principle advocated by a16 z, decentralized on-chain protocols are difficult to be compatible with regulation, while front-end applications are fully capable of complying with regulatory requirements, allowing the team and product itself to get rid of possible regulatory risks. Like any App, the front-end application can include KYC/AML/CTF verification according to regulatory requirements, remove tokens that have been warned by regulators at any time, apply for license qualifications, etc.

If the SEC is regulated and enforced under such a compliance path, it may be due to other things besides the SEC's stubbornness in order to complete political tasks.

The most likely one is Uniswap's automatic market maker mechanism (AMM). The specific mechanism will not be explored for the time being, but the AMM mechanism is operated by the decentralized Uniswap Protocol, not Uniswap Labs. If the SEC challenges the Uniswap Protocol, it is equivalent to challenging the freedom of code release based on freedom of speech, which is equivalent to the SEC opening up a new and even less likely to win the case.

Fourth, Impact on the Market

Whether it is the defense in the Uniswap Labs article or the recent cases of crypto regulation, the SEC's attack on Uniswap Labs seems relatively weak, and there is basically no chance of winning. Although $UNI is under pressure in the short term.

We recognize that this is a move with political demands.

This behavior of the SEC will only make people in the crypto world more united, just as hayden.eth, founder of Uniswap Labs, said:

"I work in cryptocurrency because I believe it can have a huge positive impact on the world by eliminating gatekeepers (middlemen) and increasing access to value and ownership, just like the way the Internet seamlessly accesses information.

I am extremely proud of the various versions of Uniswap, the thousands of projects built on it, the web applications with millions of users, the wallets with hundreds of thousands of downloads, and changing the lifestyles of tens of millions of people around the world. We are still in the early stages - this technology and revolution will play a role for decades.

Hopefully we can unite more as an industry. The more united we are, the stronger we are and the harder it is to kill. So let's be friends. "