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Uniswap Labs claims SEC will fail, urges agency to drop enforcement action

Uniswap Labs argues that the SEC lacks authority to regulate its protocol under current definitions.

Uniswap SEC dispute courtroom scene

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Uniswap Labs has urged the SEC to drop its pending enforcement action against the company. Arguing through a response to the agency’s Wells notice, Uniswap Labs CLO Martin Ammori said that the SEC would have to redefine what an exchange is to have jurisdiction over Uniswap.

The SEC’s Wells notice was issued to Uniswap Labs in April, accusing the Uniswap protocol of being an unregistered securities exchange and the interface and wallet of being unregistered securities brokers.

A Wells notice is a formal notification issued by the SEC or other securities regulators to inform individuals or companies of completed investigations where infractions have been discovered. This signals the agency’s intention to recommend legal action against Uniswap as it builds its case to pursue the company for alleged violations of federal securities laws.

“These assertions assume that value represented in a specific digital file format is a security – and that the SEC can unilaterally extend the definitions of exchanges, brokers and contracts,” Uniswap states in the blog post published Tuesday.

Uniswap Protocol, as developed by Uniswap Labs, operates the application and interface for Uniswap, a decentralized exchange (DEX) built over the Ethereum blockchain.

Legal contentions

According to Ammori, Uniswap’s legal strategy revolves around challenging the SEC’s authority to regulate the Uniswap Protocol and its associated products based on the definition of securities and exchanges.

The company asserts that the majority of digital assets traded on the Uniswap Protocol do not constitute securities under federal law. Uniswap contends that the SEC has failed to provide clear guidance on which specific assets it deems to be securities, creating an atmosphere of regulatory uncertainty for DeFi projects.

Uniswap also notes that the decentralized nature of the Uniswap Protocol renders it immune to the regulator’s oversight, arguing that its autonomous operation precludes the company from being held responsible for ensuring compliance with securities laws. The company maintains that, as a decentralized protocol, Uniswap is not controlled by any single entity, including Uniswap Labs itself.

“The Protocol is not controlled by, or comprised of, any “group of persons,” let alone Universal Navigation Inc. (“Uniswap Labs” or “Labs”). Labs initially developed the Protocol, but the Protocol is open-source and fully autonomous. Labs cannot change the Protocol’s core code,” Uniswap states in its Wells notice response.

Another notable contention is with Rule 3b-16, which expands the definition of “exchange” to include DeFi protocols. Uniswap claims that this set of proposed changes are unlawful.

Uniswap says that the proposed amendments to Rule 3b-16 misinterpret the Exchange Act and thus run counter to the original intent of Congress. There’s also the contention that the proposed rule points to a violation of the separation of powers under the major questions doctrine and the non-delegation doctrine, as it represents a significant expansion of the SEC’s regulatory authority without explicit congressional approval.

Uniswap argues that the proposed rule fails to provide fair notice to regulated parties, potentially infringing on the Due Process Clause of the US Constitution.

The company also asserts that the proposed amendments are “arbitrary and capricious” under the Administrative Procedure Act (APA), as the SEC has not adequately justified its position or considered the potential consequences for the DeFi industry.

SEC’s previous actions against Uniswap

In September 2021, it was reported by Reuters that the SEC had launched an investigation into Uniswap Labs, the developer of the decentralized exchange Uniswap.

According to the report, the SEC was seeking information about how investors use the Uniswap exchange and how it is marketed. The regulator’s focus appeared to be on gathering information rather than alleging any wrongdoing at the time.

The news of the SEC’s investigation into Uniswap Labs came amidst increasing regulatory interest in the DeFi space. SEC Chairman Gary Gensler had previously hinted at the need for greater oversight of DeFi projects, particularly those that offer incentives or digital tokens to participants.

At the time, Gensler argued that even in the absence of a central entity controlling a decentralized exchange, DeFi projects with governance structures and fees could still fall under the purview of SEC regulation. This stance signaled the agency’s intent to apply existing securities laws to the emerging DeFi ecosystem.

The SEC’s investigation into Uniswap Labs followed its first enforcement action involving securities using DeFi technology in August 2021, when it charged Blockchain Credit Partners with raising $30 million through allegedly fraudulent offerings.

The regulatory scrutiny faced by Uniswap Labs in 2021 foreshadowed the ongoing legal battle between the company and the SEC, which has since escalated with the recent issuance of a Wells notice.

The earlier investigation and the subsequent enforcement action against Blockchain Credit Partners demonstrates the SEC’s growing interest in asserting its authority over the DeFi industry and applying securities laws to decentralized projects.

Uniswap’s Wells notice response also highlighted the potential consequences of the SEC’s actions, stating that bringing a case against Uniswap would “push” American crypto investors to use foreign trading protocols and discourage future innovators from fostering competition and innovation in financial markets.

Ammori emphasized that Uniswap Labs is prepared to litigate if necessary and is confident in its ability to win, but hopes that the SEC will recognize that its current strategy is not protecting anyone or benefiting Americans.

Uniswap Labs will be represented in court by Andrew Ceresney, the SEC’s former head of enforcement. Ceresney represented Ripple in its case with the SEC. Former US solicitor general Don Verrili, who represented Grayscale in its case against the SEC, will also join Uniswap’s legal team.

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