On Wednesday, the Securities and Exchange Commission (SEC) warned Uniswap of its intention to take legal action against the company, a leading platform for DeFi - a segment of the cryptocurrency market where traders rely on computer protocols acting as automated market makers for the exchange of various tokens. This alert takes the form of a Wells Notice*, which the SEC sends to a company before launching a formal lawsuit, giving it a final opportunity to refute the allegations. In this case, that process is likely to be little more than a formality as the agency has been investigating Uniswap for some time, as part of a widespread crackdown on the cryptocurrency sector.
The specific nature of the SEC's allegations against Uniswap Labs is not yet known - the company having built the protocol of the same name, but not controlling it. However, given the agency's recent prosecutions of high-profile cryptocurrency firms such as Coinbase, it is likely that the agency will allege that the firm illegally offered unregistered securities to the public or failed to register as a broker or exchange.
SEC chairman Gary Gensler has countered that existing securities laws are clear and that the cryptocurrency industry has sought special treatment while failing to comply - a position supported by the White House and, in particular, Gensler's powerful ally Senator Elizabeth Warren. This conflict has already led to a number of high-profile lawsuits, most notably involving Coinbase and Ripple, which focus on the SEC's jurisdiction over digital assets and how a 1946 Supreme Court test defining securities should apply to cryptocurrencies.
The stakes in any trial between the SEC and Uniswap Labs will be high, given that DeFi, once a small niche in the cryptocurrency market, has grown rapidly. Uniswap recently announced that the protocol has facilitated more than $2 trillion in transactions, and there is growing interest from traditional finance in the potential of the underlying technology.
Unlike conventional brokers or cryptocurrency exchanges, DeFi platforms do not have a central authority to act as a counterparty for exchanges, or to stand between buyers and sellers. They rely on automated protocols, governed purely by a computer program, which set the rules for trading, collateral requirements and so on.
In the case of Uniswap Labs, founder Hayden Adams wrote the original underlying code that powers the protocol, and the company provides an interface for users to trade certain cryptocurrency tokens. But the protocol itself is open-source and is used by many other projects in DeFi.
This distinction was crucial in resolving a class action lawsuit filed against Uniswap Labs last year, which claimed that the company was responsible for traders who had been defrauded. In that case, the plaintiffs argued that Adams had built the equivalent of a dangerous autonomous car that wreaked havoc.
Uniswap Labs also used the autonomous car metaphor, but argued that the technology it had built was neutral and whether it was used for evil or good was beyond its control. In a sophisticated ruling describing the nuances of DeFi in detail, a federal judge clearly sided with Uniswap Labs, handing the DeFi industry a major victory.
More recently, in a ruling last month in the SEC's case against Coinbase, the judge declined to dismiss allegations that the company was offering illegal securities, but ruled that Coinbase's decentralised wallet offering could not be considered a broker for the purposes of SEC authority. This finding is likely to strengthen Uniswap Labs' case in any trial with the SEC, although it does not take into account the interface of the company over which the company has control and which has in the past put forward tokens that the SEC subsequently deemed to be securities.
In the aftermath, Hayden Adams ruled on his X account:
"Today @Uniswap Labs received a Wells notice from the SEC.
I’m not surprised. Just annoyed, disappointed, and ready to fight.
I am confident that the products we offer are legal and that our work is on the right side of history. But it’s been clear for a while that rather than working to create clear, informed rules, the SEC has decided to focus on attacking long-time good actors like Uniswap and Coinbase. All while letting bad actors like FTX slip by.
When I first set out to build Uniswap, the goal wasn’t to reimagine finance.
It was an experiment in radically decentralized, fully automated onchain markets. I didn’t know if it would work or if anyone would use it.
Fast forward to today, the Uniswap Protocol has processed over $2 trillion in volume. Many thousands of teams and developers have forked our code or built on top of it. We built entirely new financial infrastructure that is transparent, fair, secure, and accessible powering an entire industry.
The team at @Uniswap did all of this in the US from our office in New York City.
People often ask me why we stay in the US and my answer is simple: I believe that blockchain is incredibly powerful technology. Like the Internet, it’s here to stay. So someone needs to figure it out, and it might as well be us.
And that when you build technology that improves people’s lives – you don’t need to hide.
The @SEC’s mission mission is “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.” This is a noble mission. I would argue @Uniswap does a far better job of this today than the SEC.
Yes, I'm frustrated that the SEC seems to be more concerned with protecting opaque systems than protecting consumers. And that we'll have to fight a US government agency to protect our company and our industry.
This fight will take years, may go all the way to the Supreme Court, and the future of financial technology and our industry hangs in the balance. If we stand together we can win.
I think freedom is worth fighting for. I think DeFi is worth fighting for.
And of course, we won’t stop shipping. Stay tuned !"
*The Wells Notice is a document that the U.S. Securities and Exchange Commission (SEC) sends to a company or person to inform them that the agency is considering taking legal action against them for alleged violations of the securities laws. This notice gives the party concerned a final opportunity to provide a written explanation or arguments to contest the agency's preliminary conclusions or to demonstrate why no legal action should be taken. The Wells Notice is not a formal charge, but rather a warning that an SEC investigation has produced sufficient preliminary evidence suggesting a violation that could warrant legal action.
