The U.S. Securities and Exchange Commission (SEC) issued a warning to UniSwap Labs on Wednesday, indicating that it may bring an enforcement lawsuit against the company. UniSwap Labs is the creator of the decentralized trading protocol UniSwap Protocol, and UniSwap is a leading protocol in the DeFi field. Since its launch over five and a half years ago, its trading volume has exceeded $2 trillion, accounting for 55.5% of the total trading volume in the decentralized trading market.
The warning was issued in the form of a Wells notice, representing an informal reminder from the SEC to the company before formally filing a lawsuit, providing the company with a final opportunity to refute the charges. However, receiving a Wells notice does not necessarily mean that the SEC will definitely file a lawsuit. In essence, this is the last opportunity for the recipient to defend themselves, and they can provide evidence and arguments to try to persuade the SEC not to take action. If the SEC decides to proceed, it will file a formal lawsuit and issue a "civil litigation order" (complaint). However, in general, the Wells process is often just a formality. It is rumored that the SEC has been investigating UniSwap for a considerable amount of time, and the SEC is seeking to take comprehensive action against the cryptocurrency industry.
An SEC spokesperson stated in an interview, "The U.S. Securities and Exchange Commission does not comment on the existence of potential investigations."
Currently, the specific nature of the charges against UniSwap Labs by the SEC is not yet known. However, based on previous lawsuits by the SEC against high-profile cryptocurrency companies such as Coinbase, the likelihood of charges related to illegally offering unregistered securities to the public, or operating as an unregistered broker or compliant exchange, is relatively high.
In a press conference on Wednesday afternoon, UniSwap's Chief Operating Officer Mary-Catherine Red and Chief Legal Officer Marvin Amori told reporters that the content of the Wells notice focused on UniSwap's operation as an unregistered securities broker and an unregistered securities exchange. However, it is not clear whether UniSwap's native token UNI is implicated as a potential security in the SEC notice.
The timing of the lawsuit facing UniSwap is delicate, as it coincides with widespread criticism of the SEC within the cryptocurrency industry. The industry generally believes that the SEC's handling of issues in the crypto space is overly arbitrary, taking enforcement actions without clear rules and without considering the unique nature of cryptocurrencies based on blockchain and decentralization. SEC Chairman Gary Gensler has countered this by stating that the existing securities laws are clear, and the cryptocurrency industry is seeking special treatment without complying with the law. The White House, particularly Gensler's powerful ally, Democratic Senator Elizabeth Warren, also supports this view.
Historically, conflicts between the U.S. Securities and Exchange Commission and the cryptocurrency industry have been frequent, with several high-profile lawsuits, such as those involving Coinbase and Ripple. The focus of these lawsuits is the SEC's jurisdiction over digital assets and how the 1946 Howey Test for defining securities should apply to cryptocurrencies.
These lawsuits are ongoing, with mixed results, and both sides have had their moments of advantage. However, recent rulings indicate that the SEC, as a regulatory agency, still holds a relatively leading position in terms of the law. But in this lawsuit, given the uniqueness of DeFi technology and UniSwap Labs' legal victory in a collective lawsuit last year, the outcome of the UniSwap case is still unpredictable.
In terms of significance, since the DeFi summer of 2020, DeFi has become a crucial segment of the cryptocurrency market, and the leading UniSwap protocol has facilitated over $2 trillion in transactions. Mainstream financial interest in its underlying technology is increasing. Therefore, the outcome of the lawsuit between the SEC and UniSwap Labs will have far-reaching implications.
Unlike traditional brokers or cryptocurrency exchanges, DeFi platforms do not have a central entity as a counterparty, nor do they have institutions to match buyers and sellers. Instead, they rely on automated protocols supervised purely by code, which set trading rules and collateral requirements.
In the case of UniSwap Labs, founder Hayden Adams wrote the original underlying code that provides the basis for the protocol, and the company provides users with an interface to trade certain cryptocurrencies. The protocol itself is open-source and is used by many other projects in the DeFi space. Based on the open-source UniSwap code, users can participate directly in market trading without any intermediaries, while maintaining custody of their assets.
This uniqueness is particularly important for UniSwap Labs' defense. In fact, UniSwap has had relatively rich experience in dealing with lawsuits. As early as April 9, 2022, the U.S. law firm Kim & Serritella and Barton announced a class-action securities lawsuit, accusing Uniswap Labs, Paradigm, a16z, and other defendants of violating securities laws by issuing and selling unregistered securities in the form of digital tokens on the UniSwap platform, including UniSwap's governance token UNI.
The lawsuit argues that UniSwap should be held responsible for the affected investors. In this case, the plaintiffs used a car analogy, stating that Adams' mechanism effectively created a dangerous self-driving vehicle out of control.
UniSwap Labs responded by arguing that the technology they developed is neutral— the company does not have control over the operations conducted by other third parties using the technology.
The judge clearly acknowledged this viewpoint. On August 29, 2023, the case came to a close. Court documents from the U.S. Southern District of New York indicated that the UniSwap platform is capable of and, in many cases, operates legally; the plaintiffs did not engage in transactions with the UniSwap platform and protocol; and the current securities laws do not seem to cover fraudulent behavior using the core contracts of UniSwap.
The judge found that the plaintiffs were harmed by fraudulent token issuers who exploited UniSwap's core contracts, and at least according to U.S. securities laws, this does not mean that UniSwap is responsible for fraud and the resulting harm.
In the recent lawsuit against Coinbase by the SEC, although the judge refused to dismiss the charges of offering illegal securities, it ruled that Coinbase's decentralized wallet cannot be considered a broker within the jurisdiction of the Securities and Exchange Commission. This ruling also provides strong evidence for UniSwap, as it primarily operates through wallets and DApps. However, it is worth noting that the ruling did not include the user interface that the company has control over, which prominently displayed tokens that were later deemed securities by the SEC.
Overall, citing the viewpoint of Web3 legal experts, the SEC's lawsuit against the company still faces many challenges. First, trading based on the UniSwap protocol is difficult to apply to securities laws. In the previous Risley v. UniSwap Labs case, the presiding judge explicitly stated that due to the neutrality of the company, transactions on Uniswap are not subject to securities laws, and proposed that "it is best for Congress to determine whether or not it is a security."
Second, compared to many directly tradable cryptocurrencies, UniSwap, as an open-source protocol, and the applications and wallets involved do not conform to the legal definitions of securities exchanges or brokers.
Finally, UniSwap's native token UNI is a governance token, serving a single functional purpose and does not fit the legal definition of any type of security, including the definition of an "investment contract."
In addition, following the imprisonment of developers in the TornadoCash incident, UniSwap itself is treading on thin ice. According to BlockBeats, UniSwap has taken a completely compliant approach in team operations: an all-American management team, recruitment and welfare policies that fully comply with U.S. law, and a legal approach that separates open-source protocols from development entities.
Perhaps it is precisely because of this that UniSwap is confident in its compliance. In a public letter from the founder, it is explicitly stated that the company believes in the legality of the products it provides, and considers itself to be on the right side of history. At the same time, it also expressed dissatisfaction with the unclear SEC rules, citing FTX as an example to question the SEC's regulatory capabilities. The letter even concludes by stating that it will not give up the lawsuit and may continue to appeal all the way to the Supreme Court, demonstrating its determination to fight.
UniSwapLabs insiders have stated that the company is prepared for a "valuable struggle" in court, and that the company's choice to operate in New York City rather than overseas directly reflects its legitimacy.
Despite appearing to fight for what is right, UNI is still under significant pressure due to the lawsuit. According to market data, the price of UNI has plummeted from $14 to the current $9.38, a drop of over 16.88% in 24 hours following the news. Coincidentally, just the day before the SEC issued the warning, a wallet associated with the UniSwap team/early investors sold 15,000 UNI at an average price of $11.18 on-chain. While this is a drop in the bucket in terms of market value, it has still caused unease among some observers.
From the SEC's perspective, there are doubts about why they would file a lawsuit without sufficient certainty. Some believe that this is simply a show of defiance, as the conflict between the SEC and the industry has already erupted. With the upcoming elections, the SEC may also be under more political pressure. The recent approval of the Bitcoin ETF faced a lot of opposition, so there may be an urgent need for a targeted event to demonstrate their professional stance. With centralized trading platforms already targeted, the SEC is extending its reach into the decentralized field.
On the other hand, according to industry analysts, the SEC's two new rules passed on February 6th this year seem to add more confusion to this lawsuit.
The rules state that market participants who act in certain trading roles, especially those who play a significant role in providing liquidity in the market, must register with the SEC, become members of self-regulatory organizations (SROs), and comply with federal securities laws and regulatory obligations. According to the final rule, "any person engaged in the activities described in the rule is a 'dealer' or 'government securities dealer' and, absent an exception or exemption, is required to: register with the Commission pursuant to section 15(a) or section 15C, as applicable; become a member of an SRO; and comply with federal securities laws and regulatory obligations as well as applicable SRO and Treasury rules and requirements."
Based on this, it is worth exploring whether automated market makers in DeFi and the largest liquidity providers in certain trading pairs are included in this. If so, this would mean that UniSwap and even DeFi as a whole will face new challenges. However, on the positive side, if UniSwap succeeds in this lawsuit, it will clear a key obstacle for DeFi and become a cornerstone for the widespread application of cryptocurrencies.
The outcome, perhaps, lies in this one move.
References:
Fortune: SEC moves to sue Uniswap in bid to hobble fast-growing DeFi sector;
Web3小律: SEC plans to file an unwinnable lawsuit against UniswapLabs?
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