In a long-awaited move, it has been revealed that the Securities and Exchange Commission (SEC) is set to file a lawsuit against Uniswap, the popular decentralized protocol. This comes after the SEC issued a Wells notice to Uniswap Labs, which serves as a formal warning before legal action is taken against a company.
It’s important to note that this lawsuit is not a result of any fraudulent activity, theft, or market manipulation by the Uniswap protocol. Rather, it stems from the fact that Uniswap’s decentralized model poses a threat to the traditional centralized securities markets regulated by the SEC.
Uniswap operates as a decentralized protocol built on immutable code, with Uniswap Labs providing a gateway for users to access the trading protocol. To draw a parallel, Uniswap Labs is more like a taxi driver who transports a user to a stock exchange or broker, rather than being the stock exchange or broker itself.
The crux of the issue lies in the fact that Uniswap’s existence challenges the conventional notion that intermediaries are necessary for billions of dollars to be traded. In a future where decentralized protocols like Uniswap become the norm, the SEC’s regulatory model centered around intermediaries will become obsolete.
However, the SEC faces an uphill battle in this litigation. Unlike other crypto cases where the SEC can rely on the Howey test to argue that crypto tokens are securities, they must go a step further in this case. They need to prove that Uniswap is either an unregistered broker or an unregistered exchange, which is what they failed to do in their case against Coinbase. Furthermore, a private plaintiff failed to make this argument in a securities litigation against Uniswap last year.
The SEC will likely try to differentiate their stance by claiming that Uniswap Labs, along with its relayer operation, liquidity providers, front-end applications, and coders, are all part of the same entity. However, this is a difficult position to maintain and runs the risk of classifying software developers as unlicensed brokers, as seen in the SEC’s unsuccessful allegation against the Coinbase Wallet.
Additionally, the SEC may argue that Uni, the native token of Uniswap, is a security and that the airdrop of Uni tokens constituted a distribution of securities. This will provide an opportunity to test the SEC’s theory on airdrops in a court of law, as seen in the case brought against the SEC by the DeFi Education Fund, which was funded by Uni tokens.
The SEC’s argument relies on an old precedent that considers free stock dividends to be an offer or sale of securities. However, this precedent is tailored to apply to publicly traded stocks, which are already recognized as securities. Expanding this to airdrops risks giving the SEC jurisdiction over various customer reward programs, such as airline miles or prepaid arcade cards.
However, Uni operates differently from a traditional stock. It does not grant voting rights or shareholder standing in litigation, and its fee-sharing option has never been activated. In many ways, it resembles a meme coin rather than an investment contract.
While it would be more beneficial for the SEC to focus on genuine scams masquerading as decentralized finance (DeFi) projects, it is still important that the matter is litigated against Uniswap. Uniswap is a well-funded defendant and a reputable actor in the industry. Moreover, it represents a sincerely decentralized product that aligns with previous guidance from the SEC, suggesting it may not be classified as an investment contract.
In conclusion, the SEC’s lawsuit against Uniswap marks a significant development in the ongoing battle between decentralized protocols and traditional securities markets. The outcome of this litigation will have far-reaching implications for the future of decentralized finance and regulatory frameworks surrounding it.