‘Prepared to Defend DeFi’: Uniswap Answers SEC Wells Notice

Uniswap Labs, the developer behind the decentralized exchange Uniswap, has responded to a Wells notice from the United States Securities and Exchange Commission (SEC), indicating a potential enforcement action against the firm.

In a blog post dated May 21, Uniswap criticized the SEC’s legal basis for the notice, labeling it as “weak” and expressing readiness to challenge the matter in court if necessary. 

Prepared for Legal Battle

The company highlighted its legal team’s success in defending firms such as Grayscale and Ripple against the financial regulator. Chief Legal Officer Marvin Ammori argued that the SEC’s case was fundamentally flawed, based on the premise that all tokens fall under its jurisdiction as securities.

Uniswap stated that the SEC should not allocate taxpayer resources to pursuing a case against the exchange. Despite this, the company is prepared to contest the charges vigorously.

This response came as the U.S. House of Representatives was poised to vote on the Financial Innovation and Technology for the 21st Century Act, a bill that could redefine the regulatory responsibilities of the SEC and the Commodity Futures Trading Commission (CFTC) regarding cryptocurrency. Uniswap suggested that, should this legislation be enacted, the SEC’s case might become irrelevant, with the CFTC gaining enforcement authority in certain areas.

Historically, some Wells notices issued to cryptocurrency firms by the SEC have escalated into full-scale lawsuits, such as the one against Coinbase in March 2023. The SEC has also indicated intentions to pursue enforcement actions against trading platform Robinhood in May.

Ammori further asserted that the SEC would likely lose any case against Uniswap, potentially undermining its future authority over decentralized finance (DeFi), cryptocurrencies, and emerging technologies. He compared the situation to early internet laws that hindered innovation.

There is speculation that the SEC’s enforcement action might be linked to discussions about categorizing Ether as a security. Uniswap facilitates automated token exchanges on the Ethereum blockchain. Notably, the SEC is expected to make decisions on applications for spot Ether exchange-traded funds by May 23.

Confirmation and Criticism

The SEC’s issuance of the Wells notice to Uniswap in April was confirmed by Ammori on social media platform X (formerly Twitter) on April 10. He expressed disappointment but not surprise, criticizing the SEC for its lack of clarity and guidance regarding the regulation of Uniswap’s self-custodial, non-intermediated products. Ammori noted that the SEC has not provided a framework for how such products should be registered.

A Wells notice serves as a formal notification from the SEC, informing a company or individual that the regulator’s staff plans to recommend enforcement action. This notice allows the recipient to respond with a written explanation or argument, known as a Wells submission, to contest the proposed action.

Uniswap’s Operational Model

Uniswap, operating on the Ethereum blockchain, enables users to exchange various cryptocurrencies without traditional intermediaries like centralized exchanges. The SEC has been investigating Uniswap Labs since 2021, and the decentralized exchange has previously delisted several tokens due to regulatory pressure.

In its defense, Uniswap Labs has maintained that it merely develops the front-end portal for the app, which is distinct from the autonomous Uniswap protocol itself, released as public code.  

SEC’s Previous Actions and EU’s Regulatory Progress

The SEC has previously issued similar notices to crypto exchanges Coinbase and Binance, warning them about potential legal actions. As the U.S. SEC continues to take legal actions against crypto protocols, the European Union is making progress with its Markets in Crypto-Assets (MiCA) regulation, which will also cover decentralized finance (DeFi) protocols and their front-ends.

The EU regulator is mandated to prepare a report by December 30, 2024, to assess the feasibility of specific regulations for the decentralized finance market. This report will investigate how decentralized systems, especially those without a clear issuer or service provider, should be regulated within the region.