Key Takeaways:
Leading Ethereum-based decentralized exchange Uniswap has pressed the US Securities and Exchange Commission (SEC) to withdraw its proposal to gain oversight over the decentralized finance (DeFi) sector.
Since April 2023, the SEC has pushed to expand the definition of what qualifies as an exchange platform under the Exchange Act of 1934. The securities watchdog explicitly argued that entities that participate in DeFi should be included in the bracket.
SEC Accuses Uniswap of Operating An Unregistered Securities Exchange
Three months ago, Uniswap Labs – developers of Uniswap, and Robinhood Crypto – the crypto division of the Robinhood trading app, received a Wells notice from the SEC notifying that it believes them to have broken the law. The agency accused Uniswap of operating an unregistered securities exchange and designated its interface and wallet as unregistered securities brokers.
Uniswap Labs pushed back against the assertion, arguing that its protocol does not meet the definition of an exchange and thus is not subject to any regulation by the SEC. The company explained that although it invented the protocol, the technology has since become a “passive” platform that people use to trade cryptocurrencies.
Uniswap’s chief legal officer Marvin Ammori told reporters that the SEC would have to redefine what an exchange is to have jurisdiction over DeFi protocols. He explained that the protocol is specifically designed for “non-securities” like Ethereum (ETH), Bitcoin (BTC), and stablecoins, which account for 65% of its total trading volume.
Ammori added that if Uniswap has to fall under the SEC’s oversight, it should be handling securities assets like stocks, bonds, treasuries, etc., which it does not.
He also said the regulator’s claim that the Uniswap interface and wallet are securities brokers is bound to fail because a recent ruling from a federal judge dismissed the agency’s argument that the Coinbase Wallet constituted an unregistered securities broker.
Uniswap’s UNI And LP Tokens Targeted By The US Securities Watchdog
As per the Wells notice, the SEC has set its sights on Uniswap’s native UNI cryptocurrency and its liquidity provider (LP) tokens.
LP tokens are given as a receipt to users who deposit crypto assets into Uniswap’s trading pools. These tokens are equivalent to the value of their deposits and can be swapped for other cryptocurrencies on the protocol. The deposits made into liquidity pools are available to other users who wish to trade on Uniswap.
However, the SEC alleges LP tokens are investment contracts whose distribution violates the federal securities law. Uniswap rejected the argument because LP tokens are simply “bookkeeping devices” and don’t qualify for the regulator’s frameworks.
Following a comment letter sent to the SEC last month in response to the legal notice, Uniswap added further arguments in a July 9th letter calling for the regulator to drop its proposed amendments to the exchange laws.
The decentralized exchange referred to the Chevron decision made during the Loper Bright Enterprises vs Raimondo Supreme Court case on June 28, where it was declared that courts are no longer required to defer to federal agencies to interpret ambiguous laws.
Uniswap meant that the SEC would be merely wasting its time trying to get the definition of an “exchange” amended as it is already unlikely to survive a judicial challenge. The crypto giant also argued that the proposed changes have “no discernible limits” to the public, meaning the SEC would need to litigate on a case-by-case basis in court, resulting in inconsistencies and a lack of clear guidance.
Uniswap Urges SEC To Drop The Lawsuit And Reopen A Comment Period For Its “DeFi” Proposal
Uniswap has urged the Commission not to adopt the proposed amendments as it was drafted against a legal backdrop that “no longer exists”. The exchange has asked the SEC to reopen the comment period for its proposal so that the public can consider the recent Chevron decision.
Uniswap’s legal team argued that the agency “should not take on these significant litigation risks” and bringing a case against the platform could push American crypto investors to pursue foreign decentralized trading protocols, discouraging future innovators from attempting to foster new ideas that bring in more competition and innovation to financial and commercial markets.
Uniswap is one of the largest DEXs and the 4th largest cryptocurrency exchange by daily trading volume. The protocol has a total value locked (TVL) of $5.63 billion across multiple blockchains – Ethereum, Arbitrum, Base, Polygon, Optimism, Binance Smart Chain, Celo, and Rootstock.
At the time of writing, UNI is trading at $8.24 – up 1.32% in the last 24 hours.
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