Article source: Web3 Lawyer
On April 10, 2024, Uniswap Labs received a Wells Notice from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC), informing it that the SEC may take regulatory enforcement actions against Uniswap Labs, including litigation.
Uniswap Labs is the initiator of the decentralized trading protocol Uniswap Protocol. Since its launch five and a half years ago, its trading volume has exceeded 2 trillion US dollars. It dominates the decentralized exchange market, accounting for 55.5% of the total trading volume, and is the leader in the Crypto and DeFi markets.
This behavior of the SEC is seen as a blatant provocation to decentralized DeFi projects and will have a huge impact on the Crypto market. Although we have seen a strong reaction from $UNI, we have seen more solidarity in the market.
This article will combine Uniswap Labs’ SEC response article and its relatively compliant governance structure to see why the SEC filed a lawsuit that it could not win?
1. What is a Wells Notice?
First of all, it should be made clear that the Wells Notice is not a formal prosecution or regulatory enforcement document, but a formal warning or notification, and an early warning that the SEC is about to take enforcement action against suspicious projects.
Secondly, the Wells Notice did not explain the specific reasons for taking regulatory enforcement actions, which put Uniswap Labs in a passive position and forced it to fully prove its innocence.
Wells Notice initiation process: 1. After the SEC conducts an internal investigation into the suspicious company (whether it has violated securities laws), it recommends taking action against the suspicious company; 2. After receiving the Wells Notice, the suspicious company will be given a 30-day window to refute the allegations and put forward arguments to prove its innocence; 3. The SEC will then conduct an evaluation and decide whether to take regulatory enforcement measures.
One of the most well-known recent cases includes the SEC vs. Ripple case.
Ripple received a Wells Notice from the SEC in December 2020, which immediately led to its delisting from Coinbase. Although Ripple successfully argued that it was not informed that XRP would be considered a security, the three-year legal process proved costly to the company’s reputation.
2. How Uniswap Labs proves its innocence
（blog.uniswap.org/fighting-for-defi）
Let’s take a look at the article Fighting for DeFi published by Uniswap Labs:
Judging from the SEC’s continued regulatory enforcement of the market’s most compliant and law-abiding market participants (Coinbase, Uniswap), and its unwillingness to provide a clear regulatory path for 6 years, this action is more of a political appeal (combined with the recent crusade against DeFi by congressional lawmakers).
Uniswap Labs, a US-based company, created the Uniswap Protocol, bringing unprecedented innovations to the market. These innovations are based on open source code, allowing users to directly participate in market transactions without any middlemen under the premise of self-custody. Uniswap Labs believes that its products are not only legal, but also transformative. They establish transparent and verifiable markets with fewer gatekeepers, thus empowering the global public to participate in the global economy cheaply and easily.
If the SEC continues to protect the opaque system of traditional finance and attack innovative, open and transparent technologies that can create opportunities and lower costs for Americans, then Uniswap Labs will have to fight against U.S. government agencies to protect innovation and economic freedom.
Whatever the SEC decides to do, the law is clear on the following points:
1. SEC regulatory enforcement has no congressional authorization - SEC only has jurisdiction over "securities"
The SEC chairman previously made it clear to Congress that whether crypto assets can be determined to be "securities" requires confirmation by congressional legislation.
And in the Risley vs. Uniswap Labs case, the judge stated that transactions on Uniswap are not subject to securities laws (neutrality does not require a license), and clearly emphasized: "The determination of whether it is a security is best resolved by Congress."
In addition, in the SEC vs. Ripple case, the judge made it clear that secondary market transactions of crypto assets generally do not constitute investment contracts.
This shows that there is no "securities" issue in secondary market transactions on Uniswap.
Related Reading:
The pain of DeFi regulation, Uniswap is in heaven, Tornado Cash is in hell
Interpreting the SEC v. Ripple case to further clear the regulatory fog
2. Does not meet the definition of a stock exchange or broker
Even if most cryptocurrencies were deemed “securities,” the Uniswap protocol, application, and wallet would still not meet the legal definition of a securities exchange or broker.
This was evident in the recent SEC vs. Coinbase ruling, where the court rejected the SEC’s claim at an early stage in the case that non-custodial crypto wallets were brokers even if they charged fees.
3. No “Securities” are issued
The $UNI token is not a security because it does not meet the legal definition of any type of security, including the definition of an “investment contract.” Under U.S. securities law and the Howey test, an investment contract is the investment of money in a common enterprise with the expectation of profits, dependent entirely on the efforts of others. There is no contract or commitment or common cause between Uniswap Labs and the more than 300,000 holders of the token, and the value of the token is not entirely dependent on the efforts of Uniswap Labs.
Despite the SEC’s recent investigation into the Ethereum Foundation, the CFTC has made it very clear that neither Bitcoin nor Ethereum are securities. The Uniswap technology ecosystem is sufficiently decentralized, just like Bitcoin and Ethereum.
3. Uniswap’s Compliance Governance Organization
Previously, we sorted out the compliance path of Uniswap Labs after the divestiture of the protocol, which coincided with Uniswap's legal defense in the article to prove its innocence. Under such a structure, the SEC really has little chance of winning.
This path also provides a regulatory-friendly sample for Web3 decentralized projects. The purpose of such divestiture is to achieve progressive decentralization on the one hand, and to gain more room for maneuver at the regulatory compliance level on the other.
Decentralization + Non-Securities Tokens: The Uniswap protocol runs autonomously on the chain and is governed by the Uniswap DAO to achieve decentralization. The single-function token UNI is its governance token. This model avoids the SEC's securities determination and has resulted in a successful court ruling.
DAO legal packaging + member limited liability: Uniswap DAO established the legal entity of Uniswap Foundation as the legal packaging of DAO. On the one hand, it guarantees the limited liability of DAO members, and on the other hand, it can interact with the Web2 world and expand its influence;
Labs operates independently + flexible front-end development: The Uniswap Labs team, which previously developed and maintained the protocol, has become a major contributor to the protocol as a separate legal entity. On the one hand, it has gotten rid of the restrictions of the protocol, and on the other hand, it can build and maintain front-end products by calling the back-end protocol to achieve sustainability, such as the Uniswap DApp that previously started a charging model.
Regulate applications rather than protocols: As the regulatory principle advocated by a16 z, decentralized on-chain protocols are difficult to be compatible with regulation, while front-end applications are fully capable of complying with regulatory requirements, allowing the team and product itself to escape possible regulatory risks. Like any App, front-end applications can include KYC/AML/CTF verification according to regulatory requirements, remove tokens that have been warned by regulators at any time, and apply for license qualifications, etc.
If the SEC is involved in regulatory enforcement under such a compliance path, it may be due to other reasons besides the SEC being stubborn in order to complete its political tasks.
The most likely one is Uniswap's automatic market maker (AMM). We won't delve into the specific mechanism for now, but the AMM mechanism is run by the decentralized Uniswap Protocol, not Uniswap Labs. If the SEC challenges the Uniswap Protocol, it is equivalent to challenging the freedom to publish code based on freedom of speech, which is equivalent to the SEC opening up a new field where it is even less likely to win.
IV. Impact on the Market
Whether it is the defense in the Uniswap Labs article or the recent cases of crypto regulation, the SEC's attack on Uniswap Labs seems relatively weak and has little chance of winning. Although $UNI is under pressure in the short term.
We recognize that this is a political move.
This behavior of the SEC will only make people in the crypto world more united, just as Uniswap Labs founder hayden.eth said:
“I work in cryptocurrency because I believe it can have a huge positive impact on the world by eliminating gatekeepers (middlemen) and increasing access to value and ownership, much like the way the internet made information seamless.
I’m incredibly proud of the various versions of Uniswap, the thousands of projects built on it, the web app with millions of users, the wallet with hundreds of thousands of downloads, and the impact it has had on the way tens of millions of people live around the world. We’re still in the early stages — this technology and this revolution will play out for decades.
Hopefully we as an industry can come together more. The more united we are, the stronger we are and the harder it is to kill. So let’s be friends.”
