According to reports, the U.S. Securities and Exchange Commission (SEC) has written to venture capital institutions such as a16z and Union Square Ventures regarding Uniswap issues. In April this year, Uniswap, the leading decentralized exchange, received a Wells Notice from the SEC. Stating that they may face lawsuits for violating securities laws, Uniswap founder Hayden Adams said he would fight to the end. Both a16z and Union Square Ventures have participated in Uniswap since its Series A financing. The project’s latest financing was on October 23, 2022, receiving a total of US$165 million from five institutions.
(Uniswap received notification from Wells, and the founder stated that he would fight the SEC to the end)
Uniswap stated that it only provides services "passively" and does not violate the definition of an exchange.
Uniswap is facing a lawsuit with the SEC after being accused of being an unregistered exchange. In a response to the SEC Wells Notice, Uniswap Labs refuted the claim, arguing that the protocol does not meet the definition of an exchange and therefore is not subject to SEC regulation. Although Uniswap Labs says they invented the protocol, the protocol is now a "passive" technology that people use to trade cryptocurrencies. Uniswap Labs legal chief Marvin Ammori has said that the SEC must redefine the definition of an exchange in order to have jurisdiction over Uniswap. Ammori said that under the current definition, Uniswap would have to be designed specifically for securities trading to fall under regulation.
Accusations that LP tokens are investment contracts may lead to major changes in the DeFi mechanism
The regulator is targeting Uniswap’s native UNI token as well as the liquidity provider (LP) token. LP tokens are at the heart of how so-called “automated market makers” like Uniswap operate. Users who deposit assets into the protocol’s trading pool will receive LP tokens as a receipt for their contribution. They can exchange LP tokens for the value of their deposit. At the same time, the protocol uses these deposits to ensure that other traders can make the trades they want.
According to Uniswap Labs’ response, the SEC alleged that the LP tokens were investment covenants and violated securities laws. Uniswap Labs rejected this argument on the grounds that LP tokens do not comply with the regulator’s framework and are instead “bookkeeping tools.” In December, the SEC hinted at increased scrutiny of LP tokens in its settlement with BarnBridge DAO, according to law firm K&L Gates. If the accusations made by Uniswap Labs pan out, the regulator's enforcement actions could outline a coming fight with widespread implications for how DeFi operates.
Why can LP tokens be regarded as investment contracts?
In the Uniswap platform, Liquidity Provider (LP) tokens represent a user’s share of assets in the liquidity pool. These tokens can be considered investment contracts for the following reasons:
1. Ownership statement: LP tokens represent ownership in the liquidity pool. When you provide liquidity to a pool, you receive LP tokens, which entitle you to a share of the assets in that pool, including any fees earned from trading.
2. Profit distribution: LP tokens can be considered investment contracts, as they entitle holders to a share of the transaction fees generated by the pool. This is similar to dividends or profit sharing in traditional investment contracts.
3. Value Fluctuation: The value of LP tokens will fluctuate based on the performance of the underlying assets in the pool and fees earned. This change in value is similar to how the value of an investment contract changes based on market conditions.
4. Transferability and trading: LP tokens can be transferred or traded on the blockchain. This characteristic makes them similar to securities or investment contracts that can be traded or transferred between investors.
5. Risk vs. Reward: Providing liquidity means that the LP assumes certain risks, such as impermanent losses, in exchange for potential returns from earning fees. This dynamic of risk and return is very similar to investment contracts in traditional finance, where investors take risks while hoping to gain returns.
Overall, LP tokens combine multiple features such as ownership, profit sharing, value volatility, transferability, and risk-return, making them somewhat similar to investment contracts in traditional finance.
This article SEC writes to VCs about Uniswap issues! Venture capital institutions are in turmoil. Are LP tokens securities? First appeared in Chain News ABMedia.
