In a long-awaited move, the Securities and Exchange Commission (SEC) has announced its intention to sue Uniswap, the decentralized protocol, after issuing a Wells notice to Uniswap Labs. This legal action is not rooted in any fraudulent activities or market manipulation committed by the Uniswap protocol. Rather, it is a response to the threat that Uniswap poses to the traditional centralized securities markets under the SEC’s regulation.
Uniswap is built on a decentralized protocol with immutable code. Although Uniswap Labs provides a portal for users to access the trading protocol, it functions more like a taxi driver driving users to a stock exchange or broker, rather than the exchange or broker itself.
The existence of Uniswap challenges the SEC’s regulatory model, which relies on intermediaries to facilitate trades. Uniswap demonstrates that billions of dollars can be traded on decentralized protocols without the need for intermediaries. This poses a significant threat to the SEC’s regulatory framework.
The SEC’s chances of success in this litigation are low. Unlike other crypto cases where the SEC can rely on the Howey test to classify crypto tokens as securities, the SEC must prove that the Uniswap protocol is either an unregistered broker or an unregistered exchange. This is something the SEC failed to do in its case against Coinbase and in a private securities litigation against Uniswap last year.
To support its position, the SEC may argue that Uniswap Labs, its relayer operation, liquidity providers, front-end applications, and coders are all part of the same entity. However, this argument is unlikely to hold up in court and could have unintended consequences for software developers at large.
Additionally, the SEC may claim that Uni, the native token of the Uniswap protocol, is a security and that the airdrop of Uni tokens constitutes a distribution of securities. This will be an opportunity to test the SEC’s theory about airdrops in a court of law.
The SEC’s stance on airdrops has already been challenged in a lawsuit filed by the DeFi Education Fund, which is funded by Uni tokens. The SEC’s argument that airdrops are an offer or sale of securities is based on a precedent involving stock dividends, which are already considered securities. This precedent does not apply to the unique characteristics of Uni tokens.
Instead of targeting Uniswap, the SEC should focus its efforts on genuine scams that falsely claim to be decentralized finance (DeFi) projects. In this case, it is beneficial that Uniswap will have the opportunity to defend itself in court. Uniswap is well-funded, operates with integrity, and its product is genuinely decentralized, aligning with prior guidance from the SEC.
In conclusion, the SEC’s decision to sue Uniswap is a response to the threat that decentralized protocols pose to centralized securities markets. However, the SEC’s case is weak, and Uniswap has strong grounds to defend itself. It would be more appropriate for the SEC to prioritize tackling actual scams in the crypto space.