SEC Has ‘Extremely Low’ Chance of Winning Against Uniswap: Crypto Lawyer
So it happened. We've known for about a year now that the Securities and Exchange Commission has been investigating Uniswap. Now the SEC is preparing to sue Uniswap after delivering Wells' notice to Uniswap Labs. Wells notices are the SEC's necessary declaration of war before it can sue a company.
This isn't happening because whoever builds the Uniswap protocol has cheated or stolen money or the market has been hijacked. This is because the Uniswap model is a threat to traditional centralized securities markets regulated by the SEC.
Uniswap is a decentralized protocol built on immutable code. Uniswap Labs provides a portal for users to interact with the trading protocol. In this way, it is like a taxi driver driving the user to a stock exchange or broker and is completely separate from the stock exchange or broker.
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This is because the existence of Uniswap means that billions of dollars worth of decentralized protocols can be traded by any individual or institution as an intermediary. In that future, the SEC's moderately focused regulatory model will not endure.
The SEC's chances in this litigation are very low. Unlike other crypto cases where the SEC may use the amorphous Howey test to present allegations of crypto tokens as securities, here the SEC must go one step further. They have to show that this protocol is either an unregistered broker or an unregistered exchange, which is what the SEC failed to do with its lawsuit against Coinbase. Wallet is exactly what a private plaintiff failed to do in a private securities lawsuit against Uniswap last year.
Today @Uniswap Labs received a Notice of Wells from the SEC.
I'm not surprised. I was just angry, frustrated and ready to fight.
I am confident that the products we offer are legitimate and our work is on the right side of history. But it's been clear for some time rather than…
— hayden.eth (@haydenzadams) April 10, 2024
The SEC tries to identify a strong precedent in their position by making bold claims that Uniswap Labs – from its relay operations, enterprise vendors, front-end applications and coders – are all part of the same operation or entity. But they are not.
That's a tough hill to climb and a position that risks writing off software developers as unlicensed brokers, concerns that led Judge Kathryn Polk Failla to drop the SEC's similar accusations against Coinbase Wallet.
The SEC can also claim that Uni is a security, and that the airdrop of Uni tokens was a distribution of securities. This provides an opportunity to test the SEC's theory about airdrops in court.
The case was front and center in a well-crafted lawsuit filed against the SEC by a DeFi education fund. (A component itself backed by uni tokens. It's a small world after all.)
The SEC argues that airdrops are an offer or sale of securities using a very old precedent, which is considered a guarantee or sale of a free stock dividend to shareholders, because the company issuing them hopes that the distribution will increase the value of the securities. Company is held.
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This is the best example of SEC having a powerful battle against airdrops, but ultimately a very weak sauce. It includes items that already have a warranty as they have already been officially sold. It is a predicate used to refer to a type of spread widely known in financial markets.
In contrast, the SEC's efforts to define airdrops as securities offerings risks expanding its authority to regulate customer reward points, airline miles, prepaid playing cards, and all sorts of ridiculous examples.
However, uni does not act as a stock. It does not confer binding voting rights, and does not give shareholders standing in litigation. And the token fee sharing option is never enabled. It's more like a meme coin than an investment contract.
The SEC would be better off focusing their time on real scams that call themselves Decentralized Finance (DeFi) but are not real DeFi. However, in this case, the case is filed against Uniswap for good. A funded defendant, a fiduciary actor, and a bona fide decentralized product may avoid an investment contract decision from the SEC's prior guidance.
JW Verret is an Associate Professor at George Mason University's Antonin Scalia School of Law. He is a practicing crypto forensic accountant who also practices securities law at Lawrence Law LLC. He is a member of the Financial Accounting Standards Board's Advisory Council and a former member of the SEC's Investor Advisory Committee. He also leads the Crypto Freedom Lab, which advocates for policy change to protect freedom and privacy for crypto developers and users.
This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
