The Commodity Futures Trading Commission has issued an order filing and settling charges against Universal Navigation Inc. d/b/a Uniswap Labs.
Uniswap Labs is the popular decentralized cryptocurrency exchange that uses a set of smart contracts to create liquidity pools for the execution of trades. It is an open source project and falls into the category of a DeFi product because it uses smart contracts to facilitate trades instead of a centralized exchange.
“DeFi operators must be vigilant to ensure that transactions comply with the law”
According to the CFTC order, Uniswap Labs illegally offered leveraged or margined retail commodity transactions in digital assets via a decentralized digital asset trading protocol.
To settle the matter, Uniswap Labs agreed to pay a $175,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act (CEA).
CFTC Director of Enforcement Ian McGinley said: “Today’s action demonstrates once again the Division of Enforcement will vigorously enforce the CEA as digital asset platforms and DeFi ecosystems evolve. DeFi operators must be vigilant to ensure that transactions comply with the law.”
The financial watchdog recognized Uniswap Labs’ substantial cooperation with the Division of Enforcement’s investigation of this matter in the form of a reduced civil monetary penalty.
What did Uniswap do?
Uniswap Labs helped develop and deploy a blockchain-based digital asset protocol, allowing non-Eligible Contract Participants and institutional users in the U.S. and abroad to trade digital assets using the Ethereum blockchain.
The protocol enables users to create and trade using liquidity pools, which are pairs of digital assets valued against each other.
To facilitate access, Uniswap Labs created and maintained a web interface for users to trade in hundreds of liquidity pools on the protocol. Some of these pools included leveraged tokens, offering users leveraged exposure to assets like Ether and Bitcoin.
The order finds that these leveraged tokens qualify as margined commodity transactions that didn’t result in actual delivery within 28 days. As such, they can only be offered to non-Eligible Contract Participants through a board of trade registered by the CFTC, which Uniswap Labs was not.
Uniswap also targeted by the SEC
In May, Uniswap implored the Securities and Exchange Commission (SEC) in legal filings to reconsider its planned lawsuit, arguing that it was not justified.
Uniswap stands as the leading decentralized exchange (DEX) when it comes to daily trading volumes, holding a 22.5% market share. This surge in regulatory scrutiny arrives shortly after a comparable subpoena was sent to Uniswap’s competitor, SushiSwap, indicating an ongoing trend of increased regulatory attention on decentralized trading platforms.
In their response to the Wells notice, Uniswap Labs contended that their protocol does not qualify as an exchange under current definitions and is not subject to SEC regulation. The company stated that although it created the protocol, it is now a “passive” technology used for cryptocurrency trading.
Uniswap Labs’ Chief Legal Officer, Martin Ammori, stated that the SEC would need to redefine the term “exchange” to claim jurisdiction over Uniswap. Ammori argued that Uniswap was not specifically designed for securities trading and that the majority of its trading volume involves non-securities like Ethereum, Bitcoin, and stablecoins, which account for 65% of the protocol’s volume.
Ammori noted that the SEC is attempting to redefine several terms in its regulations to capture Uniswap, a move he said exceeds the agency’s authority granted by Congress. He also pointed to a recent federal court ruling dismissing the SEC’s claims that Coinbase Wallet was an unregistered securities broker, suggesting a similar outcome for Uniswap’s interface and wallet.
Uniswap Labs’ lawyers argued that the SEC should not pursue litigation risks by stretching its authority to regulate the protocol. They warned that such actions would drive American crypto investors to use foreign trading platforms and discourage innovation in financial and commercial markets.
The filing provided additional insights into the SEC’s potential enforcement action against Uniswap Labs. The SEC is targeting Uniswap’s native UNI token and liquidity provider (LP) tokens.
LP tokens are integral to how automated market makers like Uniswap function. Users who deposit assets into the protocol’s trading pools receive LP tokens as a receipt for their contribution. These tokens can be exchanged for the value of the deposits, while the protocol uses the assets to facilitate trading.
According to Uniswap Labs’ response to the Wells notice, the SEC alleges that LP tokens are investment contracts whose distribution violates securities law. Uniswap Labs disputes this, arguing that LP tokens are “bookkeeping devices” and do not fit into the SEC’s regulatory frameworks.
