Decentralized finance (DeFi) exchange Uniswap is moving to address a looming regulatory spat with the U.S. Securities and Exchange Commission (SEC).
The leading crypto exchange implored the 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.
