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Uniswap Strikes Back: SEC's Regulatory Reach Challenged in Court

Key Takeaways

  • Uniswap Labs contests SEC’s claims that it operates as an unregistered securities exchange, arguing the protocol doesn’t meet the legal definition;
  • The SEC’s focus includes Uniswap’s liquidity provider (LP) tokens, which Uniswap Labs argues are bookkeeping devices, not securities;
  • Uniswap Labs warns that SEC enforcement could drive American crypto investors to foreign platforms.
Uniswap Strikes Back: SEC's Regulatory Reach Challenged in Court

Uniswap Labs has urged the Securities and Exchange Commission (SEC) to reconsider its planned lawsuit against the Ethereum-based decentralized crypto exchange.

The appeal follows a Wells notice issued in April, where the SEC suggested that Uniswap might be operating as an unregistered securities exchange and that its interface and wallet might be functioning as unregistered securities brokers.

Uniswap Labs, in its formal response to the SEC, contested these allegations, arguing that the protocol does not fit the legal criteria for an exchange and, therefore, is exempt from SEC’s regulatory oversight. The company emphasized that while it created the protocol, it is now a "passive" communication technology used for trading crypto.

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Chief Legal Officer Martin Ammori explained that under the current regulatory definitions, Uniswap would need to have been explicitly designed for securities trading to fall under SEC jurisdiction.

He pointed out that the majority of Uniswap’s trading volume, comprising 65% of its activity, involves non-securities like Bitcoin (BTC)Ethereum (ETH), and stablecoins. Ammori also remarked:

In fact, the Protocol’s basic nature renders it so obviously not an “exchange” that the Commission kicked off a still-pending rulemaking to change its own definition of “exchange” to capture communications protocols.

The SEC appears focused on Uniswap's native UNI token and liquidity provider (LP) tokens.

LP tokens are essential to Uniswap’s automated market maker system, acting as receipts for users who contribute assets to the protocol’s trading pools. These tokens can be exchanged for the value of the original deposits, facilitating the protocol's trading operations.

The SEC contends that LP tokens are investment contracts and their distribution violates securities laws, a claim Uniswap Labs disputes, describing LP tokens as mere "bookkeeping" tools:

The LP Tokens are issued not for investment purposes, but instead as accounting tools, and they are therefore not securities. 

Uniswap Labs' legal team argued that the SEC would overextend its authority by pursuing this case, risking litigation, and warned that such actions could push American crypto investors to foreign platforms. Ammori expressed confidence in Uniswap’s legal standing and readiness to litigate but hopes for a peaceful resolution.

The outcome of this unfolding legal debate could influence how DeFi protocols are regulated, impacting innovation and competition in financial markets.

In related news, the US Senate has passed a resolution to repeal the SEC’s SAB 121 rule, which mandates banks to list customers' digital assets on their balance sheets.

Aaron S., Editor-In-Chief
Having completed a Master’s degree in Economics, Politics, and Cultures of the East Asia region, Aaron has written scientific papers analyzing the differences between Western and Collective forms of capitalism in the post-World War II era.
With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.
Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.
Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.

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