SEC breaks from past policy guidelines in Uniswap crackdown

According to Adam Cochran from Cinneamhain Ventures, the SEC’s recent move against decentralized crypto exchange Uniswap goes against the SEC’s long-standing policy advice.

In his legal examination of X, previously known as Twitter, Cochran looked back at various past rulings by the American regulatory body regarding the labeling of an exchange and its implications for Uniswap’s pending legal dispute.

The SEC granted guidance through No-Action Letters in 1986, 1991, and 1997 to entities aiming to set up their initial electronic trading systems. According to Cochran, these entities sought clarification as they feared being classified as exchanges due to their new electronic routing and matching functionality.

“But the SEC concluded that because the execution was on a separate system that matching, routing, communicating and ordering as a “computer service system” did not meet the holistic definition of “an exchange.”

An alternative interpretation that goes against the Securities and Exchange Commission (SEC) involves the labeling of front-ends as exchanges. Contrary to the SEC’s stance in letters from 1989 and 1990, a user interface that connects and interacts with an exchange does not automatically equate to an exchange itself.

“The SEC determined that these interfaces, which made a profit by linking up buyers and sellers for securities trades, were not classified as exchanges due to the fact that the settling and payment transpired elsewhere.”)

SEC breaks from past policy guidelines in Uniswap crackdown

In a notable observation from Cochran, he mentioned that back in 1998, the Securities and Exchange Commission (SEC) announced on LEXIS 18 (SEC No-Act case) that they had resolved the issue and would no longer entertain any more requests for No-Action Letters regarding it.

Furthermore, bringing buyers and sellers together is an essential part of an exchange transaction. The Securities and Exchange Commission (SEC) has emphasized this point in their guidance to companies back in 1979, 1996, and 1999, as noted by Cochran’s analysis.

“The exchange needed to involve the legal transfer of the assets and/or finances. So even though a buyer on Uniswap may commit to a purchase, by signing a transaction with their private key the Uniswap Labs frontend, isn’t what’s settling it.”

One significant aspect of the investigation pertains to the process of listing assets. Back in 1998, the Commission determined that setting up an electronic platform for trading unlisted common stocks doesn’t classify as an exchange, even if transaction fees are imposed.

“In this case, the commission found that once again, so long as their informational interface was no clearing and settling these transactions, then just because it was the primary listing location of an asset, it was not somehow more of an exchange.”

SEC’s Wells notice

On Ethereum‘s blockchain, Uniswap facilitates automatic token swaps, enabling users to easily exchange several cryptocurrencies without relying on conventional middlemen.

Since last year, Uniswap Labs, the primary developer of Uniswap, has faced regulatory examination. On April 10, they received a Wells notice, which signifies that the regulatory body’s staff plans to propose taking enforcement actions against them.

Previously, Uniswap Labs stated that an individual developer holds the responsibility for creating the user-friendly interface of the Uniswap app, distinct from the self-governing Uniswap protocol. The protocol, launched for public utilization, operates independently as autonomous code.

According to Cochran’s analysis, the assertions hold true. He explains that in a cryptocurrency transaction, the front-end and the smart contract function independently.

“In fact, we know these elements are distinct, because you can execute trades on the smart contract through other interfaces (like Etherscan or swap aggregators), or even directly through a node.”

2024-04-13 20:55

SEC’s Wells notice

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