SEC has ‘very low’ odds of winning against Uniswap: Crypto lawyer

The SEC investigation of Uniswap, which we became aware of a year ago, is now leading to legal action against Uniswap Labs. A Wells notice, an advance warning from the SEC prior to filing a lawsuit, has been issued.

The Uniswap situation isn’t due to any deceit or misappropriation of funds by those constructing its protocol. Instead, it’s a result of the Uniswap model posing a challenge to the conventional centralized securities markets overseen by the SEC.

Uniswap functions as a decentralized trading platform, established upon unchangeable code. While Uniswap Labs acts as an intermediary, offering users access to this protocol. In essence, Uniswap Labs serves as the taxi driver, transporting users to the exchange, distinctly different from the stock exchange or broker itself.

The occurrence of this situation can be explained by Uniswap’s presence, proving that vast sums of money can be traded on decentralized platforms without the need for an intermediary such as the SEC. In the future, the regulatory model relying heavily on intermediaries may no longer be effective.

In simpler terms, the SEC’s chances of winning this legal battle are slim. While the SEC often succeeds in labeling crypto tokens as securities using the Howey test, this time around they face a greater challenge. They must prove that this protocol functions as an unregistered broker or exchange, a feat the SEC failed to accomplish in their lawsuit against Coinbase. Similarly, a private plaintiff was unable to do so during securities litigation against Uniswap the previous year.

Today, Uniswap Labs received a warning letter from the SEC (Securities and Exchange Commission). I wasn’t taken aback by this development, but I am feeling frustrated, dismayed, and prepared to defend ourselves. I firmly believe that our offerings comply with the law and that our efforts align with the progress of the financial industry. However, it has been evident for some time that our approaches have not met with their full approval.

— hayden.eth (@haydenzadams) April 10, 2024

The SEC intends to challenge the robust precedent opposing their viewpoint by asserting forcefully that Uniswap Labs, the relayer service, liquidity providers, front-end application developers, and coders, are all interconnected and represent a single operation or entity. However, this is not accurate.

Climbing that hill is a challenging task for software developers, and being labeled as unauthorized brokers by the SEC is a concern. This apprehension caused Judge Katherine Polk Failla to dismiss the SEC’s comparable accusation against Coinbase Wallet.

The Securities and Exchange Commission (SEC) is expected to argue that Uni is a security, and that the distribution of Uni tokens through an airdrop was equivalent to offering securities. This legal debate will offer a chance to examine the SEC’s perspective on airdrops in a court setting.

The SEC faced significant attention regarding this matter in a carefully prepared lawsuit filed by the DeFi Education Fund, an organization financed through the Uni token. (The world of DeFi can indeed be quite interconnected.)

The SEC contends that airdrops can be considered as the distribution of securities based on outdated rulings. These rulings held that giving out free stock dividends to shareholders was equivalent to an offer or sale of securities, since the company behind the distribution aimed to boost the value of their own securities.

The SEC’s strongest case against airdrops to date revolves around securities that are already publicly traded stocks. This legal precedent specifically targets this kind of distribution, which is common in financial markets. However, it may not be very impactful as its strength is questionable.

Instead of labeling airdrops as offers of securities, the SEC’s stance might inadvertently broaden its regulatory scope to cover customer loyalty rewards such as points, airline miles, and prepaid game cards. This could lead to some seemingly absurd applications.

Uni functions differently than a stock. It doesn’t grant voting rights or allow shareholder status in lawsuits. Additionally, the fee-sharing feature for its token has never been activated. Instead, it resembles a meme coin more than an investment contract.

The SEC would be more effective if they investigated supposed Decentralized Finance (DeF) projects that do not truly represent the DeFi concept, instead of focusing on cases like Uniswap. However, in this particular instance, it’s likely that the legal dispute between the SEC and Uniswap will result in a clearer definition of investment contracts regarding decentralized products. Uniswap is a well-financed defendant, known for their ethical conduct, and offers a genuinely decentralized product – a category that previous SEC guidance suggested might not be considered an investment contract.

J.W. Verret is an associate professor at George Mason University’s Antonin Scalia Law School. He is a practicing crypto forensic accountant and 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 Investor Advisory Committee. He also leads the Crypto Freedom Lab, a think tank fighting for policy change to preserve freedom and privacy for crypto developers and users.

The information in this article is meant to provide a broad understanding and isn’t intended as legal or financial guidance. The perspectives shared are those of the author, who may not align with CryptoMoon’s viewpoints.

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2024-04-17 02:16