SEC targets Uniswap Labs, raising concerns over open-source code liability

On April 10, Uniswap Labs was given a warning letter by the US Securities and Exchange Commission (SEC). This letter signaled the SEC’s intent to initiate legal action against the company or individual.

Uniswap Labs is the team behind the development of the software powering Uniswap, a popular decentralized crypto exchange (DEX), where transactions take place.

According to reports, the Securities and Exchange Commission (SEC) investigated Uniswap, leading the company to disclose this in a Wells Notice. This document suggests that the SEC had been looking into Uniswap’s marketing practices and services for investors.

With the leading US financial regulatory authority targeting Uniswap, debates ensue about the status of code as a form of protected speech and the potential liability – or absence thereof – for open-source programmers.

According to some industry experts, because Uniswap Labs makes publicly available the code for its open-source interface, they argue that this matter falls beyond the SEC’s regulatory purview.

SEC targets Uniswap Labs, raising concerns over open-source code liability

Is Uniswap Labs accountable for events occurring in the decentralized, permissionless exchange that is Uniswap DEX? And if the SEC finds issue with the published code, aren’t there protections for free speech in coding?

Are developers liable for open-source code?

The legal dispute over Uniswap Labs’ connection to the open-source Uniswap code has previously been resolved in a court of law.

Six individuals filed a class action lawsuit against the organization in 2022, alleging financial losses due to fraudulent tokens exchanged on Uniswap Decentralized Exchange.

Uniswap Labs was accused of managing the liquidity pools on the protocol, even those allegedly created by swindlers from whom money was stolen.

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Yet, the judgment decided that an person creating computer code isn’t responsible for any misappropriate use of that software by a third party.

Some crypto platforms haven’t experienced such good fortune. The collapse of Tornado Cash, a crypto mixer, caused waves in the crypto world when regulators went after its creators for enabling illegal activities using their open-source software.

One of’s team members, Alexey Pertsev, was detained for over eight months in the Netherlands on allegations that he utilized the platform for money laundering activities. Another team member, Roman Storm, has denied the charges against him in the United States. He is accused of collaborating to manage a money transfer service or facilitating money laundering and circumventing sanctions.

Due to the latest incidents, blockchain creators could be concerned about being held responsible by regulators for misuses of their technology by third parties engaging in unlawful activities.

Immutable code for smart contracts

At the 2024 Bitcoin Policy Summit on April 9, Peter Van Valkenburgh, Coin Center’s research director, recommended that developers creating decentralized apps (DApps) take steps to prevent alteration of their smart contract codes to safeguard their work.

Developers can prevent potential legal issues related to deceitful practices or illegal activities on their coded platforms, as pointed out by Van Valkenburgh, by ensuring that the code is unchangeable and fixed. This means that once the code is implemented, it cannot be altered, thus reducing the risk of any future misconduct.

“You have very hard questions of whether everybody who’s participating [is] liable for the activities of that smart contract. […] I don’t see those questions having good regulatory outcomes.”

To avoid potential legal issues, DApp developers should ensure the immutability of their smart contracts right from the start.

In the opinion of Ben Hart, the CTO at MLabs, a research and development consulting firm, an alternative approach might not be ideal. He shared with CryptoMoon his perspective that modifiable code could provide developers with a more robust defense in case of errors.

Hart pointed out that if Tornado Cash’s creators had used changeable code for the mixer, giving them control, they could have guided the mixer towards complying with regulations and potentially avoided legal issues.

Developer’s intention is important 

Mutable or not, there quite simply may be no “get-out-of-jail-free card” for developers.

Julian Gretch, the legal chief at fintech company YouHodler, warned CryptoMoon, “Developers can’t always shield themselves from legal scrutiny. The intent behind their coding and intended outcomes will always be examined.”

Gretch acknowledged that the concept of intent is subjective and doesn’t come with a promise of shielding one from legal prosecution.

Gideon Greenspan, the founder of Coin Sciences and creator of the open-source MultiChain blockchain, emphasized to CryptoMoon the importance of considering “if there are hidden harmful intentions.”

In the UK during the late 1990s, the Post Office scandal came to light where hundreds of post office workers were falsely accused of theft, fraud, and accounting irregularities. The cause of these accusations was traced back to the Horizon IT system, which was flawed and produced inaccurate data.

From 1999 to 2015, it seemed as if funds were disappearing from the Post Office’s branches due to an issue with the Horizon software. Yet, the Post Office persistently chased after individuals even though they had known since at least 2010 that this central accounting system contained flaws.

Regarding the Tornado Cash situation, Hart is of the view that the developers’ primary goal was “committed to decentralization and transparency.” In his perspective, their intention wasn’t about money laundering but rather anonymizing digital currency. However, he acknowledges that “unfortunately, governments may hold a different perspective on this matter.”

Due to the subjective nature of interpreting intentions, it might be prudent for developers to introduce their creations under anonymity, following the example set by Satoshi Nakamoto and Bitcoin (BTC). Without a recognizable face, potential disputes or accusations may lack substance.

While anonymity can improve regulatory security, I’m worried that if people are forced to use it excessively, it might not be a good sign, Eric Chen, Injective’s CEO shared with CryptoMoon.

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The SEC has yet to disclose specifics about the investigation into Uniswap Labs’ actions, but it appears that finding a clear solution may be challenging.

The possibility of going to jail might effectively deter any developer with even the slightest doubt about the potential use of their code.

According to some critics, the SEC’s actions might dampen the enthusiasm in American markets. However, Daniel Mosquera, a representative for MLabs in the technical sales department, expressed a more hopeful perspective.

“He shared with CryptoMoon that the allure of the technology outweighs his apprehensions about potential persecution.”

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2024-04-24 16:11