15 Apr, 2024

SEC Breaks Past Policy Guidelines in Uniswap Crackdown

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SEC Uniswap
Key Takeaways

  • The US Security and Exchange Commission (SEC) isn’t slowing down on the crypto exchange crackdown, with its latest target Uniswap Labs.
  • Its Wells Notice against Uniswap is making headlines, with analysts raising questions about consistency in policy enforcement.


SEC Targets Uniswap on Latest Crackdown

Uniswap becomes the latest SEC target.
Uniswap | Source: Shutterstock

The US Security and Exchange Commission (SEC) isn’t slowing on its crypto exchange crackdown.

Recently, Uniswap Labs, developers of Uniswap, a top decentralized exchange (DEX), received a Wells Notice from the regulatory watchdog.

It indicated that a lawsuit against the exchange was imminent. A Wells Notice is a formal notification informing a company that the staff has completed its investigation.

And they intend to recommend enforcement action against them.

Adam Cochran, a legal analyst at Cinneamhain Ventures, reacted to the news, suggesting the SEC is contracting years of its policy.

He analyzed the SEC’s previous decisions regarding the definition of an exchange and the outcome of Uniswap’s potential legal battle.

Interestingly, the regulatory watchdog had issued no-action letters for entities wishing guidance on routing and matching trades electronically.

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

Adam Cochran, legal analyst at Cinneamhain, stated

Cochran reiterated that the entities were looking to establish their first system for routing and matching trades electronically. And the SEC is more concerned about making them an exchange.

Regulatory Commission’s Contracting Stance

US SEC breaks past policy guidlines in latest Uniswap creackdown.
SEC Breaks Past Policy Guidelines | Source: Freepik

Another scenario where the SEC contradicts itself relates to classifying front ends as an exchange.

According to the regulator’s guidance in letters from 1989 and 1990, an interface that displays and communicates with exchanges isn’t an exchange.

Adam explained that the SEC guidance found these interfaces profited from bringing buyers and sellers to exchanges.

In explicit securities, the settlement and payment occurred somewhere else—meaning that these interfaces were not exchanges.

Notably, Cochran added that the regulatory commission declared the matter settled in the 1998 SEC No Act LEXIS 18 and would not respond to No-Action Letter requests.

Another important issue Cochran pointed out was asset listing. In 1998, the SEC concluded that having an electronic system for common stocks that aren’t listed on an existing exchange doesn’t constitute an exchange, regardless of whether fees are charged.

Inside the SEC’s Well Notice for Uniswap Labs

According to the SEC’s Well Notice, Uniswap allowed automated token exchanges on the Ethereum blockchain.

It has also enabled its users to swap multiple crypto tokens without conventional intermediaries.

The Uniswap team confirmed the notice, reiterating that it was disappointing but not unexpected by the SEC. He added that the regulatory commission was abusing its powers.

He added that the commission doesn’t have authority over Uniswap’s self-custodial and non-intermediated products.

Therefore, the commission cannot tell the exchange how to register them. Uniswap Labs has been under regulatory scrutiny since 2021. 

The decentralized exchange (DEX) claimed that it was only guilty of developing the app’s front-end portal.

According to them, the front end is separate from the Uniswap protocol and is an autonomous code released for public use.

Adam Cochran backs these sentiments, reiterating that the front end and the smart contract are separate items in crypto trading.

The elements are distinct since users execute trades on smart contracts via other interfaces like Etherscan or directly through a node.

Do you think the regulatory watchdog will enforce a lawsuit for the Uniswap exchange?