SEC Moves to Sue Uniswap in Aim to Hinder Fast-Growing DeFi Sector

The Securities and Exchange Commission has warned Uniswap On Wednesday, she intends to take enforcement action against the company, which is the main platform for Challenge– a segment of the crypto market where traders rely on computer protocols that act as automated market makers to trade various tokens.

The warning took the form of a so-called Wells notice, which the SEC sends to a company before launching a formal legal action and which gives it a final opportunity to refute any allegations. In this case, this process will likely prove little more than a formality, as the agency has reportedly been investigating Uniswap for some time and is in the midst of a broad crackdown on the crypto industry.

When reached for comment, an agency spokesperson said: “The SEC does not comment on the existence or non-existence of a possible investigation. »

Fortune has not yet known the specific nature of the SEC’s allegations against Uniswap Labs, the company that built the protocol of the same name but does not control it. But based on the agency’s recent lawsuits against leading crypto companies like Coinbasethe agency is likely to claim that the company illegally offered unregistered securities to the public or that it failed to register as a broker or exchange.

The impending lawsuit against Uniswap comes at a time when the crypto industry is loudly complaining that the SEC is acting in bad faith when it comes to the sector, pursuing enforcement actions despite clear rules, while failing to consider the distinct blockchain-based technology from cryptography. President of the SEC Gary Gensler countered that existing securities laws are clear and that the crypto industry has sought special treatment while failing to comply with them – a position echoed by the White House and, in particular, powerful ally Gensler, Sen. Elizabeth Warren (D-Mass.).

The conflict between the SEC and the crypto industry has already resulted in a number of high-profile lawsuits, including involving Coinbase And Ripplewhich focus on the SEC’s jurisdiction over digital assets and how a 1946 Supreme Court test defining securities should apply to crypto.

These lawsuits, which are ongoing, have produced mixed results that have allowed both sides to gain the upper hand, although the most recent ruling suggests that the legal momentum lies with the SEC. However, the outcome of the Uniswap case is particularly unpredictable given the unique nature of DeFi technology and a notable legal victory for the company last year in a class-action lawsuit.

The stakes in any lawsuit between the SEC and Uniswap Labs will be high given that DeFi, once a small niche of the crypto market, has grown rapidly. Uniswap recently announced that the protocol has facilitated over $2 trillion in transactions, and the traditional financial industry is increasingly interested in the potential of the underlying technology.

DeFi platforms as self-driving cars

Unlike conventional brokerages or crypto exchanges, DeFi platforms do not have a central authority that serves as a counterparty to transactions or sits between buyers and sellers. Instead, they rely on automated protocols overseen only by code that sets trading rules, collateral requirements, etc.

In the case of Uniswap Labs, founder Hayden Adams wrote the original underlying code that powers the protocol, and the company provides an interface for users to trade certain crypto tokens. But the protocol itself is open source and used by many other projects in the DeFi world.

That distinction was key to resolving a class-action lawsuit filed last year against Uniswap Labs, which claimed the company was responsible for traders who were scammed. In that case, the plaintiffs argued that Adams built the equivalent of a dangerous self-driving car that went crazy.

Uniswap Labs also took up the self-driving car metaphor, but argued that the technology it developed was neutral and whether individuals used it for better or worse was beyond its control. In a sophisticated ruling detailing the nuances of DeFi, a federal judge face cleanly with Uniswap Labs, managing the DeFi sector is a major victory.

More recently, in a decision last month In the SEC’s lawsuit against Coinbase, the judge refused to dismiss allegations that the company offered illegal securities, but ruled that Coinbase’s decentralized wallet offering could not be considered a broker-dealer for purposes of the authority of the SEC. This finding is likely to strengthen Uniswap Labs’ arguments in any lawsuit with the SEC, although it does not take into account the company’s interface over which the company has control and which has, in the past, implemented highlight the tokens that the SEC subsequently considered securities.

People close to Uniswap Labs told Fortune that the company was prepared to offer a “dignified fight” in court, and claimed that the company’s legitimacy was reflected in the fact that it chose to operate in in broad daylight in New York rather than abroad.

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