The SEC’s Suit Against Uniswap Is an Opening Attack Against DeFi

Uniswap Labs, the Brooklyn-based outfit primarily responsible for developing the protocol of the same name, reportedly received a Wells Notice indicating the U.S. Securities and Exchange Commission intends to sue. While the decentralized finance (DeFi) behemoth said it is “ready to fight” the SEC, indicating a willingness to go to court, the move does represent the latest front in the SEC’s yearslong battle with the crypto industry.

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And to some extent, it is entirely predictable. Before this, the SEC has filed suit against U.S.-based exchanges Coinbase and Kraken. In fact, the reason the industry is so familiar with the term “Wells Notice” is because Coinbase received one in the months before the SEC’s lawsuit dropped. But the move is also a serious escalation in the SEC’s anti-crypto legal barrage.

“Taking into account the SEC’s ongoing lawsuits against Coinbase and others as well as their complete unwillingness to provide clarity or a path to registration to those operating lawfully within the US, we can only conclude that this is the latest political effort to target even the best actors building technology on blockchains,” Uniswap said on a blog announcing the Wells Notice.

The SEC’s biggest crypto cases so far have been after centralized institutions — the aforementioned centralized exchanges Coinbase and Kraken and the company behind the XRP cryptocurrency, Ripple. Suing the organization behind a decentralized protocol like Uniswap is uncharted territory.

Perhaps the closest example on the books would be the SEC’s case against LBRY, which built a decentralized alternative to YouTube that was forced to shut down after a lengthy appeals process with the U.S. securities watchdog. The SEC alleges LBRY sold unregistered securities via a utility token launch, and initially sought $22 million in fines but lowered that to $111,000 after acknowledging the company’s financial struggles.

See also: What Happens if the SEC Classifies ETH a Security?

The ongoing, international cases against the developers of Tornado Cash might also be instructive, considering those cases in the U.S. and the Netherlands have become symbols of whether or not individuals are responsible for how their self-executing code is used after releasing it to the public.

“The SEC is very imaginative in the ways that you can be violating their rules,” Bill Hughes, senior counsel and director of global regulatory matters at Consensys, told CoinDesk. Part of the issue, conceivably, is that Uniswap Labs runs the biggest portal onto the Uniswap protocol via uniswap.org. Another potential concern is the UNI governance token, launched to give users some control over protocol governance but could be twisted to look like a securities offering.

That said, Hughes doesn’t think the SEC will pursue cases against Uniswap token holders or users. “If you are one of those and a little freaked out, take a breath and calm down,” he said on X. “If they were also going to sue YOU, then you’d be getting an email from the SEC asking to talk to you on the phone. You aren’t going to be getting one of those so relax.”

Whatever the case, Hughes suggested this is likely just the biggest shot the SEC will take against the DeFi industry. The SEC’s move “has been to sue somebody in some category and move on to another category … like suing Coinbase and then Kraken. We’ll see if they sue other DEXes.”

CORRECTION (April 11, 2024, 19:44 UTC): Fixes the spelling of Uniswap’s name in the headline.