Implications of the SEC’s Confrontation with Uniswap

A potential lawsuit by the SEC against the decentralized exchange Uniswap could set a significant precedent for the cryptocurrency market, though experts consulted by ForkLog express doubts about the agency’s chances of success.

Unclear Allegations

According to a notice received by Uniswap, the SEC has identified certain violations of securities laws in the company’s activities. However, specific allegations have not been disclosed.

“I think it’s not about regulating decentralized financial products, but about what the DeFi product did with certain assets, likely related to securities — stocks, bonds, and others,” speculates Andrey Tugarin, founder of the legal firm GMT Legal.

Uniswap has 30 days to respond, during which it must legally justify the accusations’ invalidity. The exchange’s team has already declared its “readiness to fight.”

The SEC’s interest in Uniswap could be seen as a compliment to the developers, if not for the negative impact of such “attention,” notes Nikita Zuborev, an analyst at the aggregator BestChange.

“Uniswap, after $2 trillion in traded volume, has finally become a large and serious enough exchange to attract the attention of the American regulator and warrant investigative resources,” he explains.

The expert believes the Commission continues a trend of deep market regulation, as far as US laws allow, given its rather limited powers. Therefore, if the court is rational and consistent, no DEX should fall under regulation.

“Formally, this is an over-the-counter segment, as despite having an exchange-like interface, the platform itself is not an intermediary; transactions are conducted by decentralized smart contracts,” Zuborev notes.

Tony Bi, founder and acting CEO of CeDeFiAi, argues that in this case, the SEC once again demonstrates absolute incompetence. Instead of forming clear guidelines for industry regulation, it “extorts money” from established innovative products, and instead of “protecting investors,” it tries to incite market panic, leading to the opposite effect.

“Retail market shake-ups are often the Commission’s doing, and one might think that [SEC Chairman] Gary Gensler has been ‘buying the dip’ all along,” the expert speculates.

In the short term, this confrontation poses no threat to ordinary exchange users. Tony Bi reminds that the SEC lawsuit has not yet been filed, and court proceedings, in the absence of guidelines, can last for years.

“Most likely, it will end in a fine and compromise, unless someone decides to play the Ripple game,” he concludes.

Nikita Zuborev calls the case a “deliberately losing battle” due to the baselessness of the accusations, which Uniswap’s lawyers have already thoroughly explained.

“Optimism is bolstered by the fact that last year the platform already won a court case against a group of defrauded investors. The essence of the dispute was different, but the judge’s arguments (primarily that the platform is not related to token issuers) could strengthen the defendant’s position,” the analyst emphasizes.

Nevertheless, he points out the importance of wording if the SEC takes the case to court:

“Here we are dealing with case law, and any clause could be used in the future against other projects. In particular, it is important how the judge will label cryptocurrencies that the SEC considers unregistered securities. This remains the main area for various speculations around crypto projects — Securities vs. Commodities.”

Cryptocurrencies Are Not Securities

CEO of Indefibank Sergey Mendeleev sees “nothing new” in the SEC’s claims. According to him, the agency clings to any process where illegal securities trading is suspected, whether decentralized or not is a secondary issue.

“Of course, cryptocurrencies are not securities, but they can’t catch the crooks on Wall Street, as they might accidentally catch themselves. And they have to meet their KPI, so they’ve invented this pastime,” the expert states.

Liquidity pools and similar instruments could potentially be at risk, as they meet all the parameters of the Howey Test, says Nikita Zuborev.

“Simple PoS tokens are not securities because not every purchased token yields profit, only those frozen in staking do. With a more rational approach, they could focus on this mechanism and make claims against the organizers of staking pools and/or stakers, but not against platforms for purchasing digital goods,” he notes.

The analyst finds it difficult to predict whether the SEC will take a sensible approach or continue “shooting sparrows with a cannon.” Depending on the chosen strategy, different DeFi projects will be at risk.

“If they involve experts, all staking/farming platforms will suffer. If they continue to scatter lawsuits randomly, centralized exchanges that had the misfortune of dealing with US citizens (essentially all exchanges older than six years — from the era of trading without KYC), as well as large market players, will be at risk — who knows where their flawed logic will lead them, even utility-NFTs face risks,” Zuborev lists.

Product manager and marketer of DeFi products Yulia Palamarchuk suggests that platforms with the highest total value locked (TVL), such as Compound, AAVE, and 1inch, might attract the SEC’s special interest first.

Regulating DeFi Is Impossible

Blum co-founder Gleb Kostarev is convinced that attempts to regulate the decentralized finance sector are doomed to fail.

“It’s impossible to prohibit someone from launching smart contracts that automatically exchange one asset for another. I doubt the SEC will win this case,” he states.

On the other hand, this case is a clear signal to the industry: regulators will closely monitor the decentralized finance sector.

“The arrival of regulation in this sector will primarily involve mandatory KYC implementation at the exchange or wallet level in the coming years, and this is likely unavoidable,” Kostarev believes.

Tony Bi predicts that sooner or later, lending protocols will also face regulatory attacks, as they are effective tax evasion loopholes.

Meanwhile, Yulia Palamarchuk reminds that the SEC’s influence is limited to the US territory — their regulation primarily concerns operations within this jurisdiction. Therefore, for DeFi product users who are not US citizens, the risks are minimal.

“Even attempts to block US citizens’ access via IP addresses may be ineffective thanks to VPN services,” she points out.

Overall, the expert is convinced that regulating DeFi will require a new approach to the globalized financial system, and currently, it appears to be a complex task.

Previously, the US Treasury called for legislation expanding the agency’s scope in the “digital asset ecosystem,” as well as rules addressing jurisdictional issues for regulating foreign industry companies.