The Securities and Exchange Commission (SEC) is preparing to sue Uniswap after delivering a Wells notice to Uniswap Labs. This lawsuit is not due to any fraudulent activities or market manipulation on the part of Uniswap, but rather because the decentralized protocol poses a threat to the traditional centralized securities markets that the SEC oversees.
Uniswap is a decentralized protocol built on immutable code, while Uniswap Labs provides a portal for users to access the trading protocol. This distinction is important, as Uniswap Labs is more like a taxi cab driver that takes users to a stock exchange or broker, rather than being the exchange or broker itself.
The SEC’s chances of success in this litigation are low. Unlike other crypto cases where the SEC can rely on the Howey test to classify crypto tokens as securities, they must go further in this case. They have to prove that the Uniswap protocol is either an unregistered broker or unregistered exchange, which they were unable to do in their case against Coinbase.
The SEC may try to argue that Uni, the token used on the Uniswap protocol, is a security and that the airdrop of Uni tokens constitutes a distribution of securities. This will provide an opportunity to test the SEC’s theory about airdrops in court.
However, the SEC’s arguments regarding airdrops being an offer or sale of securities are weak. They are based on precedent that applies to stock dividends, which are already considered securities. Trying to expand this precedent to cover airdrops could have unintended consequences, potentially leading to the regulation of customer reward points, airline miles, and other similar items.
Uni, the token used on Uniswap, does not function like a stock. It does not provide voting rights or shareholder standing in litigation, and its fee-sharing option has never been activated. It is more akin to a meme coin than an investment contract.
While it would be better for the SEC to focus on actual scams in the decentralized finance (DeFi) space, it is still important that this matter is litigated against Uniswap. Uniswap is a well-funded defendant and a virtuous actor, and its product is genuinely decentralized, aligning with prior guidance from the SEC on what may avoid being classified as an investment contract.
In conclusion, the SEC’s lawsuit against Uniswap is motivated by the threat that decentralized protocols pose to traditional securities markets. However, the SEC’s chances of success are low, and their arguments regarding airdrops as securities are weak. It is crucial for the SEC to focus on true scams in the DeFi space, but litigating against Uniswap will provide clarity on the regulatory treatment of decentralized protocols.