Uniswap fights back against SEC as the ethereum crackdown continues

The Securities and Exchange Commission has targeted ethereum in recent months, following years of crackdowns on the crypto sector in general. Some of the most prominent figures in decentralized finance are now fighting back.

Uniswap Labs, which provides decentralized finance infrastructure such as a popular DeFi crypto exchange that allows users to store their own coins, highlighted all of the reasons why the SEC should not take legal action against them in a 40-page filing Tuesday. It comes a few weeks after the commission issued Uniswap a Wells notice, informing the company that it had detected potential violations of US securities laws.

“The SEC’s entire argument is based on the incorrect assumption that all tokens are securities. Tokens are essentially a file format for currency,” explained Marvin Ammori, Uniswap’s chief legal officer.

“The SEC has to essentially unilaterally change the definitions of exchange, broker and investment contract in order to try to capture what we do,” Ammori stated.

A Wells notice is often one of the last stages before the SEC pursues formal charges. It generally establishes the foundation of the regulatory argument and provides an opportunity for the possibly accused to refute the SEC’s claims.

So far this year, the federal regulator has issued Wells notices, filed lawsuits, or reached settlements with a slew of crypto firms, with the SEC’s legal challenges increasingly focusing on Ethereum and decentralized finance players such as ShapeShift, TradeStation, Uniswap, and Consensys. It also comes as the agency is apparently looking into the Ethereum Foundation.

CNBC contacted the SEC about the current batch of Wells warnings sent to cryptocurrency firms, but an agency representative declined to comment.

Consensys attempted to anticipate the SEC’s move in April by filing its own case, alleging regulatory overreach. The 10-year-old cryptocurrency corporation said the lawsuit followed three subpoenas delivered last year, as well as a Wells notice from the SEC alleging the company was breaching federal securities laws.

“This action is about the almost certainty that we hold that the SEC is trying to slow or kill ethereum, decentralization, disintermediation, and disintermediated technology in the U.S., and probably wouldn’t stop there with its long arm,” said long-time ethereum veteran Joseph Lubin, who went from co-founding the blockchain to launching and running Consensys.

“It might influence other nation-states to do similarly draconian things,” said Lubin.

Security versus commodities
The new round of moves targeting significant players in the Ethereum ecosystem comes ahead of a long-awaited decision by the regulator on whether to allow or deny applications to start spot ether exchange-traded funds.

To date, the agency’s position on ether’s classification as a commodity or a security is unclear.

“We believe major banks prefer the way things are organized. We believe certain parts of the US government enjoy the way they operate,” Lubin stated. “Without explicitly stating their intentions, without public discussion and clear rulemaking, the SEC seems to have decided to reclassify ether as a security without being able to utter that that’s what they’re doing.”

The industry claims that if ether, the native currency of the Ethereum blockchain, is classed as a security, it will jeopardize the future of the Ethereum network and many neighboring crypto enterprises. Exchanges, both centralized and decentralized, would be compelled to choose between registering with the SEC and delisting ether.

“If the SEC, in fact, does take the position that ethereum is a security, pretty much everyone in this business that is using or providing services of the ethereum blockchain, they’re going to be on notice that they might need to be registered,” said digital assets attorney Christopher Gerold, who previously served as the New Jersey Bureau of Securities chief.

“Whatever protections they thought they had before are no longer going to be there, and we’re going to see a shift in the industry,” Gerold concluded.

The head of litigation and investigations at Consensys told CNBC that the firm is concerned that the SEC is targeting developers.

“They asked for a list of the names of any Consensys developers who contributed any coding to the merge,” stated Laura Brookover.

The so-called merge was a years-long systemwide upgrade to the Ethereum blockchain that went live in September 2022, changing the way transactions are confirmed. The proof-of-stake paradigm, which has superseded the proof-of-work methodology, compels network volunteers to “stake” their ether tokens in order to protect the network.

Brookover claims that the government has expressly requested the identities of public and private Consensys software developer code repositories.

“Those are very strange requests from a financial regulator,” Brookover added. “I can speak to that, because I used to be in the CFTC’s enforcement division and investigated cases myself.”

Multiple engineers and industry insiders have told CNBC that the SEC may be becoming more interested in Ethereum since the regulator believes its native token would behave more like a security following the merger.

According to Brookover, the Consensys lawsuit seeks a court declaration that ether is not a security and that the SEC lacks jurisdiction to investigate ethereum. Ultimately, the agency must react to the Consensys allegation in a formal filing.

“They’re going to be hard pressed not to say in their answer whether they think ethereum is a security or not,” said Gerold, who suspects the agency will take the stance that it is a security due to the proof-of-stake shift that went into force two years ago.

The SEC has been explicit about its classification of bitcoin as a commodity. The narrative has shifted with the introduction of ether.

In 2018, Bill Hinman, then-director of the Securities and Exchange Commission’s Division of Corporation Finance, told CNBC, “When we look at bitcoin or ether and the highly decentralized nature of the networks, we don’t see a third-party promoter where applying the disclosure regime would make a lot of sense.”

“So we’re comfortable … viewing these as items that don’t have to be regulated as securities,” Hinman stated.

In April 2023, when Rep. Patrick McHenry, R-N.C., questioned SEC Chair Gary Gensler if ether was a commodity or a security, Gensler declined.

SEC vs. cryptocurrency
Gensler has stated in several interviews that he believes much of the business already falls under its jurisdiction, and that its cases are just bringing the industry into compliance. Crypto businesses claim that previous judicial battles have not provided the regulatory clarity that the industry has sought for years.

With the Uniswap Wells notice, for example, a firm insider told CNBC that communicating with the SEC was like “talking to a wall.”

For two years before the Wells notice, Uniswap described its lengthy interactions with the agency as an opaque process that involved responding to multiple requests, including giving testimony and sending several documents to the agency, without receiving much feedback on the regulator’s concerns about potential wrongdoing. This source also told CNBC that they had not heard from the regulator in 2024 until it informed them in a half-hour phone call that they would receive a formal notice.

Consensys and Uniswap both suggest that the SEC’s wide approach to securities classification may be out of date.

“The SEC is arguing that the Uniswap protocol is an unregistered securities exchange, and that the Uniswap interface and wallet are both unregistered broker brokers,” Ammori stated.

However, Uniswap claims that the protocol itself is a general-purpose computer program that anyone may use and incorporate.

“So the protocol is not an exchange also, because under the law, it would have to be specifically designed for securities trading, and it is not,” Ammori explained.

In its answer to the SEC, Uniswap claims that the majority of its trading volume is in obvious non-security assets such as ether, bitcoin, and stablecoins.

“It’s not run by a group, as the definition requires, but as autonomous software no person or group controls,” Ammori said.

“The SEC understands that the current definition of exchange does not include the protocol or anything we perform. That is why, as we speak, there is a pending rulemaking, as the SEC is attempting to redefine roughly a half dozen words in their own regulations in order to capture us,” said Uniswap’s chief legal officer.

Alma Angotti, partner and global legislative and regulatory risk leader at the consulting firm Guidehouse, warns that it is unclear whether decentralized exchanges function as an alternative trading system, a market maker, or simply a technology that does not act as a broker-dealer.

Meanwhile, as the SEC focuses more on decentralized participants in the crypto ecosystem, the regulator continues to scrutinize centralized entities as well.

In May, investment site Robinhood got a Wells warning over its cryptocurrency business. The Securities and Exchange Commission has also sued Coinbase and Binance. With many pending legal challenges from the regulator and ongoing ambiguity about the future of cryptocurrency regulation in the United States, several crypto firms have stated that they are considering leaving the nation entirely.

“We have companies wasting resources trying to figure out, ‘Am I a broker-dealer?'” “Are these assets securities?” According to Binance’s former chief compliance officer, Christina Rea.

Meanwhile, as the SEC focuses more on decentralized participants in the crypto ecosystem, the regulator continues to scrutinize centralized entities as well.

In May, investment site Robinhood got a Wells warning over its cryptocurrency business. The Securities and Exchange Commission has also sued Coinbase and Binance. With many pending legal challenges from the regulator and ongoing ambiguity about the future of cryptocurrency regulation in the United States, several crypto firms have stated that they are considering leaving the nation entirely.

“We have companies wasting resources trying to figure out, ‘Am I a broker-dealer?’” “Are these assets securities?” According to Binance’s former chief compliance officer, Christina Rea.