Uniswap Sued by SEC: What Does it Mean for the Future of DeFi?

Leading decentralized exchange Uniswap is about to be sued by the SEC in a groundbreaking case that could decide the future of DeFi. Given Uniswap’s status as one of the most decentralized and regulatory-compliant protocols, the outcome of this case will be pivotal in shaping decentralized finance and onchain activity in general for the next several years. Let’s break down what we know about the case, Uniswap’s chances of winning, and what could happen next. 

On April 10th, New York-based Uniswap Labs received a Wells Notice from the Securities and Exchange Commission, notifying Uniswap that the SEC plans to recommend legal action against the company. This is a complete surprise to Uniswap and the blockchain industry, as Uniswap has made no major changes to its protocol in the past eight years that would warrant a lawsuit now. Additionally, Uniswap has traditionally been very conservative and regulatory-compliant regarding their UNI token, which provides no features other than governance over the Uniswap DAO. 

The case will likely pivot on a few key points. First, the Uniswap protocol is permissionless for creating liquidity pools with tokens, meaning that securities may be traded on the platform. Second, the UNI token could be considered a security, as Uniswap Labs issued it to investors and acts as the protocol's governance token. Though both seem like legitimate arguments, neither are straightforward cases for the SEC.

Ultimately, Uniswap Labs is a software publisher, and they simply published the Uniswap code for use on EVM-compatible blockchains and Layer 2s. They do not provide liquidity to the token pairs, leaving that as a permissionless activity that anyone can perform on any ERC20 token. They effectively created the infrastructure layer for the liquidity of Web3 to build upon and have commonly been called a hyperstructure for their immutable, decentralized approach to building – anyone can build on a Uniswap pool and know that that code can't be changed or modified in a way that breaks their application. Uniswap has effectively standardized liquidity and trading but does nothing that would directly make the Lab responsible for what is listed. As a blog post about the implementing lawsuit states, there is no investment contract between Uniswap Labs and people trading tokens or between the tokens and token holders in most cases. 

Until now, the UNI token has been heavily criticized for its lack of utility beyond simply voting for governance changes and treasury deployments within the Uniswap DAO. For years, holders have been hoping for a fee switch, giving UNI token holders dividends from every swap on the platform. Uniswap Labs has hesitated to introduce this feature or propose a vote in the DAO, as it could make the token a security. However, a couple of weeks ago, the Uniswap Foundation, a part of the Uniswap DAO, proposed a modification to the UNI token to turn on this fee switch and start rewarding token holders. It’s possible that, after legal counsel, the Labs decided that the best way to get regulatory clarity would be to bait the SEC with this proposed rule change, not fully implement it, and then deal with a lawsuit while the UNI token is as it has been for the past several years. Currently, only the temperature check for this change has been voted on by token holders, and there has been no actual change to the protocol or token, meaning that the argument for the SEC in declaring UNI a security will be much more difficult. Uniswap Labs also argues that UNI does not pass the Howey test – the government’s measure of whether an asset is a security or not – since the value of the token is not solely dependent on the work of Uniswap Labs and that there is no common enterprise that the UNI token represents an investment in. Whether or not these arguments hold up in court remains to be seen, as it could very easily be argued that even though there is a DAO, the voter apathy and general proposals by the Uniswap Foundation and people associated with Uniswap Labs instead of random individuals involved with the community could be seen as general control by Uniswap Labs and associated entities. 

All that being said, Uniswap is one of the most regulatory-compliant, conservative, and decentralized DeFi protocols in existence, and the SEC’s lawsuit will not be easy for them. It will likely take years before we get a final judgment, and it will decide the future of DeFi in the United States. If the court rules in favor of Uniswap, then DeFi will flourish, with the fee switch likely enabled and many other DeFi protocols able to function without the worry of the SEC pursuing legal action based on the precedent set in this case. On the other hand, if Uniswap loses, it will be incredibly difficult for token-based DeFi projects to continue – they will either need to perform KYC on each member, remove the token entirely and have a tokenless primitive, or some other solution to appease regulators. 

Though the Uniswap case may seem like a negative event, the regulatory clarity it will provide the industry will be worth the hassle. The U.S. government's continued pursuit of cryptocurrency companies and protocols only legitimizes the industry and its work in creating open, transparent, and immutable financial infrastructure for the future global economy.

By Lincoln Murr

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