The SEC plans to sue Uniswap, here’s what’s next

The Securities and Exchange Commission is digging into a predictable move in decentralized finance as it prepares to sue one of the largest decentralized exchanges.

Decentralized exchange Uniswap said on Wednesday that this was the case received a notice from Wells, that is, a formal notice from the SEC stating that the agency intends to file charges against a respondent, which will appear within approximately the next month. Uniswap founder and CEO Hayden Adams said he was not surprised, but “annoyed, disappointed and ready to fight.”

The SEC has gone after other exchanges, even if they were more centralized Coin base, Cracking And Binance. The agency’s attempt to sue Uniswap is unique, says Jennifer Schulp. director of financial regulatory studies at the libertarian think tank Cato Institute.

“This is a new area that they can move forward with, although it is certainly not something that surprises me or anyone else that they continue to open new areas or new fronts in the fight against crypto,” Schulp said in an interview with The Block .

Many DeFi protocols do not work with US customers and go to great lengths to block US customers’ access to the protocols. Uniswap was unusual in that it remains committed to serving U.S. customers, Schulp said.

The crypto industry has criticized the SEC for what it calls its “regulation by enforcement” approach, saying it is not possible to register with the agency under current rules.

In Washington, SEC Chairman Gary Gensler has argued that most cryptocurrencies are securities and should be regulated the same as other investments. The SEC’s top enforcer, Gurbir Grewal, flogged last week to the crypto industry, condemning the industry for its “significant non-compliance” and “creative attempts” to circumvent its jurisdiction.

‘Just the beginning’

Teresa Goody Guillén, a partner at law firm BakerHostetler and a former trial attorney for the SEC, also said she was not surprised the agency had issued a notice from Wells to a DeFi exchange.

“The SEC’s approach appears to target exchanges and larger players in the crypto market so that if they fail, it will have a greater impact on the market, which could make it more difficult for the crypto industry to operate.” Goody Guillén said in an interview.

Shutting down exchanges will have a bigger impact on the sector than any one particular cryptocurrency, she added.

‘I think this is just the beginning [the SEC] moving into the DeFi space,” Goody Guillén said, adding that the The current securities regulatory regime does not work for cryptocurrencies.

“It is unfortunate that the SEC is not more involved with the industry and is not aware of the holes in the securities regime,” she said.

Wells’ announcement comes as the SEC considers a proposal that would broaden the definition of an exchange to include DeFi exchanges. The regulationsproposed in January 2022, would require DeFi projects to regularly file with the SEC, be subject to mandatory disclosures, and place strict limits on how they operate.

The rule proposal can be read as a “recognition that the current regulatory landscape does not clearly cover DeFi,” said Schulp of the Cato Institute.

“By proposing that rule, the SEC clearly thinks it has the authority — I disagree with that and many people disagreed,” Schulp said. “The fact that they are moving forward with a DeFi exchange case before the rule goes into effect is really interesting and disappointing, especially given the calls for regulatory clarity in recent years.”

A potential bullshit

What happens next depends on which judge is assigned to the case, says Goody Guillén of BakerHostetler.

“Different judges have such different opinions and that’s how circuit splits arise, which can then be resolved at the U.S. Supreme Court.” she said.

Judges were all different in the way they approached decision making in crypto cases to divorce expanding institutional sales from programmatic sales to the SEC’s side on certain cryptocurrencies, including an algorithmic one stable currency.

The executive branch is struggling to regulate an industry that doesn’t fit easily within the SEC’s current regulatory authority, said John Aughenbaugh, an associate professor at Virginia Commonwealth University.

“If the SEC wants to investigate Uniswap or any other cryptocurrency exchange, it must make and justify the allegation that the company operating the exchange is in fact selling bonds or other security instruments that fall within the SEC’s authorizing law and regulatory authority,” it said Aughenbaugh. in an email to Het Blok.

If the company gets the “right” judges, the SEC could falter, the professor added.

“So, until or unless Congress clearly passes legislation on this issue, it is a moot point whether the SEC has the authority to regulate any cryptocurrency market (such as that operated by Uniswap Labs) and whether the federal courts should the SEC will legally bless. in this regard,” he said.