Although there’s a lot of drama in the crypto-asset world, one particular issue is quietly brewing in the background while in fact it could be the catalyst for fundamental changes to the entire crypto ecosystem. The United States’ Securities and Exchange Commission’s (SEC) potential action notice against Uniswap. This confrontation could have a significant impact not just for Uniswap, but DeFi as a whole.
Uniswap vs SEC: Legal Battle
Just recently, Uniswap Labs received a Wells notice from the SEC, which is considering legal action against them due to their operations within the U.S. Uniswap on the other hand believes this move could be part of a broader political effort targeting decentralized blockchain technologies collectively. But before all that, let’s summarize the Uniswap v SEC situation:
Wells Notice
The SEC served Uniswap a notice of the substance of a possible charge that could be raised over the tokens that Uniswap issued (UNI), which in the eyes of the SEC appear to demonstrate elements of a security under federal securities law.
Token Classification
Uniswap, a company commonly perceived as the beacon of decentralization, argues that tokens are digital file formats, thereby not inherently securities according to the letter of the law, and should not be treated as such.
Legal Status
Uniswap further maintains that their tokens are legal, emphasizing that most tokens traded, such as stablecoins and coins like Ethereum and Bitcoin (commonly accepted as commodities), are not securities.
Technological Innovation
Uniswap is seen as a true pioneer in decentralized finance, creating significant infrastructure through the Uniswap Protocol, which utilizes a large portion of Ethereum’s block space.
Regulatory Framework
Uniswap, same as the majority of the crypto world raised some reasonable critique regarding the SEC’s ambiguity on the crypto-asset classification or compliance requirements, and for inconsistent enforcement of existing laws.
Legal Precedents and Definitions
Uniswap makes references to legal decisions and tests (like the Howey test and Ripple decision) that support their stance that their operations and the UNI token do not meet the definition of securities.
Sponsored
However, as usual, any argument has at least one counterargument, so the situation is not that simple and the crucial aspect of what could be considered a security may depend on the level of decentralization.
Leaving the regulatory processes in the US to the US regulators, and only reflecting on the different arguments raised by both parties it seems that Uniswap’s level of decentralization may be the decisive element in determining whether its tokens could be reasonably considered as securities.
Centralization vs. Decentralization
One of the elements that could have been factored in by the SEC when compiling their basis for the notice on the preliminary classification of Uniswap’s token, is whether the platform operates with centralized “top-down” decision-making or decentralized governance.
Centralized Governance
In general, it could be argued that if Uniswap is centralized, then its issued token could be seen as an instrument affording certain benefits that could be attributed to a security, as it is commonly understood, because Uniswap’s decisions could favor a central authority over the community.
Decentralized Governance
If decisions are made by the community, reflecting a decentralized structure similar to that of Ethereum’s, then the SEC’s position might be slightly different towards the UNI token, as it has been with ether which was implicitly classified as a commodity when the SEC approved the Ether futures ETF (emphasis on “futures”, not a spot ETF).
Permissionless Access
One of the best ways to ensure decentralization is to allow everyone to participate, then the possibility of a single point of failure is reduced as the burden of the decision making is shared among the community. Contrarily to Ethereum where anyone can propose changes, in Uniswap this is reserved for those who by themselves or collectively hold at least 1% of tokens. This might not seem much, but it’s 10 million tokens and with today’s (2024-04-25) UNI prices $78 million. Taken in context that out of the 381 thousand UNI token holders, the top 100 wallets control ~84% of the total token supply, that 1% threshold to propose a change may be quite a challenge if one does not have the funds support even his best proposals.
Smart Contract Immutability and Updates
Uniswap’s smart contract immutability is unquestionable, once deployed they cannot be changed. However that does not mean the Uniswap network cannot be updated, although the updates are implemented not by somehow compromising the smart contract immutability, but through new iterations of the protocol, controlled by Uniswap Labs, suggesting a level of centralization.
User Interface Control
Regardless of the smart contract immutability, apparently there are other ways of controlling access to certain tokens. This was demonstrated by Uniswap Labs, when it delisted tokens from its interface without any community consultation. This move has not affected the immutability of the smart contracts, because they were still operational, it was only a change in the user interface. Despite the means, the effect was just the same, which only strengthens the argument of possible centralized control.
EU Regulatory Standpoint
MiCA Regulation
In general there is no ambiguity of what is a security or what requirements apply to the different crypto-asset classifications. Essentially, the MiCA regulation, aims to be technology-agnostic, so in terms of decentralized finance (DeFi) it identifies degrees of decentralization, where its purest forms are exempted. However, having the ability to unilaterally decide to effectively delist specific tokens based on the developing regulatory environment might be difficult to contest a degree of centralization.
Crypto-Asset Classification
Uniswap’s token is a crypto-asset, there could be further arguments in relation to its more specific classification (e.g. utility token), but any exemptions attached to that classification would not be available as the token has already been “admitted to trading” on a trading platform.
The content of this article represents solely the personal opinions of the authors and is not intended as legal or financial advice. The authors do not offer any legal assessments or opinions on the disputed public relationships, including those between Uniswap and the SEC or the legal aspects of Uniswap’s activities. It is important to note that the authors are not licensed as US lawyers. The views expressed are based on publicly available information and do not constitute professional advice in any legal or financial capacity.
