Uniswap Labs responds to the US SEC Wells notice

Written by: 0xjs@黄金财经

In April 2024, the U.S. SEC issued a Wells notice to Uniswap Labs. On May 22, 2024, Uniswap Labs responded with a 43-page document.

Uniswap Labs believes that the U.S. SEC should adopt open source technology to improve outdated business and financial systems instead of trying to make them disappear through litigation. Uniswap Protocol is a secure, low-cost, transparent infrastructure that "protects investors and maintains fair, orderly and efficient markets." This is exactly the mission of the SEC.

The U.S. SEC is to expand its jurisdiction from exchanges to communication technology, and from securities to all markets. Their legal arguments were weak and were rejected by the court. And tomorrow the House of Representatives is expected to pass a bill that gives the Commodity Futures Trading Commission strong powers to cover digital asset trading.

Uniswap Protocol is a major market innovation that benefits consumers

The Uniswap Protocol is an autonomous software that enables users to trade directly with each other securely, without paying fees to centralized intermediaries or relying on them to keep their assets safe. Anyone with an internet connection can integrate the protocol, and it does not rely on any team or Uniswap labs to maintain it. It just works. It has supported $2 trillion in trading volume without any hacks and has been integrated and replicated thousands of times by thousands of teams.

Many traditional markets are inefficient, opaque, operate on limited hours and dates, have delays of days, and require multiple middlemen to charge fees, increasing costs for all participants. In contrast, users of the Uniswap Protocol can directly access the market and custody their own assets. Transactions are transparent and can be verified by anyone. Settlements are instant, not two days. Service is available around the clock around the world, rather than from 9am to 5pm on weekdays.

These features give users unprecedented agency, control over what they own, and create value on the internet in new ways.

The SEC’s Legal Theory Is Weak and Faulty

The SEC alleges that the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, that the Uniswap interface is an unregistered securities broker-dealer, and that the UNI token is an investment contract.

These assertions assume that value represented in a specific digital file format is a security, and that the SEC can unilaterally stretch the definitions of exchange, broker, and contract to the point of meaninglessness. A token is a file format, like PDF. The protocol is a general-purpose computer program, like TCP/IP, that anyone can use and integrate. Hundreds of thousands of users who received UNI tokens for participating in the early stages of the protocol received them for free, without a contract and without an expectation of profit solely from the efforts of Uniswap Labs.

A quick overview of the main contents of Uniswap Labs' response to the Wells Notice

The purpose of the document is to refute the SEC's allegations that Uniswap Labs may have violated securities laws and to propose why enforcement action should not be taken against Uniswap Labs.

The following is a summary by chapter based on the content of the document:

Chapter 1: Introduction

This chapter outlines the Uniswap Protocol as an innovative technology that allows efficient, secure, and intermediary-free trading of digital assets, which is extremely beneficial to users. The document argues that Uniswap Labs does not operate an exchange, broker, or clearing company, and believes that the protocol itself is not subject to securities laws. It emphasizes the autonomy and open source nature of the protocol, as well as its innovation in removing traditional market intermediaries.

Chapter 2: Factual Background

This chapter provides detailed background information on Uniswap Labs and the protocol it has developed. Uniswap Labs is an innovative software company based in New York, founded by Hayden Adams, that focuses on the development of software that enhances the user experience, including a web application interface (Interface) for accessing the protocol and a mobile application wallet. The protocol is a decentralized automated market maker (AMM) that is supported by liquidity providers (LPs) and operates completely autonomously and is not controlled by any individual or entity. The document also introduces the UNI token, a governance token that allows holders to control limited modifiable aspects of the protocol.

Chapter III: Labs does not operate an exchange based on the plain language of the definition of an exchange

This chapter argues that Uniswap Labs does not operate an exchange based on the plain language of the Exchange Act. The document explains in detail why secondary market transactions conducted through the protocol do not constitute investment contracts and why the protocol itself does not meet the statutory definition of an exchange.

Chapter IV: Recent precedent establishes that Labs does not meet the definition of a broker under the Exchange Act

This chapter argues that Uniswap Labs does not meet the definition of a broker under the Exchange Act based on recent legal precedent. The document argues that Uniswap Labs did not induce users to trade on the protocol, nor did it assess the value of investments or provide investment advice to users, and that the Interface fees collected were insufficient to support the broker's claims.

Chapter 5: Uniswap Labs did not engage in clearing activities because it did not custody or touch users' tokens

This chapter argues that because Uniswap Labs did not custody or touch users' tokens, it did not engage in clearing activities. The document argues that Uniswap Labs did not act as a depository institution because it did not custody users' tokens, nor did it act as an intermediary to "move" assets because it did not touch users' tokens.

Chapter 6: Uniswap Labs did not engage in the offer or sale of unregistered securities

This chapter explains that Uniswap Labs' distribution of UNI tokens either did not involve an investment of money or property or was exempt from registration requirements. The document discusses in detail the four different distribution methods of UNI tokens and argues that these distributions do not meet the remaining requirements of the Howey Test and that LP tokens are not securities.

Chapter 7: Enforcement Action Would Violate the Significant Issues Principle and Infringe Uniswap Labs’ Due Process Rights

This chapter argues that if the SEC takes enforcement action, it will violate the Significant Issues Principle and infringe Uniswap Labs’ due process rights. The document argues that the SEC lacks congressional authority to regulate Protocol as an exchange and that the SEC did not provide adequate fair notice that it believed Uniswap Labs’ actions were illegal.

Chapter 8: Conclusion

In the final chapter, the document summarizes why the SEC should not take enforcement action against Uniswap Labs. It argues that such action would be detrimental to the public interest and the SEC’s goals and would inhibit innovation in financial and commercial markets. The document calls on the SEC not to move forward with the case, but instead to develop a responsible policy framework that promotes innovations like Uniswap Labs and encourages their adoption in markets governed by the SEC.