Original author: Will Awang (X: @will_7th)

Original source: Web3 Xiaolu

On April 10, 2024, Uniswap Labs received a Wells Notice from the Enforcement Division of the U.S. Securities and Exchange Commission (SEC), informing the SEC of possible regulatory enforcement actions such as litigation against Uniswap Labs.

Uniswap Labs is the initiator of the decentralized trading protocol Uniswap Protocol. Since its launch five and a half years ago, its trading volume has exceeded 2 trillion US dollars, dominating the decentralized exchange market, accounting for 55.5% of the total trading volume, and is Crypto , the leader in the DeFi market.

This behavior of the SEC is seen as a blatant provocation against decentralized DeFi projects and will have a huge impact on the Crypto market. Although we saw a strong reaction from $UNI, we saw more market unity.

This article will combine Uniswap Labs’ SEC response article and its relatively compliant governance structure to see why the SEC filed a lawsuit that is impossible to win?

1. What is Wells Notice?

First of all, make it clear,Wells Notice is not a formal prosecution or regulatory enforcement document, but a formal warning or notification.It is an early warning of impending SEC enforcement action on questionable items.

Secondly,The Wells Notice did not explain the specific reasons for taking regulatory enforcement, which made Uniswap Labs very passive and had to fully prove its innocence.

Wells Notice initiation process: 1. After the SEC internal investigation of the suspicious company (whether it violates securities laws), it is recommended to take action against the suspicious company; 2. After receiving the Wells Notice, the suspicious company will be given a 30-day window to rebut. Charges and put forward arguments to prove their innocence; 3. The SEC then evaluates and decides whether to take regulatory enforcement.

One of the most publicized recent cases includes the SEC vs. Ripple case.

Ripple received a Wells Notice from the SEC in December 2020, which immediately resulted in its delisting from Coinbase. Although Ripple successfully argued that it was not informed that XRP would be considered a security, the three-year legal process proved costly to the companys credibility.

2. How Uniswap Labs proves its innocence

（blog.uniswap.org/fighting-for-defi）

Let’s take a look at what Uniswap Labs releasedFighting for DeFiArticles:

Judging from the SEC’s continued regulatory enforcement against the market’s most compliant and law-abiding market participants (Coinbase, Uniswap) and its unwillingness to provide a clear regulatory path for six years,This action is more of a political appeal(Coupled with the recent crusade against DeFi by congressional lawmakers).

Uniswap Labs, a US-based company, created the Uniswap Protocol and brought unprecedented innovation to the market. These innovations are based on open source code, allowing users to directly participate in market transactions without any middlemen while maintaining their own property. Uniswap Labs believes that its product is not only legal but also transformative. They create transparent, verifiable markets with fewer gatekeepers, empowering the global public to participate in the global economy cheaply and easily.

If the SEC continues to protect the opaque systems of traditional finance and attack innovative, open and transparent technologies that create opportunities and lower costs for Americans, then Uniswap Labs will have to fight U.S. government agencies to protect innovation and economic freedom.

Regardless of what the SEC decides to do, the law is clear on the following points:

1. SEC regulatory enforcement does not have congressional authorization - the SEC only has jurisdiction over securities

The Chairman of the SEC previously made it clear to Congress that whether crypto assets can be determined to be “securities” requires congressional legislation to confirm.

And in the case of Risley vs. Uniswap Labs, the judge stated that transactions on Uniswap did not apply to securities laws (neutrality does not require permission), clearly emphasizing: The determination of whether a security is a security or not is best left to Congress.

Furthermore, in the SEC vs. Ripple case, the judge clarified that secondary market transactions in cryptoassets generally do not constitute investment contracts.

It can be seen that there is no security issue in the secondary market transactions on Uniswap.

Related Reading:

DeFi regulatory woe, Uniswap is in heaven, Tornado Cash is in hell

Interpret the SEC v. Ripple case to further clear up regulatory fog

2. Does not meet the definition of a stock exchange or broker

Even though most cryptocurrencies are considered “securities,” the Uniswap protocol, applications, and wallets still do not meet the legal definition of a securities exchange or broker.

This was evident in the recent SEC vs. Coinbase ruling, where the court already rejected the SEC’s assertion that non-custodial crypto wallets were brokers at the earliest stages of the case, even if they charge fees.

3. There is no issuance of “securities”

The $UNI token is not a security because it does not meet the legal definition of any type of security, including the definition of an “investment contract.” Under U.S. securities laws and the Howey test, an investment contract is an investment of money in an ordinary enterprise with the expectation of profit and is entirely dependent on the efforts of others. There is no contract or commitment between Uniswap Labs and the more than 300,000 holders of the token, and there is no common cause. The value of the token does not entirely depend on the efforts of Uniswap Labs.

Despite the SEC’s recent investigation into the Ethereum Foundation, the CFTC has been very clear that neither Bitcoin nor Ethereum are securities. The Uniswap technology ecosystem is decentralized enough, just like Bitcoin and Ethereum.

3. Uniswap’s compliance governance organization

Previously, we sorted out Uniswap Labs’ compliance path after the divestiture agreement, which fits perfectly with Uniswap’s legal defense to prove its innocence in the article. Under such a structure, the SEC really has little chance of winning.

This path also provides a regulatory-friendly prototype for Web3 decentralized projects. The purpose of such divestiture is, on the one hand, to achieve progressive decentralization, and on the other hand, to gain more room for maneuver in terms of regulatory compliance.

Decentralization + non-security tokens:It runs autonomously on the Uniswap protocol chain and is governed through Uniswap DAO to achieve decentralization. The single-functional token UNI is its governance token. This model avoids securities determination by the SEC and leads to successful judgments by the courts;

DAO Legal Wrapping + Members Limited Liability:Uniswap DAO establishes the legal entity of Uniswap Foundation, which serves as the legal packaging of DAO. On the one hand, it guarantees the limited liability of DAO members, and on the other hand, it can interact with the Web2 world and expand its influence;

Labs independent operation + flexible front-end development:The Uniswap Labs team that previously developed and maintained the protocol has become a major contributor to the protocol as a separate legal entity. On the one hand, it is freed from the restrictions of the protocol. On the other hand, it can build and maintain front-end products by calling the back-end protocol to achieve sustainability. Such as Uniswap DApp, which has previously launched a charging model.

Regulate applications rather than protocols:Just like the regulatory principles advocated by a 16 z, it is difficult for decentralized on-chain protocols to be compatible with regulation, but front-end applications can fully comply with regulatory requirements, allowing the team and the product itself to escape possible regulatory risks. Like any App, the front-end application can include KYC/AML/CTF verification according to regulatory requirements, remove tokens subject to regulatory warnings at any time, apply for license qualifications, etc.

If we are subject to regulatory enforcement by the SEC under such a compliance path, other than the fact that the SEC is headstrong to complete political tasks, it may be something else.

The most likely one is Uniswap’s automated market maker mechanism (AMM). The specific mechanism will not be delved into for now, but the AMM mechanism is run by the decentralized Uniswap Protocol, not Uniswap Labs. If the SEC were to challenge the Uniswap Protocol, it would be equivalent to challenging the freedom of code release based on freedom of speech. This would be equivalent to the SEC opening up a completely new field in which it would be even more impossible to win the case.

4. Impact on the market

Whether it is the defense in the Uniswap Labs article or the recent cases of encryption supervision, the SECs attack on Uniswap Labs appears to be relatively weak, and there is basically no chance of winning the case. Although $UNI is under pressure in the short term.

We further recognize that this is a move of political appeal.

This behavior from the SEC will only unite people in the crypto world, as Uniswap Labs founder hayden.eth said:

“I work in cryptocurrency because I believe it can have a huge positive impact on the world by eliminating gatekeepers (middlemen) and increasing access to value and ownership, much like the way the internet seamlessly accesses information.

I’m incredibly proud of the various versions of Uniswap, the thousands of projects built on top of it, the web applications with millions of users, the wallets with hundreds of thousands of downloads, and changing the way tens of millions of people live their lives around the world. We’re still in the early stages – this technology and revolution will be working within decades.

Hopefully we can come together more as an industry.The more united we are, the stronger we are and the harder we are to kill. So lets be friends.

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