Key Points of Uniswap Labs' Response to the U.S. SEC Wells Notice

Author: 0xjs, Jinse Finance

In April 2024, the US 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Uniswap Labs believes that the US SEC should adopt open-source technology to improve outdated commercial and financial systems rather than trying to eliminate it through litigation. The Uniswap Protocol is a safe, low-cost, and transparent infrastructure that "protects investors and maintains fair, orderly, and efficient markets," which is precisely the SEC's mission.

The US SEC aims to extend its jurisdiction from exchanges to communication technologies and from securities to all markets. Their legal arguments are weak and have been dismissed by the courts. Tomorrow, the House is expected to pass a bill granting the Commodity Futures Trading Commission strong powers to cover digital asset trading.

The Uniswap Protocol is a significant market innovation benefiting consumers

The Uniswap Protocol is autonomous software that allows users to trade directly with each other safely, without paying fees to or relying on centralized intermediaries to secure assets. Anyone with an internet connection can integrate the protocol, and it does not rely on any team or Uniswap Labs for maintenance. It is effective. It has supported $2 trillion in trading volume without any hacks and has been integrated and replicated by thousands of teams thousands of times.

Many traditional markets are inefficient, lack transparency, operate within limited times and dates, delay by days, and require multiple intermediaries to charge fees, increasing costs for all participants. In contrast, users of the Uniswap Protocol can directly access the market and custody their assets. Transactions are transparent and verifiable by anyone. Settlement is instant, not two days. Services are available globally around the clock, not just from 9 AM to 5 PM on weekdays.

These features provide users with unprecedented agency to control what they own and create value on the internet in new ways.

The US SEC's legal theory is weak and flawed

The US SEC claims that the Uniswap Protocol is an unregistered securities exchange controlled by Uniswap Labs, the Uniswap interface is an unregistered securities broker-dealer, and 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 extend the definitions of exchanges, brokers, and contracts to meaningless extents. Tokens are a file format, like PDFs. The protocol is a general-purpose computer program that anyone can use and integrate, like TCP/IP. Hundreds of thousands of users who received UNI tokens for participating in the protocol early on received them for free, with no contract and no expectation of profit solely from the efforts of Uniswap Labs.

Overview of Uniswap Labs' response to the Wells notice

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

The following is a summary of the document's content by chapter:

Chapter 1: Introduction

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

Chapter 2: Factual Background

This chapter provides detailed background information on Uniswap Labs and its developed protocol. Uniswap Labs is an innovative software company based in New York, founded by Hayden Adams, focusing on developing software to enhance user experience, including a web application interface and a mobile wallet for accessing the protocol. The protocol is a decentralized automated market maker (AMM) supported by liquidity providers (LPs) and operates autonomously, without control 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 3: Labs does not operate an exchange under the plain language of the Exchange Act

This chapter argues that under the clear language of the Exchange Act, Uniswap Labs does not operate an exchange. 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 4: Recent case law establishes that Labs does not meet the definition of a broker under the Exchange Act

This chapter points out that under recent legal precedents, Uniswap Labs does not meet the definition of a broker under the Exchange Act. The document argues that Uniswap Labs does not induce users to trade on the protocol, does not evaluate the value of investments or provide investment advice to users, and the fees collected by the interface are insufficient to support the broker claim.

Chapter 5: Labs does not engage in clearing activities as it does not custody or touch users' tokens

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

Chapter 6: Labs does 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 major questions doctrine and infringe on Labs' due process rights

This chapter argues that if the SEC takes enforcement action, it would violate the major questions doctrine and infringe on Uniswap Labs' due process rights. The document asserts that the SEC lacks congressional authorization to regulate the protocol as an exchange and that the SEC has not provided sufficient fair notice to inform that it considers Uniswap Labs' conduct illegal.

Chapter 8: Conclusion

In the final chapter, the document concludes why the SEC should not take enforcement action against Uniswap Labs. It argues that such action would harm the public interest and the SEC's goals and stifle innovation in financial and commercial markets. The document calls on the SEC not to pursue the case but to develop a responsible policy framework that promotes innovation like Uniswap Labs and encourages their adoption in markets under SEC jurisdiction.