Uniswap Labs Responds to Key Points of the Wells Notice from the U.S. SEC

Author: 0xjs, Golden Finance

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Uniswap Labs believes that the U.S. SEC should adopt open-source technology to improve outdated business and financial systems, rather than attempting to eliminate them through litigation. The Uniswap Protocol is a secure, low-cost, and transparent infrastructure that "protects investors and maintains fair, orderly, and efficient markets." This aligns with the SEC's mission.

The U.S. 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 that grants the Commodity Futures Trading Commission significant powers to cover digital asset trading.

The Uniswap Protocol is a Major Innovation Benefiting Consumers

The Uniswap Protocol is a self-sustaining software that allows users to trade directly with each other securely, without paying fees to centralized intermediaries or relying on them to safeguard their assets. Anyone with an internet connection can integrate the protocol and does not depend on any team or Uniswap Labs for maintenance. It is effective. It has supported $20 trillion in trading volume without being hacked and has been integrated and replicated by thousands of teams.

Many traditional markets are inefficient, lack transparency, operate within limited times and dates, have delays of several days, and require multiple intermediaries to charge fees, increasing costs for all participants. In contrast, users of the Uniswap Protocol can access the market directly and hold their own assets. Transactions are transparent and verifiable by anyone. Settlements are instantaneous, rather than taking two days. Services are available globally around the clock, rather than only during business hours from 9 AM to 5 PM.

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

The U.S. SEC's Legal Theory is Weak and Erroneous

The U.S. SEC claims 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 extend the definitions of exchanges, brokers, and contracts to a meaningless extent. Tokens are a file format, like a PDF. The protocol is a universal computer program that anyone can use and integrate, like TCP/IP. Hundreds of thousands of users who received UNI tokens for participating in the early stages of the protocol obtained the tokens for free, without contracts, and without the expectation of profits solely from the efforts of Uniswap Labs.

Overview 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 argue why enforcement action should not be taken against Uniswap Labs.

Here is a chapter-by-chapter summary based on the document's content:

Chapter 1: Introduction

This chapter outlines the Uniswap Protocol as an innovative technology that allows for 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 believes that the protocol itself is not subject to securities law. It emphasizes the protocol's autonomy, open-source nature, and its innovative role in eliminating traditional market intermediaries.

Chapter 2: Factual Background

This chapter provides detailed background information on Uniswap Labs and the protocol it developed. Uniswap Labs is an innovative software company based in New York, founded by Hayden Adams, primarily focused on developing software that enhances user experience, including a web application interface for accessing the protocol and a mobile wallet app. The protocol is a decentralized automated market maker (AMM) supported by liquidity providers (LPs) and operates entirely autonomously, without control from 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 Ordinary Meaning of the Term

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

Chapter 5: Uniswap Labs Is Not Engaged in Clearing Activities Because It Does Not Custody or Touch Users' Tokens

This chapter argues that since Uniswap Labs does not custody or touch users' tokens, it is not engaged in clearing activities. The document asserts that Uniswap Labs does not act as a depositary because it does not custody users' tokens and does not "move" assets as an intermediary because it does not touch users' tokens.

Chapter 6: Uniswap Labs Is Not Engaged 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 is exempt from registration requirements. The document discusses four different methods of distributing 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 Uniswap 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 contends 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 Uniswap Labs that its conduct is deemed 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 harm the public interest and the SEC's goals and would stifle innovation in financial and commercial markets. The document calls on the SEC not to pursue this case but to develop a responsible policy framework that promotes innovation like that of Uniswap Labs and encourages its adoption in markets under SEC jurisdiction.