April 2024 Wells Notice and Response
In April 2024, the U.S. Securities and Exchange Commission (SEC) issued a Wells Notice to Uniswap Labs. On May 22, 2024, Uniswap Labs responded with a detailed 43-page document.
Uniswap Labs argues that the SEC should adopt open-source technology to improve outdated commercial and financial systems instead of attempting to eliminate them through litigation. The Uniswap Protocol is described as safe, low-cost, and transparent infrastructure that “protects investors and maintains fair, orderly, and efficient markets,” which aligns with the SEC’s mission.
SEC’s Expanding Jurisdiction
Uniswap Labs contends that the SEC aims to extend its jurisdiction from exchanges to communication technology and from securities to all markets. They believe the SEC’s legal arguments are weak and have been rejected by courts. Tomorrow, the House is expected to pass a bill granting the Commodity Futures Trading Commission (CFTC) strong authority to cover digital asset trading.
Major Innovation in the Market
The Uniswap Protocol is an autonomous software allowing users to trade directly with each other without paying fees to or relying on centralized intermediaries for asset security. Anyone with an internet connection can integrate the protocol, which does not depend on any team or Uniswap Labs for maintenance. It has supported $2 trillion in trading volume without any hacks and has been integrated and replicated thousands of times by various teams.
Traditional markets often suffer from inefficiencies, lack of transparency, limited operating hours, and delays, requiring multiple intermediaries, which increase costs for all participants. In contrast, Uniswap Protocol users can access the market directly and manage their assets. Transactions are transparent and verifiable by anyone, and settlements are instant, not taking two days. The service is available 24/7 worldwide, not just from 9 am to 5 pm on business days.
These features provide users with unprecedented agency, allowing them to control their assets and create value in new ways online.
Weak and Incorrect Legal Theories by the SEC
The 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 expand the definitions of exchanges, brokers, and contracts to a meaningless extent. Tokens are merely file formats, like PDFs.
The protocol is a general-purpose computer program anyone can use and integrate, like TCP/IP. Hundreds of thousands of users who received UNI tokens for participating in the protocol early on got them for free, without a contract or an expectation of profit solely from Uniswap Labs’ efforts.
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 argues why enforcement action should not be taken against Uniswap Labs.
Chapter 1: Introduction
This chapter outlines the Uniswap Protocol as an innovative technology allowing efficient, safe, and intermediary-free digital asset trading, greatly benefiting users.
The document asserts that Uniswap Labs does not operate an exchange, broker, or clearing agency 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 the protocol it developed. Uniswap Labs is an innovative software company based in New York, founded by Hayden Adams, focusing on developing software that enhances user experience, including a web interface and mobile wallet for accessing the protocol.
The protocol is a decentralized automated market maker (AMM), supported by liquidity providers (LPs), and operates autonomously without any control by individuals or entities. The document also discusses the UNI token, a governance token allowing holders to control limited modifiable aspects of the protocol.
Chapter 3: Labs Does Not Operate an Exchange Under the Common Language of the Exchange Act
This chapter argues that Uniswap Labs does not operate an exchange under the plain language of the Exchange Act. The document explains why secondary market transactions 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 Is Not a Broker Under the Exchange Act
This chapter notes that recent case law establishes that Uniswap Labs is not a broker under the Exchange Act. The document argues that Uniswap Labs does not solicit users to trade on the protocol, evaluate the value of investments, or provide investment advice, and that the fees charged for 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 User Tokens
This chapter argues that Uniswap Labs does not engage in clearing activities because it does not custody or touch user tokens. The document asserts that Uniswap Labs does not act as a depositary because it does not hold user tokens nor act as an intermediary to “move” assets because it does not touch user 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 is exempt from registration requirements. The document discusses four different methods of UNI token distribution and argues that these distributions do not meet the remaining prongs of the Howey Test and that LP tokens are not securities.
Chapter 7: Enforcement Action Would Violate Major Questions Doctrine and Infringe Labs’ Due Process Rights
This chapter argues that an enforcement action by the SEC would violate the major questions doctrine and infringe Uniswap Labs’ due process rights. The document claims that the SEC lacks congressional authorization to regulate the protocol as an exchange and that the SEC has not provided sufficient fair notice that it considers Uniswap Labs’ conduct 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 public interest and the SEC’s goals and stifle innovation in financial and commercial markets. The document urges the SEC not to pursue the case but to instead develop a responsible policy framework that fosters innovations like Uniswap Labs and encourages their adoption in SEC-regulated markets.
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