Uniswap Labs Responds to SEC Wells Notice, Denies Crypto Tokens Are Securities

In a 40-page filing Tuesday, Uniswap Labs detailed to the SEC all the reasons why the agency shouldn’t pursue legal action against them. It comes a few weeks after the SEC issued Uniswap a Wells notice, warning the company that it identified potential violations of U.S. securities law.

Also read: SEC Leans Towards Approving Spot Ethereum ETFs, Notifies Exchanges

Uniswap Labs, the creator of the largest decentralized trading platform on Ethereum, stated that a possible enforcement action by the SEC lacks merit. According to Uniswap Labs, crypto tokens should not be considered securities but rather as digital files similar to PDFs.

Uniswap Labs Has Something To Tell the SEC

In the filing, the New York-based startup strongly denied the accusation that it runs an unregistered exchange and broker dealer. The response was issued following the announcement last month that the SEC’s Enforcement Division had served Uniswap Labs with a Wells notice, indicating their intention to recommend legal action.

The SEC’s entire case rests on the false assumption that all tokens are securities […] Tokens are, in fact, simply a file format. They are a file format for value and they are not inherently securities. The SEC has to essentially unilaterally change the definitions of exchange, broker and investment contract in order to try to capture what we do.

Marvin Ammori, chief legal officer of Uniswap Labs

According to Uniswap Labs’ Chief Legal Officer Martin Ammori, the SEC would need to reconsider the definition of an exchange in order to establish jurisdiction over Uniswap, as he informed reporters on Tuesday. 

Ammori said Uniswap would need to be specifically tailored for securities trading under the current definition.

‘Weak’ and ‘Wrong’ Arguments

According to SEC Chairman Gary Gensler, decentralized exchanges do not truly operate in a decentralized manner and, therefore, fall within the jurisdiction of the regulator. 

In addition, Gensler has emphasized that several digital assets are unregistered securities and, therefore, subject to SEC regulations.

Uniswap made a case that UNI tokens, the governance token for Uniswap, should not be considered securities. They argued that the token distributions do not fulfill the criteria set by the Howey Test, a legal framework used to determine investment contracts based on a Supreme Court ruling. 

The entity also challenged the SEC’s assertion that LP tokens, a unique type of token obtained by users when they invest in a Uniswap pool to facilitate trading of various tokens, should be classified as securities.

The LP Token is used as a bookkeeping device to keep track of which assets the user provided to the smart contract and any fees earned on the user’s liquidity […] In other words, the LP Tokens are issued not for investment purposes, but instead as accounting tools, and they are, therefore, not securities.

Uniswap

In April, Consensys filed its own lawsuit in an attempt to preempt the SEC’s action by alleging the regulator had exceeded its authority. The 10-year-old crypto firm stated that its lawsuit was in response to three subpoenas issued the previous year and an SEC Wells notice alleging the company had violated federal securities laws.

What’s in the Uniswap Wells Notice?

Tuesday’s filing gave more light on the SEC’s allegations in its upcoming enforcement action against Uniswap Labs. The regulatory agency is targeting both Uniswap’s native UNI token and liquidity provider (LP) tokens.

LP tokens are fundamental to how so-called “automated market makers” like Uniswap operate. Users who contribute assets to the protocol’s trading pools receive LP tokens as a receipt. 

Also read: Investors Enraged as Sushiswap Creator Suddenly Cashed $13M of His Sushi LP Tokens

In addition, users can exchange their LP tokens for the equivalent of their deposits. Meanwhile, the protocol leverages those deposits to ensure that other traders can execute the trades they desire.

According to Uniswap Labs’ Wells response, the SEC claims that LP tokens are investment contracts whose distribution breaches securities laws. Uniswap Labs opposes that argument, claiming that LP tokens do not fit into the regulator’s frameworks and are instead “bookkeeping devices.”

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Cryptopolitan Reporting by Florence Muchai