SEC sues UniSwap: an opportunity for DeFi?

[Vincom]

The SEC, known for its cautious approach to crypto, is aiming to increase regulations within the crypto market. They've previously targeted centralized entities like Coinbase, Binance, Kraken, and Ripple with lawsuits. Now, their sights seem set on Uniswap, the leading DEX ^[1]. A lawsuit against Uniswap seems imminent, and the chance of a successful negotiation appears slim. Uniswap Labs, the developers behind the protocol, have already declared their intent to fight the SEC in court.

The SEC's lawsuit against Uniswap Labs faces hurdles due to Uniswap's decentralized nature. Uniswap Labs developed the Uniswap protocol, but it operates without a central authority. This makes it difficult for the SEC to pinpoint a specific entity to hold accountable in court. Uniswap functions primarily as a platform that facilitates trades between liquidity providers and users. It doesn't hold user assets or offer investment contracts, which are areas typically targeted by securities regulations.

Since its launch in late 2018, Uniswap has operated without facing legal issues. However, a recent tokenomics update proposing to share Uniswap's revenue with UNI stakers ^[2] raises concerns about the SEC potentially classifying UNI as a security under the Howey Test ^[3]. While the legal outcome is uncertain, this update introduces a potential regulatory hurdle.

The SEC's lawsuit against Uniswap, the leading DEX, has major implications for the entire DeFi ecosystem. Because many DeFi protocols share similar features with Uniswap, a win for the SEC could set a precedent for them to regulate the entire DeFi space. This outcome would significantly impact the future of the crypto market, as DeFi plays a central role in its growth. On the other hand, a win for Uniswap could limit the SEC's reach in the crypto industry. This could pave the way for the continued development of DeFi and other innovative crypto projects.

While I believe Uniswap has a strong case against the SEC, their financial resources are a concern. Ripple's ongoing legal battle highlights the potential cost – hundreds of millions over several years. Uniswap Labs' estimated annual revenue of 17.2M USD ^[4] raises questions about their ability to sustain a similar fight. In a worst-case scenario, it would be crucial for Uniswap to receive financial backing from the Ethereum Foundation, major crypto players, and the community.

I would like to know your opinion on this issue:

• Is UNI token a security after the tokenomics update?
• Can UniSwap Labs win this lawsuit?
• Will the outcome of the lawsuit have a positive or negative impact on DeFi and the crypto market?

References:
[1] The SEC’s Suit Against Uniswap Is an Opening Attack Against DeFi
[2] Uniswap's UNI Gains 20% as Token Reward Proposal Inches Closer to Approval
[3] Does Crypto Pass the Howey Test?
[4] 2023’s top 5 DeFi protocols by revenue

[mk4]

In a worst-case scenario, it would be crucial for Uniswap to receive financial backing from the Ethereum Foundation, major crypto players, and the community.

Whatever the result is will definitely heavily influence the broader crypto/defi markets; I'm pretty sure everyone will be banding together and collect funds when needed. Even Coinbase will likely be chucking in.

• Is UNI token a security after the tokenomics update?
• Can UniSwap Labs win this lawsuit?
• Will the outcome of the lawsuit have a positive or negative impact on DeFi and the crypto market?

1. What update? The revenue-sharing thing isn't even live yet.
2. Highly likely, in my opinion.
3. If they win, it's a positive. And vice versa.

[d5000]

The reason why the SEC could win this lawsuit is actually very simple: Uniswap is not really decentralized.The UNI tokens were premined. So if they now talk about their platform being a "public good" this is nothing than window dressing.

The UNI token was distributed in the following way, according to their blog and other sources like the 101blockchains website:

   60% have been allocated to the Uniswap community members.
    15% of the community tokens allocated from the UNI token supply was claimed in the airdrop by liquidity providers and users.
    21.266% have been allocated for team members and future employees, which would unlock over the course of next four years.
    18.044% of the total UNI tokens have been entrusted to investors, with a 4-year unlocking schedule.
    0.69% of the UNI token supply has been allocated to advisors with a 4-year vesting period.

The 15% which went to airdrops and liquidity providers are part of the 60%, so 45% are still not distributed (see here).

So 40% of the token's holdings went either to the team itself, or to investors outside of the Uniswap user community. Imagine a bank where more than 20% of all the capital (which comes mainly from clients' deposits and credits) is owned by the bank owners and employees, and almost 20% more by some other third parties outside the community. I think even in the regular financial world this would be an overly greedy business model.

So Uniswap does not only look like a bank, or a centralized fintech provider if you want (because on the exchange itself, they don't control tokens/coins, that's true). In some aspects it's even worse than a bank, it seems.

Of course you can use the protocol in your own bank, creating your own token and so on. And afaik several have forked Uniswap. But that's not the reason the SEC targets them. It is the centralized character of the platform based on the uniswap.org website powered by the UNI token.

This is a problem most so-called "DeFi" services have, so I'm not really sad if this whole sector implodes (won't happen), or at least shrinks a bit for good.

[Vincom]

The reason why the SEC could win this lawsuit is actually very simple: Uniswap is not really decentralized.The UNI tokens were premined. So if they now talk about their platform being a "public good" this is nothing than window dressing.

   60% have been allocated to the Uniswap community members.
    15% of the community tokens allocated from the UNI token supply was claimed in the airdrop by liquidity providers and users.
    21.266% have been allocated for team members and future employees, which would unlock over the course of next four years.
    18.044% of the total UNI tokens have been entrusted to investors, with a 4-year unlocking schedule.
    0.69% of the UNI token supply has been allocated to advisors with a 4-year vesting period.

The 15% which went to airdrops and liquidity providers are part of the 60%, so 45% are still not distributed (see here).

I don't think it's unusual to allocate a portion of UNI tokens to Labs. This is done in most projects to sustain the project's development. After all, the Dev team can't just rely on community contributions like the BitCore team.

For example, in the case of Ethereum: ETH has not been accused of being a security even though 16.68% of ETH was also allocated to the Dev team.

The initial distribution of Ethereum (ETH) is as follows:
83.33% is allocated to Ethereum Crowdsale
16.68% is allocated to Ethereum Foundation, Early Contributors & Others

Therefore, I don't think UniSwap will be in trouble with the SEC if the SEC uses this reasoning. I still hold hope for the victory of UniSwap and the entire DeFi ecosystem.

• Ethereum (ETH) Tokenomics

[d5000]

Yes, I know. It's not unusual, but that's exactly the point: a large part of the DeFi and altcoin world consists of projects which are essentially centralized (I often have called these projects CeDeFi ).

In the case of the UNI token it's however worse than the case of Ethereum, because the token seems to have also a governance function, so the decision making process has also a centralized component. For example, if someone wanted to fork the platform due to a disagreement over a policy or rule, even if the non-team members vote mayorily for this fork, the team could probably block it. Basically, this avoids a healthy open source ecosystem forming around the project, and instead favours that the founder team will be leading it forever, or at least as long as it's profitable for them.

And even in the case of Ethereum there has been debate in the SEC if it should not be regarded as a security, and the debate seems to be still ongoing. This is also a possible reason that the Ethereum ETF projects could be rejected in May. Those in the US argumenting that Ethereum is not a security have mentioned that the distribution was already a long time ago so the current token distribution could be more decentralized. An interesting case to compare Uniswap is also Dash, which has a voting token too, and was classified as a security last year, even if it didn't have an explicit premine.

In the European Union's "Markets in Crypto-Assets" (MiCa) ruling which will fully come into effect in late 2024, Ethereum would be classified as a crypto asset with identifiable issuer. This category has the obligation to present a whitepaper with the tokenomics and identify a responsible entity or person. Basically a financial business. Uniswap would also fall under this rule.

Real "decentralized finance" platforms for me are those structured like UnstoppableSwaps, where you have a protocol completely independent from any "governance" tokens or structures, and you don't have a platform which takes a part of the transaction fees away. Such protocols would not be affected at all by the lawsuit.

[btc78]

There is not much information to go by hence why we can not yet come up with a conclusive speculation. Like other cases of course if Uniswap were to win against SEC there would definitely be a positive impact on the defi community at large. It would basically make them legit and would allow them to gain confidence. Of course if it was the opposite there is a chance the entire community loses confidence in defi. We would have to wait and see how this lawsuit progresses

[Volimack]

Despite the great opportunity for Defi it is now no longer a security and therefore beyond the SEC's regulatory reach. However, legal issues are ongoing. Perhaps Ripple as a company will pay a hefty fine, but we can say for sure that this is not the end of XRP and its protocol. Sadly this is not the end of regulatory concerns surrounding cryptocurrencies.

[cryptoaddictchie]

Its rare to see Govt trying to call out a dex unlike ripple and binance got sued. Maybe its tike for uniswap to prove their non guilty here. Hard to say if they can win and its a bias when we say uniswap will definitely win since we are in the crypto space. For sure everyone wanted them to win, but lets hope they will cause it will be a greater impact on defi and future projects on crypto.

[Vincom]

Yes, I know. It's not unusual, but that's exactly the point: a large part of the DeFi and altcoin world consists of projects which are essentially centralized (I often have called these projects CeDeFi ).

In the case of the UNI token it's however worse than the case of Ethereum, because the token seems to have also a governance function, so the decision making process has also a centralized component. For example, if someone wanted to fork the platform due to a disagreement over a policy or rule, even if the non-team members vote mayorily for this fork, the team could probably block it. Basically, this avoids a healthy open source ecosystem forming around the project, and instead favours that the founder team will be leading it forever, or at least as long as it's profitable for them.

And even in the case of Ethereum there has been debate in the SEC if it should not be regarded as a security, and the debate seems to be still ongoing. This is also a possible reason that the Ethereum ETF projects could be rejected in May. Those in the US argumenting that Ethereum is not a security have mentioned that the distribution was already a long time ago so the current token distribution could be more decentralized. An interesting case to compare Uniswap is also Dash, which has a voting token too, and was classified as a security last year, even if it didn't have an explicit premine.

In the European Union's "Markets in Crypto-Assets" (MiCa) ruling which will fully come into effect in late 2024, Ethereum would be classified as a crypto asset with identifiable issuer. This category has the obligation to present a whitepaper with the tokenomics and identify a responsible entity or person. Basically a financial business. Uniswap would also fall under this rule.

Real "decentralized finance" platforms for me are those structured like UnstoppableSwaps, where you have a protocol completely independent from any "governance" tokens or structures, and you don't have a platform which takes a part of the transaction fees away. Such protocols would not be affected at all by the lawsuit.

I think we will need to wait for the official lawsuit from the SEC and to know their point of view and arguments. I believe that many experts in the crypto community are ready to stand by UniSwap and we will know their views as soon as the lawsuit is underway. The governance and revenue-sharing features of the protocol could also lead to the token being accused of being a security, but I don't think UNI token meets the Howey Test, so it shouldn't be classified as a security.

I have high expectations for DeFi summer in 2024 when new money will flow into the crypto market through DeFi projects in the LSD and LRD trend. I do not expect UniSwap and other DeFi protocols to face any problems and disrupt this uptrend. We still need an altseason and DeFi trend is an indispensable part of it!

[nelson4lov]

I don't think the SEC have a strong case against Uniswap. They have been a trying to have a go at them for months and all of DeFi which is why some of the DeFi projects started censoring and blocking off US users from participating in their services. If the outcome turns out positively for Uniswap, it means that DeFi would continue to strive very hard. Otherwise, it's going to be catastrophic for the DeFi industry if it ends negatively as Uniswap is one of the core DeFi protocols and Uniswap getting convicted would be all other Dex and AMMs protocols will fall short of SEC's judgement.

[o48o]

-cut-

• Is UNI token a security after the tokenomics update?

Not only is going to be security, it's also probably going to break several regulations around anti money laundering and finance action taskforce regulations. Or i at least would be surprised if it didn't, as this is basically centralized entity giving free dividends to pseudonymic wallets, no matter if they are on the restriction list or who these people would be in the first place. And i say centralized because metamask is centralized.

This is a win to crypto regulation, but i totally see why people would see this as a loss to crypto reputation in general. As altcoins and DeFi has creating this public image for being necessary in case governements want to take over, and it's resistant to that. This is literal proof of opposite happening. But at least we can learn from this, and stop pretending that most of these altcoins are an alternative to oversight that government does on banking.

[crwth]

Everything right now is being sued by the SEC. I don't think everything they could win. Anyway, it can be an opportunity to be exposed to those who have no idea what UniSwap is and might find alternatives like on $BASE. It can possibly increase but I don't know how much it could bring exposure though.

[d5000]

I don't think UNI token meets the Howey Test

It may be a borderline case, but for me it could be classified as such. Let's see how it qualifies according to the Investopedia article about Howey Test applied to cryptocurrencies:
- Money is invested: Yes. There were UNI tokens given out for investments (see the table above). There were also some given out for "time and expertise" (which would not meet the criterion), but by far not all.
- There is an expectation of profits: Yes, I think that cannot be denied.
- There is a common enterprise: This is also a clear Yes. It's even more clear due to the governance mechanism.
- Success relies on the efforts of others: This is the crucial point. Uniswap Labs may argue that their software platform only is auxiliary for the DEX, and that in reality the value comes from the users. But I think negating the influence of the software developer does not lead far. If Uniswap for example was the 1000st fork of another project (i.e. there was no development work at all) and had less features, it would not be as successful as it is now. They can also not say that the software project is independent because the team members have been allocated tokens directly.

I think Uniswap could "save" their business model in some way, but they would have to cede control. For example, they could relaunch the UNI token without any premine, and then launch a second token which is a pure utility token, i.e. is bound completely to existing functions of the DEX or to services Uniswap Labs offers. They would however probably lose a lot of investors in this process.

I have high expectations for DeFi summer in 2024 when new money will flow into the crypto market through DeFi projects in the LSD and LRD trend. I do not expect UniSwap and other DeFi protocols to face any problems and disrupt this uptrend. We still need an altseason and DeFi trend is an indispensable part of it!

My take on this is a bit different. I think the DeFi sector could learn from these cases and try other mechanisms than premined governance tokens which are almost guaranteed to be classified as securities, to make projects sustainable. I don't say they should all be donation based because that woud probably reduce the number of possible projects, but pure utility tokens could be a piece in the puzzle, as other models where the "investment" model and the "crypto" aspect is cleanly separated.

[Vincom]

I don't think UNI token meets the Howey Test

It may be a borderline case, but for me it could be classified as such. Let's see how it qualifies according to the Investopedia article about Howey Test applied to cryptocurrencies:
- Money is invested: Yes. There were UNI tokens given out for investments (see the table above). There were also some given out for "time and expertise" (which would not meet the criterion), but by far not all.
- There is an expectation of profits: Yes, I think that cannot be denied.
- There is a common enterprise: This is also a clear Yes. It's even more clear due to the governance mechanism.
- Success relies on the efforts of others: This is the crucial point. Uniswap Labs may argue that their software platform only is auxiliary for the DEX, and that in reality the value comes from the users. But I think negating the influence of the software developer does not lead far. If Uniswap for example was the 1000st fork of another project (i.e. there was no development work at all) and had less features, it would not be as successful as it is now. They can also not say that the software project is independent because the team members have been allocated tokens directly.

I think Uniswap could "save" their business model in some way, but they would have to cede control. For example, they could relaunch the UNI token without any premine, and then launch a second token which is a pure utility token, i.e. is bound completely to existing functions of the DEX or to services Uniswap Labs offers. They would however probably lose a lot of investors in this process.

I have high expectations for DeFi summer in 2024 when new money will flow into the crypto market through DeFi projects in the LSD and LRD trend. I do not expect UniSwap and other DeFi protocols to face any problems and disrupt this uptrend. We still need an altseason and DeFi trend is an indispensable part of it!

My take on this is a bit different. I think the DeFi sector could learn from these cases and try other mechanisms than premined governance tokens which are almost guaranteed to be classified as securities, to make projects sustainable. I don't say they should all be donation based because that woud probably reduce the number of possible projects, but pure utility tokens could be a piece in the puzzle, as other models where the "investment" model and the "crypto" aspect is cleanly separated.

In the Howey test, the 3rd and 4th points are often weak points that the SEC cannot use to accuse tokens of being securities. DAOs are not companies, and profits do not come solely from the efforts of UniSwap Labs. We are likely to see arguments about this in court if the SEC does use the Howey test in its lawsuit.

DeFi protocols can learn and adapt, but this requires a revolution in the DeFi space. I am afraid that the majority of DeFi projects (DEXs, lending protocols, staking, restaking, stablecoins...) are not ready for this yet due to technological, governance, and financial limitations. In the event that UniSwap loses the case, I hope that it will be at the end of the uptrend 2025, we will have a legitimate reason for the crypto market to enter a crypto winter and DeFi projects will have time to update.

P/s: I really admire your deep understanding.

[ryzaadit]

Well these reason are bullshit.

Meanwhile, can we sue them (SEC) for their breach security and release fake news by scammer while their social media or account getting hacked ? Remember with those breach, many people can investing/trade and getting a loss damage of their asset.
To be honest, no matter is bad news we always passed those. Just a remember a multiple times news (BAN-CRYPTO) are being used especially in BULL-RUN, but still we are always reached all-time high. I always hears or know these kind of news every years.

[Vincom]

Well these reason are bullshit.

Meanwhile, can we sue them (SEC) for their breach security and release fake news by scammer while their social media or account getting hacked ? Remember with those breach, many people can investing/trade and getting a loss damage of their asset.
To be honest, no matter is bad news we always passed those. Just a remember a multiple times news (BAN-CRYPTO) are being used especially in BULL-RUN, but still we are always reached all-time high. I always hears or know these kind of news every years.

I am also anticipating lawsuits related to the consequences of the SEC's negligence regarding their hacked accounts around the time of spot BTC ETFs approval.

I suspect that Gary Gensler may have been tasked with slowing down the rapid growth of the crypto market, giving traditional companies a chance to catch up, participate, and dominate the market, thereby reaping huge profits. Therefore, despite previously supporting the crypto market, since becoming SEC chairman, he has been against crypto market development. OK well, he has gone after CEXs, and now DEXs, and the crypto community will fight him to protect this market!

[wheelz1200]

Definitely won't take off because people are lazy.  The prevalence of people keeping theor coins on centralized exchanges and not using wallets where they control theor own keys is crazy.  No matter what happens people will always use what's easy to use no matter what security risks there are.  Sad but is the way it is.

[batang_bitcoin]

The SEC's lawsuit against Uniswap Labs faces hurdles due to Uniswap's decentralized nature. Uniswap Labs developed the Uniswap protocol, but it operates without a central authority. This makes it difficult for the SEC to pinpoint a specific entity to hold accountable in court. Uniswap functions primarily as a platform that facilitates trades between liquidity providers and users.

SEC is funny, it's been from the start of their operations that Uniswap has been advertised as a decentralized cryptocurrency exchange.

It doesn't hold user assets or offer investment contracts, which are areas typically targeted by securities regulations.

They'd just categorized it the same as the CEXs that they've been flagged before although the obvious is that Uniswap is like a middleman for all of the traders that are going there. Now, good luck to them but Uniswap is a known company and the people that have worked behind it. We truly are not going to mess around if SEC starts to flag all of these DEXs.