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Uniswap Responds to Wells Notice; Update on BA's Fight Against the SEC's "Dealer" Rule; SEC Approves ETH ETPs

Uniswap Responds to Wells Notice 

What happened?

Last Tuesday, Uniswap Labs released their response to the SEC’s Wells Notice issued on April 10th. A Wells Notice is a letter sent by the SEC notifying the recipient that SEC staff intends to recommend the Commission bring an enforcement action against them. It provides the recipient with an opportunity to respond prior to the Commission’s decision. 

Specifically, Uniswap Labs argues that:

  • the plain language of the statute limits or eliminates the SEC’s jurisdiction over crypto;

  • recent precedent undermines the allegation that Uniswap Labs engaged in broker activity;

  • the allegation Uniswap Labs engaged in clearing activity is inappropriate given that it does not control user assets;

  • Uniswap Labs’ use of airdrops and exemptions means that it did not engage in the unlawful offer or sale of unregistered securities;

  • the SEC’s enforcement action would violate the Major Questions Doctrine and violate Uniswap Labs’ due process rights; and

  • the action would undermine public interest and undermine the commission’s goal.

What does it mean?

This response demonstrates Uniswap Labs’ strong legal position. In response to the broker activity allegation, Uniswap Labs highlights the similarities between their user interface, specifically the Autorouter, and the allegations made by the SEC in Coinbase regarding routing within the Coinbase Wallet. In particular, Uniswap Labs argues that the Autorouter is similar to the Wallet product as it does not perform any financial analysis and simply finds the most economical route to achieve the desired swap. Although the Autorouter performs this on a larger scale, there is no legal or technical reason to distinguish between the two services. Due to this lack of meaningful distinction, Uniswap Labs reasons that the SEC’s broker allegation is unlikely to be successful and should be dropped. 

Uniswap Labs also argues that the clearing activity allegation is undermined by the technical reality of the protocol. The SEC points specifically at Uniswap protocols’ exchange and liquidity pool (LP) functions as evidence of clearing activity. Uniswap Labs’ response states plainly: “This characterization misunderstands the facts, as Uniswap Labs does nothing to move these assets; the users themselves submit instructions executed by Ethereum miners.” Because the SEC cannot allege direct control, they must alternatively allege indirect control to successfully plead a violation of unlawful clearing activity. 

Lastly, concerning the SEC’s assertion that Uniswap Labs indirectly holds and controls LP user’s assets, Uniswap Labs states a technical reality: Uniswap Labs does not control the Protocol itself, “indeed, no one controls the Protocol because it operates autonomously.” Uniswap Labs concludes that the disconnect between the Protocol and Uniswap Labs itself is meaningful, both legally and technically, and renders the SEC’s indirect control argument moot.

Now, we wait. The Commission will now have to decide whether to sue Uniswap Labs.

Crypto Trade Organizations File Motion for Summary Judgement on SEC’s “Dealer” Rule 

What happened? 

On May 17th, the Crypto Freedom Alliance of Texas (CFAT) and the Blockchain Association (BA) filed a motion for summary judgment arguing that the Securities and Exchange Commission’s (SEC) new definition of “dealer” exceeds the statutory authority that was given to the agency by Congress and violates requirements imposed by the Administrative Procedure Act (APA). 

For context, the Securities Exchange Act defines a “dealer” as any person engaged in the regular business of buying or selling securities for that person’s own account through a broker or otherwise. The Exchange Act also creates a clear distinction that dealers are those persons that in this activity as a part of their regular business are “dealers”; this provision is commonly referred to as the “trader exception,” meaning persons engaging in trades but not as a primary business.  

The SEC’s proposed definition of “dealer” shifts the test from looking at regular business to one that hinges on whether participating in trades has the effect of providing liquidity to other market participants. The new rule comes with two tests to determine if someone is a dealer: whether a participant regularly expresses trading interest at or near the best available prices for a security on both sides of the market, or whether a participant earns revenue mainly from capturing the spread on securities prices or incentives offered by trading venues for providing liquidity.  

The motion by CFAT and BA argues that this new rule violates the statutory authority given to the SEC by the Exchange Act because the statute does not permit the SEC to redefine an already established term. Furthermore, it argues that the proposed definition of “dealer” would eliminate the distinction between “dealers” and “traders,” which is tantamount to re-writing the Exchange Act — a power that the SEC does not hold.

The motion also asserts that various APA rules were violated, namely that the SEC did not engage in reasonable decision making and economic analysis, provide adequate notice, and explain their rationale behind their decisions. 

What does it mean?

For starters, a motion for summary judgment is a request for the court to decide the case without going to full trial. This motion is typically filed when the facts of the case are believed to be settled and the case can therefore be decided. In this case, CFAT and BA are arguing that the facts are clear and undisputed regarding how the SEC’s proposed definition of “dealer” violates the statutory limits and procedural requirements set by Congress, and these violations are sufficient to render the proposed rule illegal without the need for further trial.

As we argued in our comment letter to the SEC back in 2022, the proposed definition for “dealer” exceeds the statutory authority granted by the Exchange Act. Furthermore, the lack of clarity and precision in the new definition will lead to legal uncertainty and arbitrary enforcement. We appreciate the efforts of CFAT and BA to strike down this overreaching and impractical rulemaking.

SEC Approves Spot Ether ETPs

What happened?

Thursday afternoon, the SEC approved 19b-4 applications for spot Ether ETPs from BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy and Franklin Templeton. The SEC will still have to approve the S-1 filings from the issuers before trading can begin. This process could take a few more weeks. The SEC has recently started engaging with the ether ETP issuers over the S-1 forms. 

What does it mean?

The approval process of the spot Ether ETPs is a clear indication that the SEC does not consider ether a security. Given that SEC Chair Gary Gensler has suggested in the past that proof-of-stake tokens could be securities, the SEC’s clear stance that ETH is not security sets an important precedent about the SEC’s jurisdiction over proof-of-stake tokens and the DeFi space at large, which could otherwise pose significant risks to the entire DeFi ecosystem.

The sudden radical reversal of actions from the part of the SEC after the resolution to repeal SAB 121 passed House and Senate with strong bipartisan support and the fact that Trump started to accept crypto for his election campaign and vowed to build a ‘crypto army’ suggest that political factors may play a crucial role in crypto policy during this election year.


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