The SEC has reportedly opened an investigation into Uniswap Labs, pioneer of DeFi technology, and creator of one of the largest DEXs in the landscape. This comes after SEC Chair Gary Gensler’s remarks about regulating the DeFi space.
Putting Uniswap Under the Microscope
The SEC’s investigation is supposedly beginning as more of a fact-finding mission, with staff studying how exactly people use the Uniswap platform, how they profit from it, and how the project is marketed by its developers. A team member from the exchange commented, saying they are:
“committed to complying with the laws and regulations governing our industry and to providing information to regulators that will assist them with any inquiry”.
Details are sparse at the moment. So far all we know about the investigation is the SEC is scrutinizing how the project’s automated market maker works, and examining areas of Uniswap that may have been overlooked.
This marks a historic moment in the crypto industry, as this is the first time a DeFi project has been investigated by the SEC. Hybrid DeFi projects, such as BlockFi, have been investigated by regulators before, but this is the first time a fully decentralized platform has been scrutinized. In the case of BlockFi, it was actually individual state regulators that launched their inquiries, rather than the SEC.
At the time of BlockFi’s troubles, crypto enthusiasts worried this would set a dangerous precedent for how DeFi is viewed from a legal perspective. With this news, it appears those fears were founded.
With that being said, BlockFi has currently managed to evade any wrongdoing, as the New Jersey Bureau of Securities has extended its deadline. This gives hope to users as it could mean it eventually gets dropped before entering further proceedings.
It is unclear why exactly this extension was requested, but if it has anything to do with the fact BlockFi has many decentralized elements meaning it operates outside the jurisdiction of the state, then it is possible something similar could happen with Uniswap. With so little information about Uniswap’s investigation, it is hard to make any comparisons, but it is fair to say if this goes further, then it will be the SEC’s first thorough examination into how DeFi operates.
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Is the SEC Looking for Markers of Centralization?
This could form a landmark case against Uniswap, and by extension, all of DeFi. To understand why, we need to look into how decentralization works in a legal setting. Platforms like Uniswap are distributed worldwide, running on blockchains that have no centralized hub or true headquarters.
The Uniswap Labs lead developer and CEO, Hayden Adams, may live and work in the US, but that does not mean Uniswap itself resides there. DeFi protocols do not truly reside anywhere– they are spread across the globe, running autonomously.
This is what makes the investigation so unusual. The US Securities and Exchange Commission is, as its name suggests, a US authority, not a global authority. Yet, even if one Uniswap investor—or user—is a legal US person, then the US SEC likely as governing authority.
Gary Gensler has recently described what he may be looking for here. In a recent interview with the Financial Times, he made a distressing claim that DeFi contains “a fair amount of centralisation”. He further asserted that:
“It’s a misnomer to say they are just software they put out in the web… But they are not as centralised as the New York Stock Exchange. It’s sort of an interesting thing that is in between.”
This dialogue could be the crux of the SEC’s actions against Uniswap Labs. Perhaps Gensler is searching for signs of centralized activity. This could mean if they do not find any, then the investigation will be dropped.
The idea of DeFi regulation taking this form was briefly discussed in the Senate a month ago. At that time guest speaker, Angela Walch, Professor at St. Mary’s University School of Law, urged the government to “look for where power exists… and think about how to address it”. Gensler could be attempting to do this by looking at the behavior of developers.
Will DeFi Leave the US?
The US is a hub for DeFi technology. The lead dev team at Uniswap is in New York, and the team for MakerDAO is located in San Francisco. These are two of the biggest and most well-known DeFi projects in the industry, but with news of the SEC’s involvement, it could easily drive them away.
If crypto developers fear the SEC is stunting innovation, experimentation, and growth, they will be discouraged from building projects. It is not so much that developers are worried about investigations, but more so they could become distrusting of Gensler’s beliefs.
For instance, in the Financial Times interview, he stated DeFi is “not really a new concept”, and is essentially no different from peer-to-peer lending, which was something that gained notoriety early in the century. However, this is not exactly true.
Matt Corva, General Counsel for ConsenSys, and Doctor of Jurisprudence from Washington and Lee University of Law, questioned this statement and laid out a handful of differences. In particular, he highlighted DeFi’s transparent code and transactions, generalized pools, as well as its real-time activity and its fractional fees.
These may sound like small distinctions, but this type of online activity was impossible before blockchain technology. The fact Gensler equates archaic peer-to-peer lending with DeFi is a worrying sign for the future, and is surely enough to scare some developers from innovating.
It will be fascinating to see how Uniswap’s investigation unfolds, as this could have astronomical implications for the future of DeFi. It would appear Gensler is leaning towards a harder approach to regulations, rather than the “light touch” style seen when regulating the internet. The nature of the scenario is sure to get clearer as time goes on.
Do you think the SEC is right to investigate DeFi projects? Let us know in the comments below.
About the author
Kai Morris is a crypto and DeFi specialist and researcher. He has a B.A Hons in Law and Philosophy at the University of Essex, where he studied complex economic, legal, and ethical theory relevant to the FinTech landscape. Kai has a particular interest in decentralization and privacy blockchains, as they directly relate to our human rights and flourishing. He cares about blockchain, DAG, and DeFi as a means of positively changing our lived experiences. Kai is an investor in Ethereum and Monero.