The Securities and Exchange Commission warned Uniswap on Wednesday that it intends to bring an enforcement action against the company, which is the leading platform for DeFi—a segment of the crypto market where traders rely on computer protocols that act as automated market makers for exchanging various tokens.
The warning came in the form of a so-called Wells Notice, which the SEC sends to a company prior to launching a formal lawsuit and which provides it a final opportunity to rebut any allegations. In this case, that process is likely to prove little more than a formality as the agency has reportedly been investigating Uniswap for some time, and is in the midst of a sweeping crackdown on the crypto industry.
When reached for comment, an agency spokesperson said: “The SEC does not comment on the existence or nonexistence of a possible investigation.”
Fortune has yet to learn the specific nature of the SEC’s allegations against Uniswap Labs—the company that built the protocol of the same name but does not control it. But based on the agency’s recent lawsuits against high-profile crypto firms like Coinbase, the agency is likely to claim the firm illegally offered unregistered securities to the public or that it failed to register as a broker or an exchange.
The impending Uniswap lawsuit comes at a time when the crypto industry has loudly complained the SEC has been operating in bad faith when it comes to the sector, pursuing enforcement actions despite clear rules while failing to account for crypto’s distinct blockchain-based technology. SEC Chairman Gary Gensler has shot back that existing securities laws are clear, and that the crypto sector has sought special treatment while failing to comply—a position echoed by the White House and, especially, by Gensler’s powerful ally, Sen. Elizabeth Warren (D-Mass.).
The conflict between the SEC and the crypto industry has already led to a number of high-profile lawsuits, mostly notably involving Coinbase and Ripple, that turn on the SEC’s jurisdiction over digital assets and on how a 1946 Supreme Court test that defines securities should apply to crypto.
Those lawsuits, which are ongoing, have produced mixed results that have allowed both sides to claim the upper hand, though the most recent ruling suggest the legal momentum lies with the SEC. The outcome of the Uniswap case, however, is especially unpredictable given the unique nature of DeFi technology and a notable legal victory for the company last year in a class-action suit.
The stakes of any lawsuit between the SEC and Uniswap Labs will be high given that DeFi, once a tiny niche of the crypto market, has grown rapidly. Uniswap recently announced that the protocol has facilitated over $2 trillion in transactions, and there is growing interest from mainstream finance about the potential of the underlying technology.
DeFi platforms as self-driving cars
Unliked conventional brokerages or crypto exchanges, DeFi platforms don’t have a central authority that serves as a counterparty for trades, or that sits between buyers and sellers. Instead, they rely on automated protocols overseen purely by code that set rules for trading, collateral requirements, and so on.
In the case of Uniswap Labs, founder Hayden Adams wrote the original underlying code that powers the protocol, and the company provides an interface for users to trade certain crypto tokens. But the protocol itself is open-source and used by many other projects in the DeFi world.
This distinction was critical in resolving a class-action suit filed against Uniswap Labs last year that claimed the company was responsible for traders who had been scammed. In that case, the plaintiffs argued that Adams had built the equivalent of a dangerous self-driving car that was running amok.
Uniswap Labs took up the self-driving car metaphor as well, but argued that the technology it had built was neutral—and that whether individuals used it for bad or for good was beyond its control. In a sophisticated ruling that described the nuances of DeFi in detail, a federal judge sided cleanly with Uniswap Labs, handling the DeFi sector a major victory.
More recently, in a ruling last month in the SEC’s lawsuit against Coinbase, the judge refused to throw out claims the company was offering illegal securities—but did rule that Coinbase’s decentralized wallet offering could not be considered a broker for purposes of the SEC’s authority. This finding is likely to boost Uniswap Labs’s case in any lawsuit with the SEC, though it does not account for the company’s interface over which the company has control and that has, in the past, highlighted tokens the SEC later deemed to be securities.
People close to Uniswap Labs told Fortune the company is prepared to offer a “worthy fight” in court, and claimed the company’s legitimacy is reflected in the fact it has chosen to operate in broad daylight in New York City rather than offshore.