#291—The SEC goes after DeFi
Also, the SEC’s “gross abuse of power”
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This week
The SEC goes after DeFi
Speaking of Ripple and Coinbase…
The SEC’s “gross abuse of power”
Stuff happens
1. The SEC goes after DeFi
The future of crypto regulations will continue to be decided by the courts.
When you’ve got a hammer, everything looks like a nail. And what appears to be the case for Gary Gensler’s SEC is that everything looks like a security.
Last week, popular DeFi exchange Uniswap revealed that they had been served a Wells notice, according to Coindesk, indicating a possible impending enforcement action.
Given Gensler’s track record, the contents of that Wells notice is hardly surprising.
Here’s Coindesk:
In a press conference on Wednesday afternoon, Uniswap’s COO Mary-Catherine Lader and Chief Legal Officer Marvin Ammori told reporters that the content of the Wells notice was focused on Uniswap acting as an unregistered securities broker and unregistered securities exchange. It remains unclear whether Uniswap’s native token, UNI, was implicated as a potential security in the SEC’s notice.
Uniswap CEO Hayden Adams isn’t surprised either. Instead, he’s “Just annoyed, disappointed, and ready to fight.”
Uniswap, for their part, published a defense on their blog (via Greg Kidd) and referenced both the ongoing Ripple and Coinbase cases as part of its legal arguments:
Taking into account the SEC's ongoing lawsuits against Coinbase and others as well as their complete unwillingness to provide clarity or a path to registration to those operating lawfully within the U.S., we can only conclude that this is the latest political effort to target even the best actors building technology on blockchains.
Despite SEC rhetoric that "most" tokens are securities, the reality is that tokens are a digital file format, like a pdf or spreadsheet, and can store many kinds of value. They are not intrinsically securities, just as every sheet of paper is not a stock certificate. The overwhelming volume of traded tokens are definitively not securities – they are stablecoins, community and utility tokens, and commodities like Ethereum and Bitcoin. And tokens traded on secondary markets like Uniswap are not investment contracts. In the circumstance where a token may represent a security, the SEC has refused to create a path for businesses to register.
…
No authority from Congress: The Securities and Exchange Commission only has jurisdiction over securities, such as assets legally classified as "investment contracts." The court decision in SEC v. Ripple makes clear that secondary market transactions in digital assets generally do not constitute investment contracts. These are exactly the assets overwhelmingly traded on the Uniswap Protocol. The SEC Chair even acknowledged in Congressional testimony that new regulation of tokens would require Congress to pass a new law – that the SEC lacked the authority. Our own decisive legal victory in Risley v. Uniswap Labs, underscored the need for Congress, not the SEC, to set crypto regulation – finding that the private plaintiffs' securities law "concerns are better addressed to Congress." And, the SEC's recent decision to settle with Shapeshift only on their dealer issue – while fully ignoring the fact that they are also a DEX – clearly shows a pattern of arbitrary enforcement that is only possible when an agency's actions are untethered from the bounds of specific laws.
No securities exchange or broker claim: Even if the Ripple decision and the Supreme Court’s Howey test did not foreclose the SEC’s arguments, the Uniswap Protocol, web app, and wallet would still not meet the legal definitions of securities exchange or broker. This was made obvious in the recent SEC vs Coinbase, Inc. ruling, where the court, at the earliest stage of the case, already threw out the SEC’s claim that crypto wallets were brokers, even if they take fees. Even the SEC seems to know their existing legal definitions do not capture self-custodial on-chain decisions, which is why the agency proposed new exchange rules last year to try to capture this activity. Those rules are not yet in place, and we have explained why those rules would be struck down even if adopted.
2. Speaking of Ripple and Coinbase…
3. The SEC’s “gross abuse of power”
It hasn’t been smooth sailing recently for the SEC. In his ruling last month over the SEC case v. DEBT Box, Chief Judge Robert Shelby pulled no punches.
Here’s Coindesk (via Jun Hiraga):
In an order Monday, Chief Judge Robert Shelby, from the District of Utah, wrote that the SEC's attorneys misled the court both in applying for a temporary restraining order as well as afterward, when DEBT Box filed to dissolve the order, noting at the end that the order is focused on the TRO question, and not the underlying case.
The SEC will be required to pay defendants' and receivers' fees as part of the court's sanctions, the judge wrote.
"Each piece of support the Commission offered in seeking the TRO – and then later reiterated in defending the TRO – proved to be some combination of false, mischaracterized, and misleading," the order said. "Further, the Commission not only repeated and affirmed its misrepresentations in the face of contrary evidence, it presented new falsehoods to the court in an effort to subtly shift from its previous misrepresentations without acknowledging its previous errors."
An SEC spokesperson said the agency was "reviewing the decision."
4. Stuff happens
UK Regulators Publish Draft Guidance on Digital Securities Sandbox Open to DLT
Detained Binance Exec Pleads Not Guilty to Money Laundering Charges in Nigeria: Reports
Argentine government passes registration requirements for crypto firms
'What Are We Waiting for'? SEC Commissioner Hester Peirce Discusses Moving Crypto Regulation Forward
Republican Sen. Tillis Calls for ‘Light’ Crypto Regulatory Framework Ahead of Presidential Election