The Securities and Exchange Commission (SEC) of the United States is going against its own previous guidelines in its recent action against decentralized crypto exchange Uniswap, according to Adam Cochran, a venture capitalist at Cinneamhain Ventures. Cochran analyzed the SEC’s past decisions on the definition of an exchange and how they apply to Uniswap’s potential legal battle. Cochran points out that the SEC has issued No-Action Letters in the past to entities seeking guidance on electronic trades, and these entities were concerned about being classified as an exchange. The SEC concluded that if the execution took place on a separate system from the matching and routing, it did not meet the definition of an exchange.
Another contradiction mentioned by Cochran relates to the classification of front-ends as exchanges. The SEC’s guidance in the past stated that an interface that communicates with an exchange is not an exchange itself. Cochran explains that the SEC found these interfaces were not exchanges because the settlement and payment happened elsewhere, even though they brought buyers and sellers together.
Cochran also mentions that in 1998, the SEC declared that it would no longer respond to No-Action Letter requests. The act of connecting buyers and sellers does not constitute an exchange, according to past guidance provided by the SEC.
Cochran’s analysis also addresses the issue of asset listing. In 1998, the SEC found that having an electronic system for common stocks not listed on an existing exchange does not constitute an exchange, even if fees are charged. The primary listing location of an asset does not make it more of an exchange if there is no clearing and settling of transactions, according to the SEC’s findings.
Uniswap, a decentralized exchange on the Ethereum blockchain, has been facing regulatory scrutiny since 2021. Recently, the platform received a Wells notice from the SEC, indicating that the regulator’s staff intends to recommend enforcement action. Uniswap Labs, the main developer of Uniswap, has argued that only the software developer is responsible for the frontend portal of the app. Uniswap claims that the frontend is separate from the protocol itself, which is autonomous code available for public use. Cochran’s analysis supports this argument, stating that the frontend and the smart contract are distinct elements in a crypto trade, as trades can be executed through other interfaces or even directly through a node.
This is a clear case of regulatory overreach. The SEC is overstepping its boundaries and causing unnecessary harm to Uniswap.
I didn’t realize that the SEC stopped responding to No-Action Letter requests in 1998. Good to know!
It’s fascinating how the SEC’s findings on asset listing in 1998 can be applied to Uniswap’s situation today.
So now the SEC is targeting the software developer for the frontend portal? That’s just shifting blame and punishing the wrong party!