The US Securities and Exchange Commission (SEC) put Uniswap Labs on notice of a potential enforcement action.
The creator of Uniswap, the popular Ethereum decentralized exchange, has now filed a response to the Wells notice.
The response
In a blog post, the company stated that the legal arguments put forward by the regulator were weak. It added that the courts have already refuted the said arguments.
According to the company, the aggressive theories of the SEC are aimed at expanding its jurisdictions to communication technology.
It said that the regulator wants to go beyond exchanges and securities and expand to all markets. Uniswap Labs also urged the SEC to not take enforcement action against the company.
It said that the Commission would end up undermining the innovation potential of DeFi (decentralized finance) and would push American companies offshore.
The company said that consumers who use the protocol would end up the ones suffering. Last month, the SEC had sent a Wells notice to Uniswap Labs.
The regulatory body has taken issue with the UNI token of the company, based on Ethereum. The agency regards the token as a security.
The governance token of the exchange allows holders to play a key role in determining the direction of the protocol.
The issues
Other accusations against Uniswap Labs include its operations of being an unregistered broker. The SEC had made the same accusations against centralized exchanges like Binance and Coinbase last year.
Uniswap denied the allegation and said that it did not stand up to scrutiny. The company referred to a decision taken in March by US District Judge Kathleen Failla.
While she allowed the agency’s lawsuit against Coinbase to proceed, she did toss out one claim. The SEC had argued that the exchange’s Wallet product had acted as a broker.
But, the Judge said that the agency’s argument was ‘insufficient’. According to Uniswap, it offers distinct services as compared to centralized exchanges.
The distinction
When users connect to the DeFi protocol, they still maintain custody of their funds. They use automated smart contracts instead.
Therefore, Uniswap does not play a role when it comes to settling transactions or working as an intermediary.
It said that the exchange does not hold funds on behalf of its users, receive, or store their orders. All key aspects of the transactions are in the control of the user at all times.
Plus, their crypto assets also remain in their own custody until they decide to conduct a transaction. Uniswap has also taken issue with the SEC calling liquidity pool (LP) tokens as securities.
These tokens are used for tracking assets that users provide to smart contracts on the exchange. This makes it possible to trade via liquidity pools.
Uniswap claims that these tokens are not meant to be used for investment purposes but as accounting tools. Therefore, they are not categorized as securities.
This is not the first time that Uniswap has had to face legal issues due to the permission-less nature of decentralized exchanges.
Last year, Judge Failla tossed out a class action lawsuit with allegations of securities law violations.