Decentralized cryptocurrency exchange Uniswap (UNI) fell 5% today on reports that the U.S. Securities and Exchange Commission (SEC) would investigate Uniswap Labs. According to The Wall Street Journal, which cited sources familiar with the case, SEC lawyers will probe how investors use Uniswap and how it is marketed.
A decentralized exchange (DEX) facilitates trading without the need for third parties — like a broker — in the middle. Uniswap is one of the major DEXs and is unusual in that it is based in the U.S.
DEXs tend to be more anonymous than centralized exchanges like Coinbase and Gemini. These require users to provide personal information to comply with anti-money laundering regulations. In contrast, Uniswap customers only need to connect their wallets to be able to trade.
DEXs also have a wider selection of available coins than centralized exchanges. Uniswap, for example, supports thousands of Ethereum-based ERC-20 tokens.
What does this mean for Uniswap?
It is early days, and an investigation doesn’t necessarily mean the SEC will bring any formal charges. However, given SEC Chair Gary Gensler’s previous comments about the need to clamp down on exchanges selling unregulated securities, this investigation could be just the start.
Gensler, who took up the position of SEC chair in April, spoke substantively about crypto for the first time at the start of August. He told the Aspen Security Forum that it was likely many cryptocurrencies were actually unregistered securities. “I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight,” he said.
Securities have to follow strict rules about how they are traded and how they report information. Most cryptocurrencies, however, are treated as commodities and are not subject to the same level of scrutiny.
Gensler believes the legislative priority should center on crypto trading, lending, and decentralized finance (DeFi) platforms. Ordinary cryptocurrency exchanges are not allowed to trade securities. “Make no mistake,” Gensler said. “To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption.”
The shifting sands of regulation
Discussions continue in Washington about what direction cryptocurrency regulation should take, and how heavy it should be. Authorities are trying to weigh questions of consumer protection against questions of personal freedom. There’s also a concern that overregulation could damage this emerging industry.
In the meantime, Gensler seems to want to use existing rules to crack down on a market that he views as the “Wild West.”
The SEC is in the middle of a protracted legal battle with Ripple (XRP) because it claims Ripple has been operating as an unregistered security. Ripple execs argue that it is a cryptocurrency and that the SEC should have informed them of the issue much earlier.
It’s worth noting that so far, SEC actions haven’t had that much impact on crypto prices. Sure, Ripple is no longer among the top three cryptos by market capitalization. But it continues to rank amongst the top 10, even though it isn’t easy for U.S. traders to buy it.
The worry for Uniswap and other exchanges is that the SEC may try to pursue trading platforms rather than individual cryptocurrencies. And by Gensler’s logic, with thousands of coins on the Uniswap platform, there’s a good chance one of them is a security.
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Emma Newbery owns Ripple.
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