UNI Takes an SEC Hit

SEC Shakedown. The UNI token erased nearly $2B in market capitalization and is down more than 20% off this week’s announcement that the Securities and Exchange Commission (SEC) had sent the Protocol’s developer a Wells Notice. How will impending legal action impact the token going forward?

The specific contents of the Wells Notice were not disclosed, but it most likely informs Uniswap Labs that the SEC is considering filing a formal enforcement action due to potential securities violations involving Uniswap's smart contracts and the UNI token.

This is not the first time that the SEC has targeted a crypto corporation, but the investigation into Uniswap – a decentralized swapping protocol – marks a significant departure from the agency’s past enforcement actions, which have primarily targeted centralized entities and scammers.

While the SEC appears to be adamant in bringing charges in this case, the agency has suffered a series of recent crypto-related defeats in court, the precedent of which could make it difficult to secure a favorable verdict against Uniswap.

As indicated by its name, the SEC only has the ability to regulate securities.

Precedent set in the Ripple case suggests that secondary market transactions likely fall outside of its jurisdiction, and the dismissal of the SEC’s attempts to label Coinbase wallet as an unregistered broker shows that software used for predominantly legal purposes, such as the Uniswap Protocol, may not meet the legal definition of a securities exchange or broker.

Uniswap Labs founder Hayden Adams expressed that his firm is prepared to duke it out with the SEC in court to defend their token and project, meaning the eventual decision in this case will hold lasting ramifications for the crypto industry in America.

 Despite the high costs of hiring lawyers to combat the SEC, Uniswap Labs is well-capitalized from previous private market raises and continues to generate income through their frontend fee switch, and should be able to cover these expenditures without needing to sell UNI tokens on the market.

With the market now cognizant that the SEC is likely to bring an enforcement action against Uniswap, it is likely that much of the relative downside for the token has already been priced in.

An eventual favorable resolution in this case for Uniswap would be a boon for the crypto industry, placing decentralized smart contracts outside of the scope of US securities regulation while potentially creating clarity on how a token can become non-security.