The Securities and Exchange Commission has been heavily cracking down on the crypto sector for years, but in recent months the agency appears to have turned its attention to areas such as: Ethereum, especially. Some of the biggest players in decentralized finance are now fighting back.
in Tuesday, 40 page submission Uniswap Labs, which builds decentralized financial infrastructure including a popular DeFi crypto exchange that allows users to store their own coins, has told the SEC all the reasons why the agency should not take legal action against them. Detailed. This comes weeks after the commission issued a Wells notice to Uniswap warning that it had identified potential violations of U.S. securities laws.
“The entire SEC “This lawsuit is based on the false premise that all tokens are securities, when in reality they are simply a file format that represents value,” said Marvin Amori, Uniswap’s chief legal officer. Stated.
“The SEC essentially needs to unilaterally change the definition of exchanges, brokers, and investment contracts in order to capture what we do,” Anmoli said.
Wells notices are typically one of the final steps before the SEC files formal charges. Generally, it provides a framework for regulatory discussion and provides potential accusers with an opportunity to rebut her SEC claims.
So far this year, federal regulators have issued notices to Wells, filed lawsuits, and reached settlements with a number of crypto companies, and the SEC’s legal challenges include Ethereum, ShapeShift, TradeStation, Uniswap, Consensus. Agencies come as well reportedly We are investigating the Ethereum Foundation.
CNBC contacted the SEC about the recent wave of wells notices sent to crypto companies, but a CNBC spokesperson declined to comment.
In April, ConsenSys sought to preempt the SEC’s action with its own lawsuit, alleging regulatory overreach. The 10-year-old cryptocurrency company said it filed the lawsuit after receiving a wells notice from the SEC alleging that the company violated federal securities laws, in addition to three subpoenas issued last year.
“This action is a near certainty that the SEC is attempting to slow down or kill Ethereum, decentralization, disintermediation, and disintermediation technologies in the U.S., and it likely won’t stop there with its long arm. ” said a person involved in running Ethereum for many years. Joseph Rubin is a veteran blockchain co-founder who went on to launch and run ConsenSys.
“It may influence other nation-states to do similar tough things,” Rubin continued.
Security vs. Commodities
The recent wave of actions targeting major companies operating in the Ethereum ecosystem comes ahead of a long-awaited decision on whether regulators will approve or reject an application to launch a spot Ether exchange-traded fund.
To date, the authorities’ position on classifying Ether as a commodity or security remains unclear.
“We think the big banks like the way things are organized, and we think certain factions of the U.S. government like the way it’s operated,” Rubin said. “The SEC appears to have decided to reclassify Ether as a security without a clear statement of intent, without any public debate or clear rulemaking, without even being able to say that that’s what they’re doing.”
The industry argues that if Ether, the native token of the Ethereum blockchain, were classified as a security, it could throw into question the future of the Ethereum network and many adjacent crypto companies. Exchanges, both centralized and decentralized, would be forced to choose between registering with the SEC or delisting Ether altogether.
“In fact, if the SEC takes the position that Ethereum is a security, almost everyone in this industry who uses or provides services on the Ethereum blockchain could potentially be required to register. ”, said Christopher Jerrold, a digital asset lawyer who previously served as New Jersey’s commissioner of securities.
“The protections that we thought existed before no longer exist and we’re going to see changes in the industry,” Gerrold continued.
ConsenSys’ head of litigation and investigations told CNBC that the company is alarmed by the SEC’s targeting of developers.
“They requested a list of names of ConsenSys developers who contributed coding to the integration,” Laura Brookover said.
The so-called merge was a system-wide upgrade to the Ethereum blockchain that took place over many years. Effective September 2022, changes have been made to how transactions are verified. The proof-of-stake model, which has been replaced by the proof-of-work model, requires volunteers on the network to deposit, or “stake,” Ether tokens in order to secure the network. .
Brookover said the agency explicitly requested the identity of public and private ConsenSys software developer code repositories.
“These are very strange requests from a financial regulator,” Brookover continued. “I can speak to that because I used to be in the CFTC’s enforcement division and have investigated cases myself.”
Multiple programmers and industry executives told CNBC that the SEC could take more interest in Ethereum because regulators believe the combined native token will function more like a security. It is said that there is.
Brookover told CNBC that ConsenSys’ lawsuit asks the court to both declare that Ethereum is not a security and that the SEC does not have jurisdiction to investigate it. Ultimately, regulators will need to make legal submissions on ConsenSys’ complaints.
“They would be hard pressed not to say in their answer whether they consider Ethereum to be a security,” Jerrold said, adding that government agencies take the position that it is a security because of evidence. He added that it might be. Stakes changes that went into effect two years ago.
One thing the SEC has clarified is the classification of Bitcoin as a commodity. In Aether, the story changed.
In 2018, when Bill Hinman was still director of the Securities and Exchange Commission’s corporate finance division, he told CNBC: I don’t see any third-party promoters for whom it makes much sense to apply a disclosure regime. ”
“So we feel comfortable regarding these as items that don’t need to be regulated as securities,” Hinman continued.
In April 2023, when Representative Patrick McHenry (R.N.C.) asked SEC Chairman Gary Gensler whether Ether was a commodity or a security, Gensler demurred.
SEC vs. Cryptocurrency
Mr. Gensler has repeatedly said in multiple interviews that he believes much of the industry is already under the company’s jurisdiction and that the company’s lawsuits merely bring the industry into compliance. Cryptocurrency companies argue that recent legal battles have not provided the regulatory clarity the industry has long sought.
Regarding the Uniswap Wells notice, for example, company officials told CNBC that dealing with the SEC was akin to “talking to a wall.”
In the two years preceding the Wells notification, Uniswap had engaged in a lengthy and opaque process with the agency, responding to multiple requests to provide testimony and sending multiple documents to the agency regarding possible wrongdoing. He said it was an opaque process without much feedback on regulators’ concerns. The person told CNBC he never heard from the regulator in 2024 until the agency told him in a 30-minute phone call that he would receive a formal notification.
ConsenSys and Uniswap suggest that the SEC’s broad approach to classifying securities may be outdated.
“The SEC asserts that the Uniswap protocol is an unregistered stock exchange and that the Uniswap interface and wallet are both unregistered brokers,” Anmoli said.
However, Uniswap claims that the protocol itself is a general-purpose computer program that anyone can use and integrate.
“Therefore, this protocol is also not an exchange, because under the law it must be specifically designed for securities trading, but in reality it is not,” Anmoli continued.
Uniswap claims in its response to the SEC that the majority of its trading volume is clearly non-securities such as Ethereum, Bitcoin, and stablecoins.
“It is not run by a group, as per the definition, but as autonomous software it is not controlled by any individual or group,” Anmoli added.
“The SEC recognizes that the current definition of an exchange does not apply to the protocol or our activities. That is why the SEC is now redefining about six words in its own regulations to capture us. That is why the rulemaking is pending,” Uniswap’s chief legal officer continued.
Alma Angotti, partner and global legislative and regulatory risk leader at consulting firm Guidehouse, says it’s not clear whether decentralized exchanges act like alternative trading systems, market makers, or just technology that doesn’t really work. Warning that it’s not clear. As a broker-dealer.
Meanwhile, as the SEC increases its focus on decentralized players in the cryptocurrency ecosystem, centralized players also remain under regulatory scrutiny.
May, Investment Platform robin hood The company said it had received a Wells Notice regarding its cryptocurrency operations. The SEC also sued Coinbase and Binance. With multiple legal challenges pending from regulators and ongoing uncertainty about the future of cryptocurrency regulation in the United States, several crypto companies have said they are considering withdrawing from the country altogether.
“Some companies are wasting resources trying to figure out, ‘Am I a broker-dealer? Are these assets securities?'” said Christina Rea, former chief compliance officer at Binance. .
“We already have enough trouble getting them to comply with other important laws such as anti-money laundering, anti-bribery and anti-corruption laws.”
On Thursday, the committee is expected to make a decision on whether to approve one of the Spot Ether ETF applications after months of delays. Many are waiting to see if regulators will clarify their stance on Ether.
— CNBC’s Jordan Smith contributed to this report.
