• The SEC’s enforcement actions this year have increasingly focused on Ethereum and players working in decentralized finance.
• Uniswap Labs detailed to the SEC in a document filed Tuesday all the reasons why the agency should not take legal action against them.
• This comes weeks after the agency issued Uniswap a Wells Notice, warning the company that it had identified potential violations of U.S. securities law.

For years, the Securities and Exchange Commission has been cracking down on the crypto industry as a whole, but in recent months, the agency appears to have set its sights on ethereum, especially. Some of the biggest names in decentralized finance are now fighting back.

In a Filing of 40 pages Tuesday, Uniswap Labs – which is building decentralized financial infrastructure, including a popular DeFi crypto exchange that allows users to hold their own coins – has detailed to the SEC all the reasons why the agency should not take legal action against them . This comes weeks after the commission issued Uniswap a Wells Notice, warning the company that it had identified potential violations of U.S. securities law.

“The entire SEC This case is based on the false assumption that all tokens are securities. Tokens are really just a simple file format of value,” said Marvin Ammori, Chief Legal Officer at Uniswap.

“The SEC basically needs to unilaterally change the definitions of exchange, brokerage and investment contracts in order to try to understand what we’re doing,” Ammori said.

A Wells Notice is typically one of the last steps before the SEC formally issues charges. It generally sets out the framework for regulatory argument and provides potential defendants with the opportunity to rebut the SEC’s assertions.

So far this year, the federal regulator has sent notices to Wells, filed lawsuits or reached settlements with a host of crypto companies, and the SEC’s legal challenges are increasingly focused on Ethereum and players working in decentralized finance, including ShapeShift, TradeStation, Uniswap and Consensys. This also comes from the fact that the agency is would have investigating the Ethereum Foundation.

CNBC contacted the SEC about the recent batch of Wells notices sent to crypto companies, and an agency spokesperson declined to comment.

In April, Consensys attempted to preempt the SEC’s action by filing its own lawsuit, alleging overreach by the regulator. The 10-year-old crypto company said its lawsuit followed three subpoenas issued last year, as well as a Wells notice from the SEC claiming the company was violating federal securities laws .

“This action speaks to the near certainty that we believe the SEC is trying to slow down or kill Ethereum, decentralization, disintermediation and disintermediation technology in the United States, and would probably not stop there with its long arm” , said Ethereum. veteran Joseph Lubin, who went from co-founder of blockchain to launching and running Consensys.

“This could prompt other nation states to take similarly draconian measures,” Lubin continued.

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The recent flurry of actions targeting big names working in the Ethereum ecosystem comes ahead of a long-awaited decision on whether the regulator will approve or deny applications to launch ether spot exchange-traded funds.

To date, the agency’s position on the classification of ether as a commodity or security remains unclear.

“We think the big banks like the way things are organized. We think certain factions of the U.S. government like the way they operate,” Lubin said. “Without explicitly stating its intentions, without public debate, and without clear regulations, the SEC appears to have decided to reclassify ether as a security without being able to say that is what it is doing.”

The industry argues that if ether – the native token of the Ethereum blockchain – were classified as a security, it could call 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.

“If the SEC, in fact, takes the position that Ethereum is a security, almost everyone in that business who uses or provides services from the Ethereum blockchain will be on notice that they may need to be registered,” a said. said digital assets attorney Christopher Gerold, who previously served as head of the New Jersey Bureau of Securities.

“The protections that they thought they had before won’t be there anymore, and we’re going to see a change in the industry,” Gerold continued.

The head of litigation and investigations at Consensys told CNBC the company was alarmed that the SEC was targeting developers.

“They asked for a list of the names of all the Consensys developers who contributed to the coding of the merger,” Laura Brookover said.

The so-called merger was a years-old system-wide upgrade to the Ethereum blockchain that entered into force in September 2022 and changed the way transactions are verified. The proof-of-stake model, which replaced the proof-of-work model, requires network volunteers to stake their ether tokens, or “stake” them, in order to secure the network.

Brookover says the agency explicitly asked for the identity of Consensys software developers’ public and private code repositories.

“These are very strange requests from a financial regulator,” Brookover continued. “I can speak to this because I was in the CFTC enforcement division and was investigating cases myself.”

Several coders and industry executives told CNBC it’s possible the SEC will take more interest in Ethereum because the regulator believes its native token will function more as a security after the merger.

Brookover told CNBC that the Consensys suit asks the court to declare both that ether is not a security and that the SEC does not have jurisdiction to investigate Ethereum. Ultimately, the regulator will have to respond to Consensys’ complaint in a court filing.

“They’re going to have a hard time not saying in their response whether they think Ethereum is a security or not,” Gerold said, adding that he suspected the agency would take the position that it is a security. ‘safety because of the evidence. change in participation that came into effect two years ago.

One thing the SEC has been clear about is its classification of bitcoin as a commodity. With the ether, the narrative changed.

In 2018, when Bill Hinman was still director of the Securities and Exchange Commission’s division of corporate finance, he told CNBC that “when we look at bitcoin or if we look at ether and the highly decentralized nature of the networks , we don’t do it. I don’t see a third-party sponsor where applying the disclosure regime would make complete sense. »

“So we’re comfortable… viewing these as items that don’t need to be regulated as securities,” Hinman continued.

In April 2023, when Rep. Patrick McHenry, R-N.C., asked SEC Chairman Gary Gensler whether ether was a commodity or a security, Gensler hesitated.

Gensler has, in several interviews, repeatedly stated that he believes much of the industry already falls under his jurisdiction and that his lawsuits only bring the industry into compliance. Crypto companies say recent legal battles have failed to provide the regulatory clarity the industry has sought for years.

With advice from Uniswap Wells, for example, a company source told CNBC that dealing with the SEC was like “talking to a wall.”

During the two years before the Wells notice, Uniswap described prolonged interactions with the agency as an opaque process that involved responding to multiple requests, including testifying and sending multiple documents to the agency, without obtaining much feedback on the regulator’s concerns about potential wrongdoing. This source also told CNBC that they had not heard from the regulator in 2024 until the agency told them in a half-hour phone call that it would receive a formal notice .

Consensys and Uniswap suggest that the SEC’s overall approach to securities classification may be outdated.

“The SEC argues that the Uniswap protocol is an unregistered securities exchange and that the Uniswap interface and wallet are both unregistered broker-dealers,” Ammori said.

But Uniswap claims that the protocol itself is a general-purpose computer program that anyone can use and integrate with.

“So the protocol is also not an exchange, because under the law it should be specifically designed for securities trading, and that is not the case,” Ammori continued.

Uniswap argues in its response to the SEC that the majority of its trading volume is obviously non-securities, like ether, bitcoin and stablecoins.

“It is not managed by a group, as the definition requires, but as standalone software, no one person or group is in control,” Ammori added.

“The SEC knows that the current definition of exchange doesn’t cover the protocol, or anything that we do. That’s why, as we speak, regulation is in the works, because the SEC is trying to redefine about a half a dozen words in its own regulations to try to capture us,” continued Uniswap’s legal director.

Alma Angotti, partner and global head of legislative and regulatory risk at consultancy Guidehouse, cautions that it is less clear whether decentralized exchanges operate as an alternative trading system or a market maker – or whether they really are just that. ‘a technology that doesn’t work. as a broker-dealer.

Meanwhile, while the SEC focuses more on decentralized players in the crypto ecosystem, centralized players also remain under the regulator’s watch.

In May, investment platform Robin Hood announced that it had received a Wells notice for the company’s crypto operations. The SEC also sued Coinbase and Binance. With multiple ongoing legal challenges from the regulator and continued uncertainty over the future of crypto regulation in the United States, several crypto companies have said they are considering leaving the country entirely.

“We have companies wasting resources trying to figure out, ‘Am I a broker? Are these assets securities?'” said Christina Rea, former Binance compliance manager.

“We have a hard enough time getting them to comply with other important laws: anti-money laundering laws, anti-corruption laws and anti-bribery laws.”

On Thursday, the commission will make a decision on whether to approve one of the spot ether ETF applications after a months-long delay. Many are waiting to see if the regulator will clarify its position on ether.

—Jordan Smith of CNBC contributed to this report.

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