SEC Contradicts Own Policies in Uniswap Case, Says Adam Cochran of Cinneamhain Ventures
Summary:
Adam Cochran of Cinneamhain Ventures argues that the U.S. Securities and Exchange Commission (SEC) is contradicting its own policies in its action against decentralized crypto exchange Uniswap. Cochran referenced past actions by the SEC that differentiated between platforms and exchanges. He highlighted that performing operations like order routing and matching or connecting buyers and sellers does not equate to running an exchange, under certain conditions. Uniswap, which facilitates automated token exchanges on the Ethereum blockchain, has been under regulatory scrutiny since 2021.
In the most recent action against decentralized crypto exchange Uniswap, the United States Securities and Exchange Commission (SEC) is seemingly going against the grain of its own longstanding policy advice, argues Adam Cochran of Cinneamhain Ventures. Cochran used X (formerly Twitter) to dissect several earlier assertions by the U.S. watchdog concerning the characterization of an exchange, and what the implications could be for Uniswap's impending legal fight.
Cochran drew attention to a variety of No-Action Letters issued by the SEC in 1986, 1991, and 1997 to organizations needing guidance on implementing electronic trade matching and routing systems. These organizations were worried that implementing such a system would categorize them as an “exchange.”
However, the SEC stated that the individual elements of matching, routing, communicating, and ordering within a “computer service system” did not meet its broader definition of "an exchange," as the actual execution took place on a separate system.
The SEC's interpretation of front-ends as an exchange is another inconsistency. In letters from 1989 and 1990, the regulatory body stated that an interface communicating with and displaying an exchange wasn't an exchange in itself. Cochran explained that, according to SEC guidance, even though these interfaces profited from connecting buyers and sellers to trade explicit securities, the fact that settlement and payment occurred elsewhere meant these interfaces were not considered exchanges.
In 1998, on the SEC No-Act. LEXIS 18, the Commission stated it had resolved the matter and would no longer entertain No-Action Letter requests. Cochran also highlighted that even if a platform links buyers and sellers, it doesn't amount to an exchange. The SEC gave this guidance to firms in 1979, 1996, and 1999. For an operation to be recognized as an exchange, there had to be a legal transfer of the assets and/or finances.
Also, in relation to asset listing, the SEC ruled in 1998 that having an electronic system for unlisted common stocks did not form an exchange, even if fees were levied. Consequently, even if a platform is the prime listing location of an asset, it's not necessarily an exchange if its informational interface isn't involved in clearing and settling transactions.
Automated token exchanges on the Ethereum blockchain are facilitated by Uniswap, which lets users swap a variety of crypto tokens without the need for conventional middlemen. Uniswap Labs, the main developer of Uniswap, has faced regulatory examination since 2021. On the 10th of April, the platform received a Wells notice—a formal communication that the regulator’s staff is considering recommending an enforcement action. Uniswap Labs previously stated that only the software developer is liable for devising the app’s front-end portal.
Cochran's critique supported these statements. He suggested that a crypto trade consists of separate elements, the front-end and the smart contract.
He stated that it is evident that these elements are distinct due to the fact that you are able to perform trades on the smart contract through alternative interfaces or even directly via a node.
Published At
4/13/2024 8:34:03 PM
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