The SEC's recent Wells notice to Uniswap Labs marks a significant shift from previous regulatory practices, challenging established guidelines and sparking debate over policy consistency.

SEC's Enforcement on Uniswap Challenges Historical Definitions and Precedents in Exchange Regulation

According to Adam Cochran of Cinneamhain Ventures (via Cointelegraph), the latest action by the United States Securities and Exchange Commission (SEC) against decentralized cryptocurrency exchange Uniswap contradicts years of its policy guidelines.

In a legal analysis of X (formerly Twitter), Cochran cited several previous decisions by the US regulator regarding the definition of an exchange and what they mean for Uniswap's potential legal battle.

The SEC issued No-Action Letters in 1986, 1991, and 1997 to entities seeking guidance on electronic trade routing and matching. According to Cochran, the entities "wanted to establish their first system for routing and matching trades electronically." They were concerned that would result in an "exchange."

“But the SEC concluded that because the execution was on a separate system, matching, routing, communicating, and ordering as a “computer service system” did not meet the holistic definition of “an exchange.”

Another precedent that contradicts the SEC concerns the classification of front-ends as exchanges. In letters dated 1989 and 1990, the regulator stated that an interface that displays and communicates with an exchange is not an exchange.

“The SEC guidance found that because these interfaces, even though they profited from bringing together buyers and sellers to exchange explicit securities the fact that the settlement and payment happened elsewhere meant these interfaces were not exchanges,” explained the venture capitalist.

SEC Historical Guidance Distinguishes Between Exchange Functions and Connectivity, Impacting Uniswap's Status

Cochran also mentioned it in 1998 in the SEC No-Act. LEXIS 18, the Commission declared the case resolved and would no longer respond to No-Action Letter requests.

In addition, connecting buyers and sellers does not constitute an exchange. According to Cochran's analysis, the SEC provided companies with this guidance in 1979, 1996, and 1999.

“The exchange needed to involve the legal transfer of the assets and/or finances. So even though a buyer on Uniswap may commit to a purchase, by signing a transaction with their private key the Uniswap Labs frontend, isn’t what’s settling it.”

Another relevant point in the analysis is asset listing. In 1998, the Commission determined that having an electronic system for common stocks not listed on a current exchange does not constitute an exchange, regardless of whether fees are charged.

“In this case, the commission found that once again, so long as their informational interface was no clearing and settling these transactions, then just because it was the primary listing location of an asset, it was not somehow more of an exchange.”

Uniswap Faces SEC Scrutiny Over Its Decentralized Trading Model, Despite Clear Distinctions in Technology

Uniswap enables automated token exchanges on the Ethereum blockchain, allowing users to swap multiple crypto tokens without using traditional intermediaries.

Uniswap Labs, Uniswap's main developer, has been subject to regulatory scrutiny since 2021. On April 10, the platform received a Wells notice, a formal notification that the regulator's staff intends to recommend enforcement action.

Uniswap Labs previously stated that it was solely responsible for developing the app's front-end portal. According to the Labs' team, the front end is separate from the Uniswap protocol, which is autonomous code released for public use.

Cochran's analysis supports these claims. He believes that the front-end and smart contract are two distinct components of a cryptocurrency trade.

“In fact, we know these elements are distinct, because you can execute trades on the smart contract through other interfaces (like Etherscan or swap aggregators), or even directly through a node.”