The U.S. Securities and Exchange Commission has been cracking down on the cryptocurrency industry for years, but in the past few months, the agency appears to be turning its sights on Ethereum, especially. Some of the biggest names in decentralized finance are now fighting back.
In a 40-page filing on Tuesday, Uniswap Labs detailed to the SEC all the reasons why the agency should not pursue legal action. A few weeks ago, the commission issued a Wells Notice to Uniswap, warning the company that it had discovered possible violations of U.S. securities laws.
“The SEC’s entire The case is based on the false assumption that all tokens are securities. In fact, a token is just a value file format.
“The SEC must unilaterally change the definitions of exchanges, broker-dealers and investment contracts in order to try to capture what we do,” Amory continued.
A Wells Notice is typically one of the last steps before the SEC formally files charges. It typically lays out the framework for a regulatory argument and provides potential defendants with an opportunity to rebut the SEC’s claims.
So far this year, federal regulators have served Wells with notices, filed lawsuits or settled with a number of cryptocurrency companies, with the agency’s legal challenges increasingly focused on Ethereum and players in the decentralized finance space, including ShapeShift, TradeStation, Uniswap, and Consensus.This is also because the institution is It is said Investigate the Ethereum Foundation.
CNBC reached out to the SEC regarding the recent batch of Wells notices issued to cryptocurrency companies, and a spokesperson for the agency declined to comment.
In April this year, Consensys tried to preempt the SEC’s action through its own lawsuit, accusing the regulator of overstepping its authority. The 10-year-old cryptocurrency company said its lawsuit follows three subpoenas last year and a Wells Notice from the SEC claiming it violated federal securities laws.
Ethereum veteran said: “This action almost certainly reflects our view that the SEC is trying to slow or stifle the development of Ethereum, decentralization, disintermediation and disintermediation technologies in the United States, and is likely to It doesn’t stop there with its long arms.
“This may influence other nation-states to adopt similar draconian measures,” Lubin continued.
safety and merchandise
The recent flurry of actions against major players in the Ethereum ecosystem comes ahead of the regulator’s long-awaited decision on whether the regulator will approve or reject an application to launch an Ethereum spot exchange-traded fund. .
To date, the agency’s stance on classifying ether as a commodity or security remains uncertain.
“We think the big banks like the way things are organized. We think certain factions of the U.S. government like the way they are run,” Lubin said. “Without clear articulation of their intentions, public discussion, and clear rulemaking, the SEC appears to have decided to reclassify ether as a security without being able to show that this is what they are doing.”
The industry believes that if ether, the native token of the Ethereum blockchain, is classified as a security, it could put the future of the Ethereum network and many adjacent crypto companies into doubt. Exchanges, whether centralized or decentralized, will be forced to choose between registering with the SEC or delisting Ethereum entirely.
“If the SEC does take the position that Ethereum is a security, then nearly everyone in the industry who uses or provides services on the Ethereum blockchain will be aware that they may be required to register,” said N.J. Christopher Gerold, digital asset lawyer for the head of the Securities Bureau, said.
“Whatever protections they thought they had before, those are no longer there and we’re going to see a shift in the industry,” Jerrod continued.
The head of litigation and investigations at Consensys told CNBC they are alarmed that the SEC has been targeting developers.
“They asked for a list of names of Consensys developers who contributed any code to the merge,” said Laura Brookover.
The so-called merger is a system-wide upgrade to the Ethereum blockchain that has been underway for several years. Effective September 2022, changes are made to how transactions are verified. The proof-of-stake model replaces the proof-of-work model, requiring volunteers on the network to stake their ether, or “stake” them, in order to secure the network.
Brookover said the agency has explicitly requested the identities of public and private Consensys software developer code repositories.
“These requests from financial regulators are very strange,” Brookover continued. “I can say that because I have worked in the CFTC’s Enforcement Division and have personally investigated cases.”
Multiple programmers and industry executives told CNBC that the SEC may take more interest in Ethereum because the regulator believes that its native token will function more like a security after the merger.
Brookover told CNBC that their lawsuit asks the court to declare that Ethereum is not a security and that the SEC lacks jurisdiction to investigate Ethereum. Ultimately, regulators will have to respond to Consensys’ complaints in legal filings.
“Whether they think Ethereum is a security or not, it’s hard for them not to hold on to their answer,” Jerrod said. He added that he doubted the agency would take the position that Ethereum is a security because there are The evidence shows – shareholding changes that took effect two years ago.
One thing the SEC is clear about is classifying Bitcoin as a commodity. With Ethereum, that changes.
In 2018, when Bill Hinman was still director of the SEC’s Division of Corporate Finance, he told CNBC: “When we look at Bitcoin or Ethereum and the highly decentralized nature of the web, we No’ I don’t see it making sense for third party sponsors to apply a disclosure regime.
“So we feel comfortable … treating these as things that don’t have to be regulated like securities,” Hinman continued.
In April 2023, when Rep. Patrick McHenry (RN.C.) asked SEC Chairman Gary Gensler whether Ethereum was a commodity or a security, Gensler denied it.
SEC and Cryptocurrency
Gensler has said repeatedly in interviews that he believes much of the industry already falls under his jurisdiction and that his lawsuit is simply to get the industry to comply. Cryptocurrency companies argue that the latest legal battles do not provide the regulatory clarity the industry has sought for years.
For example, regarding Uniswap Wells’ notice, a source at the company told CNBC that dealing with the SEC was like “talking to a wall.”
In the two years leading up to Wells’ notice, Uniswap described its protracted interactions with the agency as an opaque process that involved responding to multiple requests, including providing testimony and sending several documents to the agency without getting much information about it. Feedback from regulators regarding concerns about potential misconduct. Sources also told CNBC they heard nothing from the regulator at all in 2024 until the agency told them in a half-hour phone call that they would receive a formal notification.
Both Consensys and Uniswap said the SEC’s broad approach to classifying securities may be outdated.
“SEC believes that the Uniswap protocol is an unregistered stock exchange, and the Uniswap interface and wallet are unregistered brokers,” Ammori said.
But Uniswap believes that the protocol itself is a universal computer program that anyone can use and integrate.
“Therefore, the protocol is also not an exchange because by law it must be designed exclusively for the trading of securities, but it is not,” Amory continued.
Uniswap also argued in its response to the SEC that the majority of its trading volume was clearly non-securities, such as Ethereum, Bitcoin and stablecoins.
“As the definition requires, it is not run by a group, but as autonomous software no one person or group can control it,” Amory added.
“The SEC knows that the current transaction definition does not cover agreements or anything that we do. That’s why as we speak, there is a pending rulemaking as the SEC is trying to include that in its own regulations Redefining about six words to try and capture us,” Uniswap Chief Legal Officer continued.
Alma Angotti, partner and global head of legislative and regulatory risk at advisory firm Guidehouse, warned that it’s unclear whether decentralized exchanges function like alternative trading systems or market makers, or whether they are really just a different kind of exchange. Technology at play as a broker-dealer.
Meanwhile, centralized players also remain under regulatory scrutiny as the U.S. Securities and Exchange Commission intensifies its focus on decentralized players in the crypto ecosystem.
May investment platform Robin Hood Announced receipt of Wells Notice regarding the company’s crypto business. Regulators face several pending legal challenges. Amid lingering uncertainty over the future of cryptocurrency regulation in the United States, several crypto businesses have said they are considering leaving the country entirely.
“Some companies are wasting resources trying to figure out, ‘Am I a broker? Are these assets securities?'” said former Binance chief compliance officer Christina Rea.
“We’re already having a hard time getting them to comply with other important laws – anti-money laundering laws, anti-bribery and corruption laws.”
On Thursday, the committee will make a decision on whether to approve one of the Ethereum spot ETFs after months of delays.
— CNBC’s Jordan Smith contributed to this report.
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