CFTC fines Uniswap Labs: derivatives at risk

Uniswap Labs has agreed to pay a fine of $175,000 as part of a settlement with the CFTC. 

The CFTC had sued the company for illegal trading of digital asset derivatives.

Uniswap Labs

Uniswap Labs is the company behind the development of the leading decentralized exchange (DEX) in the world, namely Uniswap. 

Despite Uniswap being only a decentralized protocol, the company that developed it is a centralized and easily identifiable entity, so much so that it received a complaint from the CFTC and a Wells notice from the SEC.

In the specific case of the CTFC complaint, the accusation was not about developing a DEX, but about allowing the trading of financial derivative products on digital assets without the necessary authorizations. 

The CFTC

The Commodity Futures Trading Commission statunitense si occupa in special modo degli scambi di commodity e di derivati, come per l’appunto i future. 

Apparently, there was nothing to say to Uniswap Labs regarding spot token exchanges on the DEX, also because the main cryptocurrencies are considered commodities, and for the exchange of commodities, no special licenses or authorizations are required. 

The specific problem, on the other hand, concerned precisely the futures, or other derivatives, for which the law requires that the public offering be made only by authorized entities. 

CFTC: the fine against Uniswap Labs

With an official press release published yesterday, the CFTC states that it has issued an order of filing and resolution of charges against Universal Navigation Inc. d/b/a Uniswap Labs, a Delaware company based in New York.

The order notes that Uniswap Labs has illegally offered leveraged or margined commodity transactions to a retail public through a decentralized digital asset trading protocol (the DEX). 

This requires Uniswap Labs to pay a monetary penalty of $175,000 and to cease from violating the Commodity Exchange Act (CEA) as just described.

Uniswap Labs has accepted the conditions set by CFTC, and therefore will pay the fine and cease offering leveraged or margin commodity transactions to the retail public. In exchange, the CFTC withdraws the complaint and the case is closed. 

What happened between CFTC and Uniswap Labs?

The CFTC writes that Uniswap Labs has contributed to the development and distribution of a blockchain-based digital asset protocol. Their DEX offers the possibility to trade tokens using the Ethereum blockchain, thanks to liquidity pools that consist of a matched pair of digital assets and are valued against each other.

Furthermore, it specifies that Uniswap Labs has developed and maintained a web interface that has made this service available to users, effectively considering them responsible for the development and launch of the eponymous DEX. 

This interface allows even retail users to trade hundreds of liquidity pools, including a limited number with leverage. These pairs provided leveraged exposure to digital assets such as BTC and ETH. 

Although Bitcoin and Ethereum are commodities, their trading without a license is allowed only in spot mode, meaning token against token, whereas in this specific case the pairs under accusation allowed leveraged or margin trading that did not result in an actual delivery within 28 days.

These leveraged pairs, in order to be offered to non-eligible participants (retail), must by law be tradable only on exchanges that have been designated or registered by the CFTC as contract markets. Uniswap, on the other hand, does not have any designation or registration with the CFTC.

It is worth noting, however, that the official CFTC statement explicitly admits that Uniswap Labs cooperated with the Division of Enforcement’s investigations on this matter, and this led to a reduction in the fine. 

The other DEX in the sector

The Director of Enforcement, Ian McGinley, stated that this action by the CFTC demonstrates that the Division of Enforcement will vigorously enforce the CEA as digital asset platforms and DeFi ecosystems evolve.

Additionally, he added: 

“DeFi operators must be vigilant to ensure that transactions comply with the law”.

This suggests that after Uniswap they might also go after other DEX, in case they detect similar violations worth intervening on. 

The challenge with the SEC

Uniswap Labs also has an open issue with the SEC, which deals with security exchanges. 

The other U.S. agency responsible for overseeing financial markets accuses Uniswap Labs of acting as an unregistered security exchange and unregistered broker-dealer. 

In this case, however, the accusations appear much less strong, because the main cryptocurrencies existing in the world have been defined as commodity, and not security.

If against the CFTC for Uniswap Labs a head-on clash was reasonably inconvenient, given that the violations of the CEA seemed quite evident, against the SEC it might therefore have a greater chance of victory. 

The investors of Uniswap Labs risk another lawsuit

From unconfirmed rumors, another complaint would emerge, this time against investors in Uniswap Labs, including Andreessen Horowitz (a16z) and Union Square Ventures. 

The complaint comes from the Attorney General of the State of New York, Letitia James, who in the past had already taken action against Tether. 

The accusations are not yet clear, nor how this further case might evolve.

We will keep you updated!