Policy Analysis: Uniswap Receives Wells Notice from SEC

Uniswap founder Hayden Adams announced on social media that Uniswap has officially received a Wells Notice from the SEC. In response to this news, the price of UNI dropped by over 5%, falling from 11.2 U to a low of 9 U, and is currently trading at around 9.4 U.

What is Wells Notice？

The Wells Notice is a letter sent by the SEC after concluding an investigation into an individual or company, informing them that the SEC intends to take enforcement action against them. The notice informs the investigated party that the SEC has concluded they violated securities laws. It indicates that the SEC has identified potential litigation and provides the notified party with an opportunity to explain why enforcement action should not be taken.

Key elements include: the SEC has preliminarily characterized the investigated company and its operations, but it's not a formal, final complaint, and the investigated company still has the opportunity to respond. In essence, receiving a Wells Notice means there will be a definite impact and there's a possibility of the situation worsening, but the ultimate outcome cannot be predicted at present.

Uniswap's Response

Hayden Adams stated, “I believe our product offerings are lawful and prepared to fight.” Uniswap issued a blog post titled Fight for DeFi in response to receiving the Wells Notice. The content primarily addresses the following three points:

1) The entire suite of products will remain available, and the SEC's actions are deemed a political move.

2) Uniswap does not meet the legal definition of a securities exchange; UNI does not meet the legal definition of a security.

3) The SEC's actions have not been authorized by Congress.

Which Tokens Have Been Identified as Securities by the SEC？

Currently, there are 66 types of tokens recognized by the SEC as securities.

Among them, there are 4 tokens with a market capitalization of over $10 billion, namely BNB, SOL, ADA, and TRX.

Tokens with market capitalizations ranging from $1 billion to $10 billion include ICP, MATIC, ATOM, NEAR, SAND, MANA, AXS, and others, which are associated with prominent projects or public chains.

There are 12 tokens with market capitalizations ranging from $100 million to $1 billion, including NEXO, FTT, DASH, and LUNA.

Tokens with market capitalizations less than $100 million total 38, including some mirror assets issued by the Mirror Protocol.

In the lawsuit against Binance, the SEC classified 10 cryptocurrencies as securities, including BNB, BUSD, SOL, ADA, MATIC, ATOM, SAND, MANA, AXS, and COTI.

In the lawsuit against Coinbase, the SEC classified 13 cryptocurrencies as securities, including SOL, ADA, MATIC, SAND, AXS, CHZ, FLOW, ICP, VGX, NEXO, and others.



Why Does the SEC Emphasize That All Tokens Are Securities？

Because the SEC is the primary regulatory agency for the US securities market, it oversees all securities and related exchanges or broker-dealers. If a token is classified as a security, the SEC not only regulates the token itself but also has jurisdiction over the exchanges or broker-dealers that offer trading of that token.

Projects That Have Received Wells Notices in the Past

BUSD

On February 13, 2023, enforcement officials from the U.S. SEC issued a Wells notice to Paxos, stating that the BUSD issued and listed by Paxos is an unregistered security and that they plan to sue Paxos for violating investor protection laws. Meanwhile, the New York State Department of Financial Services ordered Paxos to cease issuing more BUSD tokens.

The following day, stablecoin issuer Paxos released a statement, indicating that they had received a Wells Notice from the U.S. Securities and Exchange Commission (SEC) but strongly disagreed with the views of SEC staff because BUSD is not considered a security under federal securities regulations. It should be noted that apart from this, Paxos did not face any other charges.

Shortly after, Coinbase ceased support for BUSD. Within a month, BUSD received redemption requests totaling $7.9 billion, accounting for nearly 50% of its circulation. Although Binance Launchpool still supported the use of BUSD for new coin mining in March, BUSD eventually exited the stage of history.



Bittrex Exited the United States

In April 2023, David Maria, the Chief Legal Officer of cryptocurrency exchange Bittrex, stated that SEC enforcement officials had issued a Wells Notice to Bittrex in March. Bittrex was accused of operating as an exchange, broker-dealer, and securities ATS without registering with regulatory agencies, thereby violating the law.

Maria mentioned that Bittrex had been preparing to gradually reduce its U.S. operations upon receiving the notice. At that time, Bittrex was uncertain whether the SEC would file a lawsuit, as the company was in the process of winding down its U.S. operations. If the SEC decided to take enforcement action, Bittrex would file a lawsuit unless regulatory agencies could present a “reasonable settlement proposal.”

In addition to the mentioned companies, Coinbase and Ripple have also received Wells Notices. This action led to Ripple being delisted directly from Coinbase and subsequently incurring high legal costs. However, Ripple has been temporarily ruled by a judge as not being a security.