DeFi targeted as regulators probe popular crypto exchange Uniswap

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(Kitco News) – Decentralized exchange (DEX) Uniswap has come under scrutiny by regulators. According to The Wall Street Journal, the U.S. Securities and Exchange Commission is probing Uniswap Labs, the developer of Uniswap, a widely used cryptocurrency exchange for decentralized finance (DeFi). Uniswap, which is built on Ethereum, is the largest DEX, boasting trading volume of $1.5 billion in the past 24 hours. Its pink unicorn logo has become synonymous with DeFi, one of the hottest crazes in crypto.

DeFi gives users an opportunity to generate passive returns through activities such as lending, yield farming and staking without the need for a middleman, such as a bank. DeFi has also paved the way for people that are underbanked or unbanked to gain access to financial services that would otherwise be out of reach for them considering no bank account is needed. DeFi has grown into a force in the blockchain space, with $175 billion in total value locked (TVL) across protocols, according to DeFi Llama. Uniswap has a token of its own, UNI, which is down 3% in the last 24-hour period.

Good Cop, Bad Cop

In its investigation into Uniswap, the SEC is targeting Uniswap Labs, which is the project behind the DEX. Regulators are digging further into the DeFi space and want to know just how investors are accessing this decentralized platform as well as how it is marketed to them.

Ari Paul, founder of BlockTower Capital, predicts the investigation will result in “some sort of enforcement action,” though he believes it will be “very mild” in nature. He says that this is part of the SEC’s MO, to target a few “high profile good actors” and punish them with a “slap on the wrist” to send a message to the rest of the industry.

Uniswap’s “offense,” so to speak, was seemingly its former airdrop in which it distributed free money via UNI tokens to users on its platform. The airdrop was akin to a Wild West event because it placed 400 tokens worth $3 each at the time into the hands of each user, for $1,200 in free money. Paul says that the airdrop probably qualifies as an “unregistered security sale” despite the fact that technically there was no sale. The good news for Uniswap, according to Paul, is that it probably won’t be the victim of an “unfair punishment” and that it is “clearly trying to create real value and reward their users.”

The U.S. regulatory wheels tend to move slowly, however, so Uniswap might need to get used to remaining in the sights of officials for a while. Paul recommends that it be business as usual in the interim.

The latest regulatory crackdown comes on the heels of a recent tussle between lawmakers and the cryptocurrency community in which the infrastructure bill tacked on an arbitrary crypto tax. In addition, SEC Chairman Gary Gensler recently said that while DeFi poses a challenge to regulators because projects operate outside of the traditional investment lines, that would not stop the SEC from regulating it.

Kitco has reached out to Uniswap for a comment and is awaiting their response.

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