Offering leveraged or margined retail commodity transactions in digital assets via a decentralized digital asset trading protocol has led to charges against Uniswap Labs. The company is required to pay a $175,000 civil monetary penalty.

The Commodity Futures Trading Commission (CFTC) issued an order filing and settling charges against Universal Navigation Inc. d/b/a Uniswap Labs, a Delaware company based in New York.

The CFTC notes that the action is part of its continuing enforcement focus in the digital asset decentralized finance (DeFi) space as those DeFi ecosystems evolve.

“DeFi operators must be vigilant to ensure that transactions comply with the law,” said Director of Enforcement Ian McGinley in the press release accompanying the agency’s order.

Digital asset trade

Uniswap Labs helped and deploy a blockchain-based digital asset protocol that offered to non-eligible contract participants and institutional users in the US and abroad the ability to trade digital assets through use of the Ethereum blockchain. The protocol allows users to create and trade with liquidity pools, which consist of a matched pair of digital assets that are valued against each other. 

To offer access to the protocol, Uniswap Labs developed and maintained a web interface that it made available to users. Through the interface, users could trade in hundreds of liquidity pools on the protocol. Among the digital assets traded on the protocol and through the interface were a limited number of leveraged tokens, which provided users leveraged exposure to digital assets such as ether and bitcoin. 

The New York Department of Financial Services sent subpoenas, and the company said it received a Wells Notice from the SEC.

The SEC said these leveraged tokens are leveraged or margined commodity transactions that did not result in actual delivery within 28 days. Therefore they could only be offered to non-eligible contract participants on a board of trade that has been designated or registered by the CFTC as a contract market. Uniswap Labs was neither. 

Non-eligible contract participants are individuals or entities that are not permitted to engage in certain transactions that are available to eligible contract participants, such as derivatives, and such participants are often corporations, partnerships and wealthy individuals.

Uniswap is one of the two (along with PancakeSwap) of the biggest decentralized exchanges in operation.

Interestingly, the CFTC explicitly refers to ether (and bitcoin) as a commodity in one whole section of the order.

Rule violation

The CFTC said Uniswap Labs violated Section 4(a) of the Commodity Exchange Act, which makes it unlawful to offer to enter into, execute, confirm the execution of, or conduct an office or business in the US for the purpose of soliciting, or accepting any order for, or otherwise dealing in any transaction in, or in connection with, a commodity futures contract, unless such transaction is made on or subject to the rules of a board of trade that has been designated or registered by the CFTC as a contract market for the specific commodity.

Along with settling this action with the CFTC, some of Uniswap’s chief investors received subpoenas from the New York Department of Financial Services. And last month the company said it had received a Wells Notice from the SEC, which indicates the agency is likely to take some action against the business.

It appears each of these regulators believes Uniswap is an unregistered exchange.

Previous lawsuits against major US-based crypto firms have involved Ripple Labs, Coinbase, Kraken, Bittrex and others. Uniswap intends to fight the lawsuit, according to its statement.

The CFTC said it recognized Uniswap Labs’ substantial cooperation with its investigation of this matter in the form of a reduced civil monetary penalty.

Dissents

CFTC Commissioner Caroline Pham dissented in the In re Universal Navigation Inc DeFi enforcement action because she said there was “no evidence in the administrative record that describes the specific terms and/or characteristics of the ‘Leveraged Tokens’ as characterized in the settlement order.”

She said without such information, it is not possible to perform an appropriate product legal analysis of those tokens to determine whether they are a CFTC-jurisdictional product. This in turn makes it impossible to decide whether the CFTC has the authority to bring this enforcement action in the first place and whether a violation of CFTC regulations has actually occurred.

CFTC Commissioner Summer Mersinger also dissented, saying: “This case has all the hallmarks of what we have come to know as regulation through enforcement: A settlement with a de minimis penalty that bears little relationship to the conduct alleged, sweeping statements about the broader industry that are not germane to the case at hand, and legal theories that have not been tested in court.”