From money to DeFi: A shift in the war for crypto

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A shot across the bow 

The CFTC announced an order and a settlement of $175,000 against Uniswap Labs yesterday. 

The regulator claimed that the DeFi company offered margin products illegally. Basically, third parties could offer leveraged or margined returns against bitcoin and ether through tokens. Uniswap, it’s important to note, didn’t offer such tokens themselves. 

Since Uniswap wasn’t registered as a market maker, it couldn’t act as a contract market, the CFTC added. 

It’s not necessarily the first time that the CFTC has brought this type of order against DeFi firms. Last September — nearly a year to the date — it announced a similar settlement with ZeroEx, though that firm paid a slightly heftier sum of $200,000. 

“In both cases, an unaffiliated entity issued a token that staff claimed could be used to obtain leveraged exposure to the price of bitcoin and ether. In fact, Commissioner Mersinger referred to the tokens at issue in both matters as ‘the same tokens’ in her dissent,” Reed Smith partner Jonathan Ammons said. He’s part of the firms on chain team, specializing in crypto matters.

“An important difference between the two matters, though, is that in ZeroEx, people transacted on a peer-to-peer basis whereas Uniswap’s participants were trading through liquidity pools and automated market maker algorithms.”

The Uniswap case breaks “new ground,” he added, and perhaps shows a “shot across the bow” on the CFTC’s part. 

Uniswap did block trading to the four leveraged tokens — which seem to be tied to Index Coop, though the CFTC didn’t name the firm — through its app after the ZeroEx order, which shows that it attempted to comply, though the CFTC still, clearly, didn’t think that was enough (perhaps that explains the difference between the settlements, and why Uniswap’s was so low to begin with).

The intent here, Ammons added, could be to “send a message to the rest of the DeFi community that the CFTC considers this type of activity to be unlawful.” And perhaps it’s fair to say that the CFTC planned to reiterate its point, given how big of a player Uniswap is in the space. 

If we’re judging by market reaction, folks didn’t seem too stressed about the announcement. UNI initially jumped 6%, but has since flattened a bit. Still up 5% on the week. 

But I didn’t want to just talk about the CFTC settlement, though it does show that the CFTC is cracking down on certain DeFi offerings. In my discussion with Ammons, I also picked his brain on the potential Uniswap enforcement action that still lingers just beyond the horizon. 

Mind you, the SEC could opt to not bring any official action against Uniswap after sending over a Wells notice, but the Axios report last month that the regulator is questioning venture capitalists about the DeFi firm could perhaps be seen as the SEC not dropping its hunt. (I should add that Andreessen Horowitz didn’t respond to my inquiries on the report.)

“I think that it’s clear that [SEC] made the claim that the UNI token and the LP tokens are securities or investment contracts, and in that way, the SEC is is kind of treading the water that they have done before, just with a with a DeFi protocol, as opposed to centralized,” Ammons said. 

“Uniswap came out with some very good and intelligent arguments to the contrary not only in terms of the Howey Test analysis but also just the secondary market transaction issues,” he added. “The SEC has not had a great track record of succeeding in litigation on the secondary market transactions. So it will be interesting to see where it goes.”

Clearly, the CFTC and the SEC are after two different things, but the SEC could angle its case towards the fact that Uniswap made the UNI and LP tokens, whereas — as we just said — the contracts in the CFTC order weren’t Uniswap’s own. 

It wouldn’t surprise Ammons if the CFTC and SEC were sharing info on their probes into Uniswap, he added. Just like it wouldn’t surprise him if the New York Attorney General subpoenaed Union Square Ventures and Andreessen Horowitz (as CoinDesk reported yesterday) because of shared information between the SEC and the AG’s office. 

He added that the SEC could very well be looking into whether or not VCs had an expectation of profit when purchasing UNI or LP tokens, though I can’t reiterate enough that we don’t know what the SEC is really interested in at this point. But that evidence could “bolster a Howey analysis of those tokens.”

One thing’s for sure, if the SEC is trying to “bring more transparency to these protocols and essentially make them perform KYC and AML and comply with all of the other regulations that apply to securities exchanges, then it really could have a pretty drastic impact on the US market because that type of anonymity is an important component for DeFi protocols,” and it would essentially go poof if a case went in the SEC’s favor.

Just another day in cryptoland.

— Katherine Ross

Data Center

• BTC is flat and ETH is down 1% on the daily, with both trending sideways over the past month. (BTC: $56,450; ETH: $2,380).
• Tron’s TVL is up 10% over the past month to $7.88 billion, about two-thirds bigger than Solana’s.
• There are 1,078 validators waiting in the Ethereum queue with only one in line to exit.
• Uniswap processed $60.84 billion in volume in August, up from $59.03 billion in July.
• About 13.3% of DEX volumes on EVM chains currently flow through the Uniswap web app, per this Dune dashboard.

Defend DeFi

Money is just one of many apps for blockchains. But so far, it’s clearly the most popular.

Bitcoin is perhaps the purest expression of the money app in the blockchain context. And the Bitcoin war has been largely fought and won — the CFTC has long considered it a commodity and the SEC never stood a chance of finding Satoshi Nakamoto in any case. 

Running political defense of bitcoin these days isn’t so much about the right to transact digital money peer-to-peer as it is about the right to mine bitcoin, especially in areas that haven’t been so receptive to the industry.

ETH gained its own commodity classification in light of bitcoin winning that fight. And while a commodity classification doesn’t automatically make either bitcoin or ether “money,” it does put them on par with more ancient currencies with intrinsic value, like silver and gold. Which is just as good.

The ETF issuers and other lobbyists, in my view, planted the victory flag in the war over crypto’s potential moneyness. As it puts out one fire with the CFTC, Uniswap Labs is all but headed into court with the SEC to defend crypto through the DeFi lens. 

The firm itself is a bedrock of DeFi, on par with Maker, with its volume staying relatively consistent over the years despite waves of new trading platforms looking to eat its lunch. 

But just like how it’s possible to separate money, the app, from the blockchain, it’s also possible to separate Uniswap the front-end app and Uniswap the technology — the bundle of smart contracts that make its trades, listings and liquidity provision possible.

At least, that’s what Uniswap Labs will most likely have to prove again and again. It can block as many tokens as it likes on its web app for US residents, but the tokens will still be tradable on the technology itself, underneath, either through a different web app or by interacting with the smart contracts directly with code.

Vitalik (and other smart city proponents) might wish for our minds to immediately go to other use cases when we think of blockchains. Tokenized digital identities, wedding registries and driver’s licenses — not memecoin trading and yield farms.

They might have a point. There could very well be more to life than recreating traditional finance on blockchain rails.

But until the whole world runs on smart contracts, and we all have our own personal crypto-spending AI agents assisting us around town, DeFi is arguably crypto’s most vibrant user base — and its most critical to defend right now.

— David Canellis

The Works

• World Liberty Financial, the Trump family project, is focused on US dollar-backed stablecoins, Bloomberg reported.
• A PAC for Kamala Harris is accepting crypto donations, but not the campaign itself, CoinDesk reported.
• Robinhood settled with California’s DOJ for $3.9 million after allegations that the company didn’t let users withdraw crypto.
• A letter to the court asking to stay its $125 million monetary penalty could signal that Ripple plans to appeal in the SEC’s case.
• Siemens issued a $330 million digital bond on a private blockchain with German banks, including Deutsche Bank, CoinDesk reported.

The Riff

Q: What’s the allure of crypto cities?

There are crypto hubs and then there’s the extreme end of the crypto city prophecy, in which our entire reality is on the blockchain in some way.

I’d say the popularity of that future has mostly to do with the solarpunk aesthetic.

Cyberpunk does sound a lot like cypherpunk — which makes something like Blade Runner or Cyberpunk 2077 the most obvious place to jump to when thinking about what a completely crypto-enabled future would look like.

And then there’s the ominous Bitcoin Citadels floating in the sky, where maxis thrive in the “eternal enslavement of humanity to a tiny elite,” as former crypto columnist Ben Munster once put it. Too dark for me.

Solarpunk is egalitarian, prosperous and harmonious with nature. The pursuit of public goods, all the time. What better reason to move to a crypto city, once it’s built, that is.

— David Canellis

All the cool kids have them, so why not crypto?

The TradFi bros have New York (and the brand Patagonia, so maybe crypto should eye a clothing line too). Tech had Silicon Valley (we’re not opening that can of worms, so let’s leave it at that) and crypto has… nothing. Yet. 

I’m not a tech bro, so I can only pull on my Wall Street beginnings and say that having a hub in a city makes connections and centralization easy. 

Crypto’s a different beast, and wants different things, given that it’s not tied to a very historic location. There’s no doubt that having a spot where you can interact with folks you wouldn’t see outside of conferences makes it much easier to collaborate and build crypto together. 

Then there are things like tax breaks and other benefits and, let’s be honest, those are pretty sweet too.

— Katherine Ross

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