CFTC Settles With Uniswap Labs Over Leveraged Crypto Trading

(Bloomberg) -- The US Commodity Futures Trading Commission fined Uniswap Labs $175,000 as part of a settlement of allegations that the decentralized crypto exchange illegally offered leveraged retail trading in digital assets.

Universal Navigation Inc., which does business as Uniswap Labs, has been ordered to cease and desist from violating the Commodity Exchange Act, known as CEA, as part of the settlement. Decentralized-finance code developed in large part by Uniswap lets users directly trade digital assets — including leveraged tokens — without intermediaries.

The CFTC alleged that the token trades in question were leveraged, or margined, commodity transactions that can be offered to non-eligible contract participants only on a board of trade that has been designated or registered by the CFTC as a contract market, which Uniswap Labs was not. The CFTC said it recognized Uniswap Labs’ cooperation with the investigation by agreeing to a reduced fine.

“Today’s action demonstrates once again the Division of Enforcement will vigorously enforce the CEA as digital asset platforms and DeFi ecosystems evolve,” Ian McGinley, the CFTC’s director of enforcement, said in a statement. “DeFi operators must be vigilant to ensure that transactions comply with the law.”

Uniswap’s chief legal officer, Katherine Minarik, said in a statement that the CFTC investigation involved “a small fraction of a percent of trading through our interface related to a handful of tokens,” adding that the settlement did not involve any admission or denial of the regulator’s findings. “We remain singularly focused on building the future of DeFi for everyone and taking on the fights necessary to make that happen,” she added.

CFTC Commissioners Summer Mersinger and Caroline Pham issued dissenting opinions. Mersinger said the settlement has “all the hallmarks of what we have come to know as regulation through enforcement.” She pointed out that Uniswap had already blocked trading of the tokens at issue.

“Rather than applauding Uniswap for being attentive to our enforcement efforts and initiating steps to respond to our approach in policing the DeFi space, we brought charges against Uniswap covering the time period before those particular tokens were blocked from its platform,” Mersinger said. “For those in the DeFi community trying to comply with the CEA and CFTC regulations, the only take-away this settlement offers is the approximate cost the Commission assigns to an attempt by DeFi to do the right thing.”

Earlier this year, Uniswap announced that it received a Wells notice from the Securities and Exchange Commission, an indication that the regulator was planning to take action against the company.

In her dissent, Pham said “the CFTC’s novel approach today is legally simplistic and conveniently cuts corners to create a pretext for enforcement.”

“I believe the CFTC can and should vigorously pursue fraud and manipulation in our markets and bring bad actors to justice,” she said. “But that is not what this case is about. It is regretful that the Commission’s action today is instead a misguided and rushed attempt to beat the SEC to the punch and claim jurisdiction over DeFi.”

Both the SEC and the CFTC have pursued actions in recent years not only against centralized exchanges like Binance, but also decentralized crypto projects that use automated software in place of intermediaries. Some targets have settled, while other actions are still winding their way through courts.

The crypto industry has argued that Congress needs to put out clearer guidelines for digital assets, in order not to hamstring the industry in the US. Opponents argue the industry has to comply with existing laws.

(Updates with comments from Commissioner Pham in ninth paragraph.)