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🇺🇸 SEC launches investigation of Uniswap Developer
Last week it was announced that the US Securities and Exchange Commission (SEC) is investigating Uniswap Labs, the entity responsible for developing the world’s largest decentralized exchange, Uniswap. While the exact details of the investigation remain unknown, SEC Chairman Gary Gensler previously noted that the alleged decentralization does not insulate the platform’s stakeholders from regulatory obligations. For its part, Universal Labs told the Wall Street Journal that it is “committed to complying with the laws and regulations governing our industry and providing information to regulators to assist them with any inquiries.”
The investigation raises questions about possible wrongdoing that the developer of the decentralized exchange may have engaged in. The SEC and other regulators in the US have repeatedly made it clear that software developers who only create tools and do not implement them should not be considered virtual asset service providers, nor subject to that style of regulatory scrutiny. The implication here seems to be that Uniswap’s developers are actually promoting or managing a specific implementation of the decentralized protocol, and have therefore migrated from just a technology company to a financial services provider. While it is uncertain how regulators will view the use of UNI tokens to manage the implementation of the protocol, the value derived from such tokens and the decision-making rights attached to them have likely attracted the attention of SEC regulators seeking to identify potentially illegally offered securities.
The question of whether a given token is a security can, in the simplest terms, be answered with the question of whether the token is an investment contract. Specifically, does it represent an investment of value in the joint venture, with the expectation of a return, as a result of the efforts of a third party? If the SEC determines that the UNI Tokens constitute such an investment agreement, there may be restrictions on the exchange of the Tokens and potential penalties related to its initial offering. There will also be an interesting tangential question of what it means to formally “offer” securities, since the means and methods by which tokenized securities are disseminated through the economy may be quite different from traditional securities. Uniswap has faced similar challenges in the past, regarding the placement of potential securities on their platform, but this is the first time their own management token has potentially been involved.
In addition to securities laws, Uniswap may also face questions related to their ability to detect and prevent financial crimes, such as money laundering, terrorist financing and sanctions evasion. If Uniswap Labs is deemed to be ultimately responsible for monitoring all exchange-like activities that occur on the implementation of the platform for which it serves as a shareholder, they should implement tools optimized to ensure that they do not facilitate illegal transactions, nor allow activities related to with a sanctioned person or state. They would similarly need to maintain a robust Know Your Customer (KYC) program to ensure that the beneficial owners of corporate clients, along with the clients themselves, do not pose excessive financial crime risks.
In order to achieve the goals of the compliance program described above, any decentralized exchange in similar circumstances would benefit from tools such as Lens and Navigator from Elliptic, which enable continuous monitoring of cryptoasset wallets and transactions. Partnering in the global fight against money laundering, exploitation, fraud and dark web crime is vital for DeFi protocol implementers, to ensure trust in their ecosystems and their ongoing sustainability from a regulatory perspective.
🇧🇾 Belarusian President Lukashenko supports cryptocurrency mining
Alexander Lukashenko, the president of Belarus, has encouraged his citizens to embrace cryptocurrency mining as an alternative to low-paying agricultural jobs and as a way to repurpose some of the country’s many vacant industrial spaces. Given the ongoing international unrest surrounding Lukashenko’s near-dictatorial control of the country and his crackdown on political opposition, the move toward greater integration of the crypto industry can be seen as a preemptive move to avoid future economic sanctions from the US and other Western powers. Lukashenko’s statement is likely to exacerbate existing concerns about the ability of global bad actors to secretly integrate into the financial system through crypto mining.
🇨🇺 Cuba will accept the adoption of crypto assets
Cuba’s central bank is reportedly developing rules and regulations to enable an active crypto-asset market in the US-sanctioned island nation, 100 miles off the coast of Florida. While details on the pending rules are scarce, the move signals that Cuba may take an approach more akin to that of close ally Venezuela (which has issued its own crypto-asset, the Petro) than Ecuador (which has banned the crypto-asset entirely). Interestingly, there is talk among the technical intelligentsia in Cuba that the adoption of Bitcoin (or some other cryptocurrency) as legal tender could provide significant financial benefits to the state. Such a move would demonstrate something of a domino effect, started by El Salvador’s announcement earlier this year that Bitcoin would be adopted as legal tender in the country.
🇺🇸 BitConnect founder charged with $2 billion fraud by SEC
Satish Kumbhani, the founder of BitConnect, has been charged by the SEC in connection with a $2 billion fraud allegedly perpetrated by his company. The SEC alleges that Kumbhani operated a crypto ponzi scheme, paying new investors with old investors’ money and never materially investing in the purported underlying technology that was claimed to generate profits. Glenn Arcaro, the lead US promoter of BitConnect’s coin, was separately arrested and pleaded guilty to fraud charges in US Federal Court. The whereabouts of Kumbnhani, a citizen of India, are currently unknown.
🇺🇸 The Biden administration is pushing for improved crypto reporting rules in the budget
As part of the US Treasury Department’s ongoing efforts to strengthen and clarify tax reporting obligations related to transfers and holdings of cryptoassets, an effort has been made to include new language related to such requirements in the upcoming Budget Reconciliation Bill. The roll call reports that: “The administration hopes to add to the filibuster-proof package requirements that cryptocurrency companies report information about foreign account holders so the US can share information with global trading partners”. By collecting this information and sharing it with partners, the US can receive the same information reciprocally. While this may raise privacy concerns, it is likely necessary to facilitate global cooperation between financial intelligence units.
🇺🇸 Pat Toomey, a member of the US Senate Banking Committee, is looking for information on crypto technology
In a nod to the rapidly growing nature of the cryptoasset sector and its increased connection to the traditional financial services industry, Senator Pat Toomey sought input from industry participants and thought leaders on potential legislative solutions that promote technological innovation while protecting investors.
Toomey noted that:
Instead of trying to ignore or suppress cryptocurrencies and related technologies, regulators and lawmakers need to recognize that open, public networks are here to stay. Our laws and regulations must adapt to this development[.]…Not only could cryptocurrencies and blockchain technologies be as revolutionary as the Internet, they also have the potential to build wealth and financial independence for individuals who are empowered to engage in financial transactions directly with each other, without often costly intermediaries. That’s why it’s important that Congress get it right and ensure that the United States remains at the forefront of cryptocurrency and fintech innovation.
Toomey said his committee will accept submissions on his request until September 27, 2021.
did you know…you can view the result of previous transaction or wallet screening with our Screening History feature in Navigator and Lens? Speak to a team member today to find out more.
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