CFTC Sanctions Uniswap Labs for Illegal Digital Asset Derivatives Trading

Journalist

Hassan Shittu

Journalist

Hassan Shittu

About Author

Hassan, a Cryptonews.com journalist with 6+ years of experience in Web3 journalism, brings deep knowledge across Crypto, Web3 Gaming, NFTs, and Play-to-Earn sectors. His work has appeared in...

Author Profile

Share

Copied

Last updated: 

September 3, 2024

Why Trust Cryptonews

Cryptonews has covered the cryptocurrency industry topics since 2017, aiming to provide informative insights to our readers. Our journalists and analysts have extensive experience in market analysis and blockchain technologies. We strive to maintain high editorial standards, focusing on factual accuracy and balanced reporting across all areas - from cryptocurrencies and blockchain projects to industry events, products, and technological developments. Our ongoing presence in the industry reflects our commitment to delivering relevant information in the evolving world of digital assets. Read more about Cryptonews

The Commodity Futures Trading Commission (CFTC) has sanctioned Uniswap Labs, the company behind the popular decentralized trading platform Uniswap, for illegally offering leveraged and margined retail commodity transactions in digital assets.

The CFTC’s order, announced on Wednesday, mandates Uniswap Labs pay a $175,000 civil penalty and cease violating the Commodity Exchange Act (CEA).

This latest enforcement action is part of the ongoing regulatory efforts to regulate the decentralized finance (DeFi) space, and it is coming from all angles, from both the SEC and other similar agencies.

Uniswap Sanction: $175K Penalty For Facilitating Leveraged Commodity Transactions

According to the CFTC, Uniswap Labs developed and deployed a blockchain-based protocol on the Ethereum network.

This protocol allows users, including non-eligible Contract Participants and institutional investors in the U.S. and abroad, to trade digital assets through liquidity pools.

These pools consisted of matched pairs of digital assets valued against each other.

The platform’s user interface facilitated access to hundreds of these pools, including a limited selection of leveraged tokens that exposed users to the price movements of digital assets like Bitcoin (BTC) and Ether (ETH) with approximately 2:1 leverage.

The CFTC found that these leveraged tokens constituted margined or leveraged commodity transactions, which, by law, must be traded on a CFTC-registered contract market.

Uniswap Labs, however, was not registered as such, making its offering of these leveraged tokens illegal under the CEA.

The agency noted that the leveraged transactions did not result in the actual delivery of the underlying assets within the required 28-day period, thereby further violating commodity trading regulations.

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

The CFTC also acknowledged Uniswap Labs’ substantial cooperation during the investigation, which led to a reduced civil penalty.

Is Uniswap Going Traditional?

The CFTC’s enforcement action against Uniswap Labs has sparked debate over whether traditional financial regulations should be applied to decentralized platforms.

CFTC Commissioner Summer Mersinger expressed dissent, criticizing the enforcement approach as misaligned with the nature of decentralized systems.

She argued that applying rules intended for centralized platforms to DeFi protocols overlooks the fundamental differences between these systems.

In her statement, Mersinger characterized the settlement as “regulation through enforcement” and criticized the modest penalty imposed, which she deemed disproportionate to the conduct alleged.

“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,” Mersinger stated.

She also highlighted that Uniswap Labs had taken steps to restrict users from trading leveraged tokens. This directly suggests that th exchange is now making a proactive effort to comply with regulatory requirements.

In addition to the CFTC’s charges, Uniswap Labs is also facing potential enforcement from the Securities and Exchange Commission (SEC).

In April, the company received a Wells Notice from the SEC indicating that the SEC believes it has sufficient evidence to initiate a lawsuit against Uniswap Labs for potential securities law violations.
Despite the ongoing scrutiny of the SEC, a report last month showed that Uniswap has surpassed $50 million in cumulative front-end fees. This increase is because of the increased fee to 0.25% in April.