The Breakdown - The Inevitability of the Fight Against DeFi

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday, April 14th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello, friends, back with an LRS this week, and we are going to read a piece by Daniel Kuhn called the SEC's suit against Uniswap is an opening attack against Defi.

Starting point is 00:00:47 Daniel writes, while we don't know the nature of the potential charges, the news raises the threat of legal jeopardy for decentralized finance. So let's read the piece, and then we will discuss it. Uniswap Labs, the Brooklyn-based outfit primarily responsible for developing the protocol of the same name, reportedly received a Wells notice indicating the U.S. Securities and Exchange Commission intends to sue. While the D-5 behemoth says it is, quote, ready to fight the SEC, indicating a willingness to go to court, the move does represent the latest front in the SEC's years-long battle with the crypto industry.

Starting point is 00:01:16 And to some extent, it is entirely predictable. Before this, the SEC has filed suit against U.S.-based exchanges, Coinbase, and Cracken. In fact, the reason the industry is so familiar with the term Wells Notice is because Coinbase received one in the months before the SEC's lawsuit dropped. But the move is also a serious escalation in the SEC's anti-crypto legal barrage. Uniswap said in a blog announcing the Wells notice, quote, Taking into account the SEC's ongoing lawsuits against Coinbase and others, as well as their complete unwillingness to provide clarity or a path to registration,

Starting point is 00:01:45 to those operating lawfully within the U.S., we can only conclude that this is the latest political effort to target even the best actors building technology on blockchains. End quote. The SEC's biggest crypto cases so far have been after centralized institutions. The aforementioned centralized exchanges, Coinbase and Cracken, and the company behind the XRP cryptocurrency, Ripple. Suing the organization behind a decentralized protocol like Uniswap is uncharted territory. Perhaps the closest example on the books would be the SEC's case against LBRY Library,

Starting point is 00:02:14 which built a decentralized alternative to YouTube that was forced to shut down after a lengthy appeals process with the U.S. securities watchdog. The SEC alleges library sold unregistered securities via a utility token launch, and initially sought 22 million in fines but lowered that to 111,000 after acknowledging the company's financial struggles. The ongoing international case against the developers of Tornado Cash might also be instructive. Considering those cases in the U.S. and the Netherlands have become symbols of whether or not individuals are responsible for how their self-executing code is used after releasing it to the public.

Starting point is 00:02:45 Said Bill Hughes, Senior Counsel and Director of Global Regulatory Matters at Consensus, the SEC is very imaginative in the ways you can be violating their rules. Part of the issue conceivably is that Uniswap Labs runs the biggest portal on the Uniswap protocol via Uniswop.org. Another potential concern is the Uni-Governance token, launched to give users some control over protocol governance, but could be twisted to look like a securities offering. That said, Hughes doesn't think the SEC will pursue cases against uniswap token holders or users. He said on X, if you are one of those and a little freaked out, take a breath and calm down.

Starting point is 00:03:15 If they were also going to sue you, then you'd be getting an email from the SEC asking to talk to you on the phone. You aren't going to be getting one of those so relax. Whatever the case, Hughes suggested this is likely just the biggest shot the SEC will take against the defy industry. The SEC's move, quote, has been to sue somebody in some category and move on to another category, like suing Coinbase and then Cracken. We'll see if they sue other Dexas. Hello, Breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin

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Starting point is 00:04:30 Quickly before we get back into the rest of the episode, you guys might have been following along my journey with the AI breakdown, which is a very similar show to this, but for the artificial intelligence industry. One of the things that I found as I dug into that show is that there was a huge need for better educational resources that were actually practical and useful right away. I've just announced a new company and platform called Superintelligent

Starting point is 00:04:51 that's trying to build exactly that. It's a video platform for learning AI that features fun, fast, and immediately useful video to do tutorials. Each video tutorial is around five minutes and comes with a step-by-step how-to that gets people actually using the tools that we're talking about. We've just gone live with more than 300 tutorials and are adding 30 to 50 more per week. To check it out, go to B-Supertai. That's B-Supertai. Can't wait to see you guys over there. All right, so this was obviously a big point of discussion throughout the week. And there are a few different things that I want to keep in mind.

Starting point is 00:05:23 One, let's talk about what the SEC is going for. I think it's actually probably multiple things. On the one hand, it is entirely possible that they actually want to fight this out and go all the way to the mat with Uniswap, creating some precedent that makes it harder for Defi to exist. However, it's also entirely possible to me that another objective, an intermediate objective, and frankly an immediate objective, if you will, is that they're just trying to sow chaos. This type of action creates insecurity not just among Uniswap users and Uniswop's team, but among anyone who's interacting with Defi protocols, in basically any capacity. There's a whole discussion this week about how the SEC was driving crypto offshore, which is true,

Starting point is 00:06:04 but also I think exactly the point. The SEC doesn't want to deal with crypto. They would prefer that it was just someone else's problem. And so viewed from that light, the idea that a legal action, again, along a specific category, as Bill Hughes suggested, would be meant to just cause insecurity in that category and disincentivize people from participating in it, doesn't seem totally unlike something they might do. I will say that if they are trying to fight, they have picked battles with very well-capitalized opponents on a lot of fronts. Then again, and this is the next thing that's really important,

Starting point is 00:06:36 we don't know yet what exactly the charges or issues are going to be. The way that that plays out could have significant impact on just how consequential this is for crypto in general and DFI specifically. Some of the possibilities are that they're going after Uniswap because they say maintaining that front end makes them basically in exchange. Perhaps they're going after them for a allowing securities trading. We don't really know, but that's definitely the most important thing to watch for, I think, at this point. Now, let's zoom out and look at this from a bigger perspective. Ever since DeFi summer back four years ago now, it was clear that at some point, this subsector of crypto was going to crash up against the walls of the existing legal and financial system.

Starting point is 00:07:15 Part of the reason that it didn't for so long is that the barriers to entry were really, really high. You had to be a sophisticated player, in other words, to actually participate in these protocols, which meant that you understood the risks, which meant that when things went wrong in Defi, even though people genuinely lost money, by and large, they were actors who knew what they were getting into. The first time that DeFi problems spilled over into the general crypto-buying public, I think, was the collapse of Luna. It wasn't that people were interacting with some sort of DeFi protocol explicitly. They were just holding the Luna token. The problem, of course, was that simply holding the Luna token, expose them to the Defi protocol underneath, and we all know how

Starting point is 00:07:55 that story ended. Now, even if we hadn't seen such a grand collapse, I still think there would have been some set of legal battles that Defi was going to have to fight, and so from that perspective, it's good that they're at least actually happening. It's not a question of when anymore, it's now just a question of how to fight through them. But there are also larger questions at stake. Section 230, the provision of the Internet Decency Act, which has long-protected platforms from being sued for what the users of those platforms do is under assault right now. There are people, for example, who don't want it to apply to AI platforms, which would have a dramatic impact on how that industry develops.

Starting point is 00:08:31 Uniswap and Defy are great contexts where those questions of how liable the developers behind a particular set of code are are going to come up again. And that's why I think even if you don't care about Defi, it's worth paying attention to this fight. There are underlying principles here that could be seriously impactful, not just for Bitcoin, but for participation in a digital society more broadly. Anyways, interesting stuff, like I said, what I'm really watching for is to see what the specific charges are,

Starting point is 00:08:56 and as soon as I know, you guys will know. For now, I want to say one more big thank you to my sponsor for today's show. Check out the Ledger Orange Bitcoin Nano. 5% of sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.

The Breakdown - The Inevitability of the Fight Against DeFi

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