The Breakdown - Uniswap Settles with CFTC

Episode Date: September 6, 2024

Another day, another crypto settlement with the US government that seems designed to be about setting precedent for other enforcement cases more than actually protecting anyone. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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 Thursday, September 5th, and today we are talking about yet another crypto government settlement. 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 breakdown pod. Well, the wave of enforcement actions continues this time with Uniswap reaching a settlement with the CFTC. Uniswap will pay a fine of $175,000 and agree to prevent derivatives tokens

from trading on their platform. The enforcement action related to tokens issued by third parties, which represented leveraged exposure to Ethan Bitcoin. Uniswap is not registered as a contract market, so cannot legally offer markets in these structured derivatives products according to the CFTC. CFTC Director of Enforcement Ian McGinley said, today's action demonstrates once again that the division of enforcement will vigorously, oh my God, I can't even read any more of these things. Anyways, apparently defy operators should be vigilant to ensure that transactions comply with the law, etc, etc., etc.

Regardless for Uniswop, this is not a big deal. Tocons with embedded leverage have never been a large portion of their volume, and the fine is obviously immaterial to their operations. Comments from Uniswap chief legal officer Catherine Minarek seemed nonchalant. She tweeted, Today Uniswop Labs resolved as CFTC matters about a fraction of a percent of trading through our interface of a handful of tokens for a 175k fine and a standard no-admit-no-deny settlement. We are glad to put this to rest and stay focused on building the future of Defy for all.

Why this matters a little bit more is the broader effect on the DeFi ecosystem. While derivatives' products are not a significant part of Uniswops business, there are vast sections of the ecosystem that offer peer-to-peer derivatives trading. More importantly, on-chain derivatives are a critical part of establishing defy as a viable alternative to traditional financial markets. At the moment, on-chain derivatives are illegal in the U.S. Unlike securities trading, there is no carve-out for peer-to-peer markets and derivatives. We've already seen the CFTC go after multiple derivatives platforms and without a change

in the law that seems likely to continue. Larry Floreo, the General Counsel at 1KX Network tweeted, Summary of the CFTC's argument in the order against uniswop today, you act in good faith and you'll still get fined, but will take less money in exchange for lazy precedent we'll use to extract more from the industry later on. More bad faith arguments from a bad faith regulator. Another noteworthy element of the settlement was a recognition that blocking U.S. users front end was good enough to comply with the law. This certainly won't allow Defi to thrive on shore,

but it provides at least some guidelines for developers. Much of the discussion center not on the current state of the law, but how future policy could be shaped. Crypto lawyer Gabriel Shapiro noted the legislation currently on the table is silent on these issues tweeting, Fit21 does nothing to solve this issue, by the way. A big crypto bill would also need to offer a solution on decentralized leverage. This was the focus in a pair of dissenting statements from Republican commissioners Caroline Pham and Summer Mercinger. Pham wrote, this defy case may very well be a regulatory allergic reaction to new technology, but this reaction is not realistic or sustainable. This era of human invention and productivity is characterized by

increasingly direct connections among ordinary people, and the empowerment of the individual with an app is the center of the overall digital economy. The world has changed from B2B to B to C to C, and there is no turning back the clock. Mercinger was a lot more aggressive in her views, writing, 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. She pointed out that using enforcement authorities rather than notice and comment rulemaking will only force the industry offshore. Quote,

leaving behind the bad actors and criminals who are only interested in taking advantage of American citizens. This is a case where there are no fraud allegations or complaints of harm against customers. She drew the point that financial fraud is currently rife in crypto, but the CFTC is focusing on cracking down on good actors in the sector. Uniswap had already delisted the tokens at issue in 2003 during a previous CFTC sweep. She used the analogy of going after Ford Motor Companies for selling V8s in the 1930s rather than the bootleggers making use of that technological advancement. Substantively, Mersinger's argument was that holding a platform liable for the conduct of its users would serve to, quote, severely chill the launching of any Defi protocol within the United States

and to significantly increase the odds that all Defy innovation and economic activity will occur elsewhere. She noted that the CFTC has a core mandate to foster responsible innovation rather than stuff it out. Her point was that liability should attach to only asset issuers rather than platforms. Mersinger urged the CFTC not to go down the same path as other regulators, arguing, wielding the hammer of enforcement against these DFI protocols may result in some short-term, quote-unquote, wins. But in the longer term, without more, it will only create problems. While Mersinger gives some hope for the future of the industry, most weren't very positive over the shorter term. Nick Pullman, the founder of Day One Law, wrote,

The CFTC action against Uniswap further cements what crypto founders realized five years ago. The decision to pursue an enforcement action seems to be driven by headline potential, not market protection. The dissent by Mersinger hammers that point home. Continuing down this path creates perverse incentives over time and diverts agency resources away from where material harm is actually being done to investors. But where it lacks, that headline splash. Jake Chravinsky, the chief legal officer of Variant Fund, tweeted,

reminder that the SEC, CFTC, and other regulators have their fiscal year end on September 30th. It's typical in September to see a flurry of enforcement actions as they shore up their performance reports and budget requests for Congress. It could be a busy month. Now, while this settlement marks the end of one regulatory issue for Uniswap, they still face a host of other problems. The company was issued a well's notice by the SEC in April, which will presumably turn into a lawsuit at some stage. Now it seems as though the New York Attorney General Leticia James is looking to pile on. Sources claim the NYW. NYAG has issued subpoenas to venture capital firms A16Z and Union Square regarding Uniswap.

We don't know the details, but this is likely regarding either the issuance of the Uniswap token or the question of whether Uniswap operates as an unlicensed exchange. New York has extremely strict licensing requirements for crypto companies known as the Bit License. Uniswap has always operated under the assumption that they don't need a bit license, even though they are headquartered in Brooklyn and service New York residents. The subpoena could also be a sign the NYAG as gearing up to go after the venture firms themselves. A spokesperson for Uniswap said,

Uniswap Labs is a proud, made-in-New York pioneer of defy technology, which offers a path for all of us to better, fairer access to financial services. We don't wish the burden of unnecessary subpoenas on anyone, but we welcome dialogue anytime with any government agency or elected official about the future we can build together when we champion responsible defy innovation, especially in our home state. Neither the VC firms nor the Attorney General's office commented on the news. However, one person who had viewed the subpoenas spoke under a condition of anonymity, stating, Letitia James seems to be following in the footsteps of SEC Chairman Gary Gensler,

using crypto as a political punching bag. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now, we are in a major political parties platform, which will lead ultimately to the

creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code breakdown 10 to get 10% off. Staying on similar themes, crypto-friendly United Texas Bank has been hit with a

seasoned desist order from the Federal Reserve. The central bank examined United Texas in May of last year and said it found, quote, significant deficiencies in corporate governance in board oversight. The deficiencies were related to foreign correspondent banking and digital asset customers, specifically regarding anti-money laundering and Bank Secrecy Act compliance. The bank agreed to strengthen board oversight of its compliance framework and change its customer due diligence program. United Texas had been the banking partner for Circles' USDC integration on the Stellar Network, which was used by MoneyGram to facilitate cross-border payments.

This is the second crypto-friendly bank to face a crackdown from the Fed over the past month. In early August, customers' bank was hit with a similar cease and desist and came to the same agreements on making compliance improvements. It isn't clear from the orders exactly what the Fed found in their examination. No specific claims were made in the order. It could be anything ranging from simple understaffing in the compliance department to a regulatory claim that banks need full visibility into the stable coin operations they service. Most in the industry aren't looking to give the Fed the benefit of the doubt here. Dan Spuller, the head of industry affairs at the blockchain association, tweeted, a cease and desist order for United Texas Bank in Dallas as Operation Chokepoint 2.0

continues. When customers' bank was issued a cease and desist, former banker Austin Camp, made the point that the Fed can find noncompliance anywhere they choose to look. He commented, the problem this creates is one of discretion. Under the current BSA AML standards, all banks are essentially noncompliant. Certainly, at least under the standards being applied to crypto. This means that in each case, when a regulator chooses to lean on this as a concern, there will be superficial evidence that allows them to proclaim those actions are justified. Now, staying on political themes, the Harris campaign is now accepting crypto donations, sort of. At an event on Wednesday, Coinbase CFO, Alessia Haas, said the Harris campaign was

using their platform to accept crypto donations. According to a Coinbase spokesperson, Haas was actually referring to the Future Forward USA PAC rather than the Harris campaign directly. Future Forward is one of the largest Democrats supporting PACs, having raised $164 million so far this year. Crypto donations have been a tiny part of this year's fundraising picture. In the second quarter, the Trump campaign gathered only a few million dollars worth of crypto, with almost all of it coming in the form of large donations from industry executives. Still, accepting crypto donations has become a symbol of engagement with the industry and something that Harris supporters want to see. At the same event on Wednesday, Haas opined on the much-anticipated Harris-Cryptopivot, stating,

She has a huge opportunity. We're cautiously optimistic. She has not rolled out the details yet, but she has made overtures that she would like to drive crypto legislation. With new enforcement headlines piling up, though, others are less convinced. Mike Dutas tweeted, Looking forward to one U.S. government anti-crypto regulatory action per day moving forward as the Great Democrat-led crypto reset continues. Meanwhile, the Crypto for Harris Group has planned at least eight fundraisers to be held across

the nation over the next month. co-organizer Amanda Wick said, Our system, sadly, is too often pay to play. And many folks in the crypto industry know that, but they've been burned for four years of terrible policy under Biden and are reluctant to give until Harris shows signs of a pivot. But there is a massive amount of money in votes in crypto just waiting for that sign. We are working with the campaign especially hard to get some indication of a pivot

before it's too late, and that money and those votes are lost for good. Now, a recent article published by the Northeastern University Press took a critical look at how much the crypto vote actually matters. We've seen a range of polling demonstrating crypto voters are absolutely a real constituency. A recent poll from Farley Dickinson University found that around 1 and 7 voters owned crypto, but their voting intentions are a little mixed. 50% of the crypto owners surveyed plan to vote for Donald Trump, while 38% intend to cast their ballot for Kamala Harris.

These numbers were basically inverted for non-crypto owners, implying that Trump's pro-crypto strategy is at least somewhat effective, or at least that it correlates to existing preferences. Still, the commentary alongside the polling data claimed, quote, self-identified liberals, moderates, conservatives, progressives, and MAGA voters are all about equally likely to say that they own cryptocurrencies. Northeastern University professor, Ravi Sarathi said, both Republicans and Democrats own crypto. The amount of people who are now aware of and investing in Bitcoin is grown compared to before

those ETFs were approved. He suggested that the increasing number of Bitcoin investors could make it a larger factor in the election than some are predicting. Nick Beauchamp, Associate Professor of Political Science at Northeastern University, thought it was much more clear, stating, the crypto voting block is not voters, but donors. He continued, crypto appears on almost no one's list of important issues, and most people either are unaware of it or have rudimentary opinions. However, there are a number of crypto-associated donors who care very much, and these people are the only reason that the campaigns are making

crypto statements, and probably the only reason many Republicans and some Democrats like Chuck Schumer are resisting regulation. And one final political note, having won his primary earlier this week, crypto lawyer John Deaton has arranged two debates with incumbent Massachusetts Senator Elizabeth Warren. The debates will take place in October, although of course it's unclear if crypto will be on the agenda. During his victory speech, Deaton challenged Warren to a series of five single-issue debates, covering immigration, the economy, income inequality, women's reproductive rights, and foreign wars. While Deaton is well known in the crypto industry, his campaign is centered around working-class issues. Deaton found the response from the Warren campaign unsatisfactory, stating,

the country faces multiple crises in trying to cram all the issues into two short debates is a disservice to voters. Now, while crypto might not get a mention on the debate stage, Warren's campaign is certainly leaning into the narrative in their messaging. Campaign manager Janice Rottenberg said, a small handful of crypto billionaires and corporate special interests poured more than $2 million into a super PAC to handpick their preferred Republican candidate. And now Massachusetts voters have a clear choice that could determine control of the Senate. Interesting stuff. Excited to see that campaign heating up. But for now, that is going to do it for today's breakdown. Appreciate you guys listening as always. And until next time, be safe and take care of each other.

Peace.