The Commodity Futures Trading Commission (CFTC) continues to expand its regulatory reach in the decentralized finance (DeFi) space, this time targeting Uniswap Labs, the developer behind a prominent decentralized exchange protocol. This enforcement action continues the CFTC’s recent trend of targeting DeFi platforms, following similar cases against protocols like Opyn, Deridex and ZeroEx.[1] The CFTC fined Uniswap $175,000, alleging violations of the Commodity Exchange Act for offering off-exchange leveraged retail crypto commodity products on its platform.
The CFTC’s enforcement action centers on Uniswap’s decentralized trading protocol and associated web interface, which allowed retail users to trade certain leveraged tokens. These tokens provided approximately 2:1 leveraged exposure to commodities like bitcoin and ether. The CFTC asserted that these transactions did not result in actual delivery within 28 days and were thus subject to CFTC regulation.
However, the settlement has drawn sharp criticism from within the CFTC itself. Commissioners Caroline Pham and Summer Mersinger both issued dissenting statements, raising concerns about the legal basis and potential implications of the enforcement action.
Commissioner Pham questioned the lack of evidence in the administrative record describing the specific terms and characteristics of the leveraged tokens. She argued that without such information, it is impossible to perform an appropriate legal analysis to determine whether the CFTC has jurisdiction in this matter.
Commissioner Mersinger’s dissent went further, expressing concern that the enforcement action could stifle innovation in the DeFi space. She noted that Uniswap had taken proactive measures to block trading of the leveraged tokens in question after the Commission’s settlement in a previous “DeFi Sweep” involving those same tokens. Commissioner Mersinger also noted that rather than applauding Uniswap for being attentive to the CFTC’s enforcement efforts, the Commission brought charges against Uniswap covering the time period before those particular tokens were blocked from its platform.
Both commissioners emphasized the need for clearer regulatory guidance for DeFi protocols, rather than relying on enforcement actions to set policy. They suggested that the CFTC should engage in notice-and-comment rulemaking to provide clarity to the industry.
The CFTC’s action against Uniswap follows similar enforcement measures taken against other DeFi protocols, including Opyn, Deridex and ZeroEx. In particular, in the ZeroEx case, as with Uniswap, the CFTC took action against protocol developers for soliciting or accepting orders for the same four leveraged tokens (i.e., BTC2XFLI, ETH2xFLI, ETH2xFLI-P and BTC2xFLI-P), despite the fact that neither Uniswap nor ZeroEx controlled what assets users decided to contribute to liquidity pools on the respective platforms. This approach continues to raise difficult questions about the extent of liability for DeFi protocol developers when users interact with their platforms in ways beyond their direct control.
Click here to access CFTC Commissioner Summer Mersinger’s dissent to the Uniswap enforcement action.
Click here to access CFTC Commissioner Caroline Pham’s dissent to the Uniswap enforcement action.
[1]See Katten’s Passle post on the Opyn, Deridex and ZeroEx enforcement actions here.
The word ‘responsible’ in front of the word ‘innovation’ in Congress’ statement of the CFTC’s mission was deliberate, because we all know that innovation can just as easily be used by criminals. For example, in the 1930s, new faster cars allowed criminals to escape from crime scenes and to engage in crime sprees . . . Congress, the Department of Justice, and the FBI chose to meet this threat by passing new laws . . . that targeted the criminals, not the invention they used in committing their crimes. But, imagine if J. Edgar Hoover had charged Henry Ford with liability for the crimes of John Dillinger and Bonny and Clyde because the Ford V8 was central to their ability to commit crimes. This result is the natural endpoint of the Commission’s logic that is at play in this settlement.
