Empire Newsletter: Uniswap and DeFi in the SEC’s sights

Gary’s gonna sue

Uniswap was served a Wells notice — a letter from the Securities and Exchange Commission that precedes a formal enforcement action.

Uniswap says it was not surprised, given the SEC’s “abusive” use of power as of late. CEO Hayden Adams declared that the company will fight the SEC for as long as it takes — all the way to the Supreme Court, if needed. They better get out their checkbooks.

The pending charges are a bit unclear. Across a series of posts from Uniswap executives, no one actually spelled out the allegations the SEC has apparently made.

Chief Legal Officer Marvin Ammori did say securities regulators have an argument that Uniswap is operating as an unregistered exchange and brokerage — just as they are in the cases against Coinbase and Binance.

I’d bet the SEC is also claiming that UNI, the decentralized exchange protocol’s native token, is a security. And I’d further bet the SEC is naming some other tokens in the case too. Again, just like they did in the complaints against Binance and Coinbase. In a blog post Wednesday, Uniswap Labs declared that UNI “is not a security because it does not meet the legal definition of any type of security.”

Timing-wise, the SEC filed its lawsuit against Coinbase about two months after the exchange said they got their Wells notice. It stands to reason that we’ll probably get the official complaint soon enough.

Uniswap presumably turned down or did not engage with the SEC on a settlement agreement, which, based on what other exchanges have shared, almost certainly would mean the company would have to cease to operate. Or, at the very least, shutter a majority of their offerings.

“If you followed Coinbase’s public comments, I think Brian Armstrong said they were essentially told to shut down…as a settlement,” Ammori told reporters during a press call yesterday.

“If the claim against us is that we are running an unregistered exchange of some sort and brokering unlawfully, there’s not a lot of room,” he added.

Assuming the SEC will claim that Uniswap is an unregistered broker, Coinbase Chief Legal Officer Paul Grewal says regulators have no leg to stand on. The federal judge in Coinbase’s case last month ruled that Coinbase Wallet could not be conducting “brokerage activities” as the product does not make investment recommendations or hold customer funds.

(If you haven’t already, now is the time to brush up on the Coinbase and Binance lawsuits. There’s going to be a lot of citations from here on out.)

For anyone wondering if we might actually get our hands on the Wells notice — well, don’t hold your breath.

“The notice is less exciting than you think,” Ammori told reporters after being asked if Uniswap would share a copy. Props to Ammori for finding a creative way to say “we don’t want you to see it.”

— Casey Wagner

Data Center

March was Uniswap’s second-biggest month for fees on record: $147.6 million to May 2021’s $251.3 million.
Ether (ETH) has turned slightly inflationary over the past seven days, with 2,223 ETH ($7.9 million) added to the supply.
Blast is processing more daily derivatives volume than appchain dYdX, $1.16 billion to $1.15 billion.
Bitcoin (BTC) is up 2% today, above $70K, shaking off concerns around Wednesday’s inflation data.
Grayscale posted its lowest daily net outflows — $17.5M — on Wednesday, according to BitMEX data.

Crypto can still save Kodak

The ICO boom between 2017 and 2018 was a nightmarish bubble of sketchy gambits, vaporware and affinity scams.

It also birthed some of the biggest projects in crypto today. Aave (formerly ETHLend), BNB, tron (TRX), chainlink (LINK) and filecoin (FIL) all started out as token sales from that market cycle.

But hear me out: KODAKCoin was ahead of its time.

KODAKCoin was meant to be a gamechanger for image rights management. Photographers could’ve instantly monetized their work by registering individual images to a proposed blockchain protocol, KODAKOne, which would automatically tokenize licensing rights.

Anyone who wanted to use a photographer’s work could sign up to the platform and pay KODAKCoin directly to creators, with deals settled by smart contracts.

At the same time, an AI tool would scour the web for any unlicensed usage of those images and — if all went to plan — funnel lost revenue back to creators, even damages. KODAKCoins could then be spent on the platform on “cameras, film, other photographic accessories, studio time, offers of photo assignment or talent agency models,” per its white paper.

Despite KODAKCoin being spearheaded by an unaffiliated company as part of a brand-name licensing deal, Eastman Kodak shares tripled after the ICO announcement in January 2018, as crypto markets were peaking. The whole thing crashed and burned, however, before it ever got off the ground.

The New York Times branded the whitepaper a “mishmash of marketing buzzwords,” which preceded Kodak delaying the token sale citing struggles with vetting participants. Demand, however, seemed to be there: Kodak claimed that 40,000 had signed up for the ICO, which was only to be open to accredited investors to avoid running awry of US securities laws.

Kodak said it was delaying the sale by weeks but it never came. By December 2020, KODAKCoin was officially dead.

Still, there’s very little about KODAKCoin that wouldn’t fit in with what the Web3 space is doing right now: rights licensing via NFTs, royalty exchanges for music and other content, AI-infused marketplaces.

If KODAKCoin were to launch today — when the space is arguably more accepting of token launches, centralized blockchain networks and lofty white papers — chances are it might even flourish, especially so with real participation from Eastman Kodak.

On another timeline, without an antagonistic SEC, perhaps.

— David Canellis

Rainy day funding?

Call it another effort to prepare, perhaps, for a new era in the bitcoin mining sector.

We’re just days away from bitcoin’s next block reward halving, when the number of new bitcoins produced per block of transactions falls from 6.25 BTC to 3.125 BTC. While the precise time is still a bit fuzzy, April 20 appears to be the day the milestone hits.

As Blockworks has reported, bitcoin miners are preparing. They’re building out their balance sheets. They’re diversifying their revenue streams and cutting deals with AI firms. According to Wintermute, some miners are selling bitcoins to fund capital investments.

Hut 8 is closing a troubled mining site — a reflection that financial discipline is paramount when the number of bitcoins produced will fall by half.

This week’s news that mining hardware maker Auradine had raised $80 million seems tied to this broader trend of preparation. Auradine called the round “oversubscribed” and its investors include Marathon Digital, another major US mining firm.

Auradine’s press kit makes no mention of the halving. But one assumes the halving is top of mind for Auradine, as it surely is among other mining firms, given the shifting financial winds would ostensibly impact its customer base.

The case is certainly grimmer for at-home mining enthusiasts, as Blockworks has reported. High break-even prices will likely further cement mining as a decidedly industrial business — the kind of customer Auradine’s products seem geared towards.

How much hash rate the network will lose, at least temporarily, remains to be seen. Back in February, Galaxy predicted that as much as 20% could be lopped off driven by the exit of older, less-profitable hardware, though this wouldn’t impact the overall security of the network.

As always, the price of bitcoin will be a factor here. If, over the long-term, bitcoin’s price rises, then some of those mining rigs could find new life — and profitability. If not, they might be destined for the recycling bin.

— Michael McSweeney

The Works

Cantor Fitzgerald’s Howard Lutnick says stablecoins like Tether and Circle are “fundamental” for the US economy.
Sarcophagus created a dead man’s switch to protect crypto from the grave.
MarginFi founder and CEO Edgar Pavlovsky announced that he’s resigned, adding that he doesn’t “really care about tokens, or money, or any of that.”
Ex-FTX executive Ryan Salame will be sentenced next month.
Elon Musk said he had a “test” — read: burner — account on X. The same account was found trolling Caroline Ellison around the FTX debacle.

The Morning Riff

We’ve hit that point in the cycle where keeping up is practically impossible.

Brand-new governance tokens are airdropped every other day, many of which are suddenly among the highest valued on the market.

Each week sees massive funding rounds for startups you’ve likely never heard of, building out tech stacks that you barely recognise. There’s more points programs, token unlocks, fresh yield opportunities, spicy controversies, accelerating SEC threats.

If you subscribe to the idea that we’re going much higher from here, then the industry is certain to get whackier, faster and more incomprehensible than ever — fast.

There’s little else to do but strap in.

— David Canellis

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