On September 4, 2024, the Commodity Futures Trading Commission (CFTC) issued an Order Instituting Proceedings and imposed remedial sanctions against Universal Navigation Inc., operating as Uniswap Labs. The action was taken due to Uniswap Labs’ violation of the Commodity Exchange Act (CEA) for offering and facilitating off-exchange leveraged token transactions to retail customers who were not Eligible Contract Participants (ECPs). During the period from March 2021 to September 2023, Uniswap Labs allowed users to trade digital assets, including leveraged tokens, through its decentralized protocol on the Ethereum blockchain. These transactions were conducted without the necessary regulatory compliance, leading the CFTC to impose penalties and enforce corrective measures. Uniswap Labs settled the case without admitting or denying the allegations, agreeing to pay a $175,000 civil penalty and to cease further violations of the CEA.
The case between Universal Navigation Inc., operating as Uniswap Labs, and the CFTC revolves around Uniswap Labs’ activities related to decentralized finance (DeFi). Uniswap Labs contributed to the development and deployment of a decentralized trading protocol on the Ethereum blockchain, which allows users to trade digital assets via smart contracts. The protocol enabled users to interact directly with liquidity pools, trading digital assets without a traditional order book. To facilitate access to this protocol, Uniswap Labs developed a web interface through which users could trade, including a limited number of leveraged tokens that provided leveraged exposure to cryptocurrencies like Bitcoin (BTC) and Ether (ETH). These tokens were available to both retail and institutional users between March 2021 and September 2023 (the “Relevant Period”), and trades occurred without proper restrictions.
The key issue in the case is that Uniswap Labs allowed retail customers who were not ECPs to engage in trading leveraged tokens through its platform. Leveraged tokens increase a user’s exposure to the price movements of underlying assets, potentially multiplying gains or losses. The CFTC found that these trades were conducted off-exchange, meaning they were not executed on a registered or designated contract market as required by U.S. law for such leveraged transactions involving retail investors. Furthermore, the trades did not meet the requirement for actual delivery of the underlying assets (i.e., Bitcoin and Ether) within the legally required 28-day period. This means that Uniswap Labs violated specific provisions of the CEA by offering and facilitating these transactions.
Uniswap Labs breached two key sections of the Commodity Exchange Act. First, Section 4(a), which prohibits any entity from offering or entering into commodity transactions unless they are conducted on a registered commodity futures exchange. The leveraged token trades facilitated through Uniswap’s platform were deemed off-exchange and thus violated this section, as they involved retail customers who were not ECPs. Second, Section 2(c)(2)(D)(iii), which governs retail commodity transactions conducted on a leveraged or margined basis. Uniswap’s leveraged token transactions involving non-ECPs did not result in actual delivery of the underlying assets and were not conducted on a registered exchange, constituting a violation of this provision.
In settling the case, Uniswap Labs agreed to the CFTC’s order of settlement without admitting or denying the allegations. The company consented to a settlement that included multiple remedial actions. First, Uniswap Labs was ordered to cease and desist from further violations of Section 4(a) of the CEA. Second, the company agreed to pay a civil monetary penalty of $175,000, with the payment to be made within 14 days of the order. Lastly, Uniswap Labs agreed to cooperate with the CFTC in any further investigations or actions related to the case.
As part of the settlement, Uniswap Labs waived its rights to judicial review or appeals concerning this proceeding and acknowledged the CFTC’s jurisdiction over the matter. The company’s cooperation during the investigation resulted in a reduced civil penalt.
In a dissenting statement, Commissioner Summer K. Mersinger criticized the CFTC’s enforcement action against Uniswap Labs, calling it another example of “regulation through enforcement” against decentralized finance (DeFi) protocols. Mersinger expressed concern that the CFTC’s approach, which includes de minimis penalties, untested legal theories, and a lack of guidance for compliance, risks driving responsible DeFi developers overseas and could result in expensive and conflicting litigation. She also argued that targeting DeFi platforms without addressing broader regulatory clarity does little to combat real financial fraud, such as the rise in “Pig Butchering” schemes, and diverts critical resources from cases where customers experience actual harm.
Mersinger further stated that Uniswap Labs had taken proactive steps to comply with the CFTC’s enforcement actions by blocking certain tokens, yet faced penalties. She warned that penalizing compliance efforts sets a troubling precedent and could stifle DeFi innovation in the U.S. Mersinger criticized the CFTC’s broad application of platform liability, which she believes could chill innovation and lead to DeFi development moving abroad. She called for the CFTC to pursue a more transparent, notice-and-comment rulemaking process that engages stakeholders and promotes responsible innovation in line with the agency’s statutory obligations, rather than relying on enforcement to regulate the DeFi space.
Commissioner Caroline D. Pham also issued a statement where she dissented from the CFTC’s enforcement action against Uniswap Labs involving the Uniswap Protocol on the Ethereum blockchain. She argued that there was no evidence in the administrative record detailing the specific terms or characteristics of the leveraged tokens in question, making it impossible to determine whether they fall under the CFTC’s jurisdiction. Commissioner Pham expressed concern that the CFTC’s approach was overly simplistic and based solely on the term “leveraged” in the tokens’ names, leading to a broad and potentially problematic interpretation of the Commodity Exchange Act (CEA).
Commissioner Pham also raised concerns about the Administrative Procedure Act (APA), criticizing the CFTC for establishing broad legal interpretations in a settlement order without engaging in notice-and-comment rulemaking. She warned that the CFTC’s actions could create regulatory uncertainty, negatively impact small cash market businesses, and stifle American innovation.
(Source: https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement090424, https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement090424, https://www.cftc.gov/PressRoom/PressReleases/8961-24, https://www.cftc.gov/media/11201/enfuniswaplabsorder090424/download)
