Original Title: Statement of Objection to Settlement with Uniswap Labs

Original Author: Summer K. Mersinger

Original Translator: Ismay, BlockBeats

Editor's Note: Last night, it was reported that a16z and USV were subpoenaed by a New York court regarding Uniswap regulation. Prior to this, the CFTC accused Uniswap Labs of providing illegal digital asset derivatives transactions. According to the detailed announcement of the CFTC, Uniswap Labs has actively cooperated with the investigation and only needs to pay a fine of US$175,000. But the penalty decision has aroused some dissent. Commissioner Summer K. Mersinger released a statement of dissent to the settlement with Uniswap Labs last night. She said that the Commission’s "regulation through enforcement" approach to DeFi protocols not only fails to provide clear regulatory guidance for the DeFi field, but also may inhibit innovation and drive responsible developers out of the United States. This is why U.S. institutions such as Coinbase have unanimously called for the establishment of clear regulatory rules.

The following is the original content

Today, the Commodity Futures Trading Commission ("CFTC" or "Commission") once again wielded its symbolic enforcement "hammer" against another decentralized financial protocol. Given that the Commodity Exchange Act ("CEA") and CFTC rules were designed for traditional centralized market infrastructure providers and intermediaries, I had hoped that the Commission would one day consider rulemaking, or at least provide guidance, to clarify how DeFi protocols can comply with these regulations. Unfortunately, today is not that day.

Regulation by Enforcement

This case has all the hallmarks of regulation by enforcement as we know it: a paltry settlement with a fine that had little to do with the alleged conduct, sweeping statements about the industry as a whole that have no substantive relevance to this case, and legal theories that have not been tested in court.

Our use of enforcement powers over DeFi protocols, rather than clear rules through notices and comment solicitations, risks driving responsible DeFi developers overseas, where they will build businesses, jobs, and economic activity, leaving the United States with only the bad actors and criminals whose sole purpose is to take advantage of American citizens.

In addition, if we continue to pursue an enforcement-first approach, one or more of the DeFi protocols we target may choose litigation rather than an out-of-court settlement. Litigation of these cases would not only consume significant government (and private sector) resources, but could also result in a litany of lawsuits with mixed results and conflicting conclusions.

The CFTC is not the only agency to struggle with increased enforcement, but I hope we can stop using this often short-sighted strategy. Wielding the enforcement hammer against these DeFi protocols may result in some short-term “wins,” but in the long run, it will only create more problems without better solutions.

The Cost of Doing Good

In addition, I am concerned that this settlement sets a distorted precedent for future Commission actions—punishing efforts to comply with the law.

The allegations in this settlement are supported by the fact that Uniswap created, offered, and maintained a protocol that allowed third parties to trade leveraged tokens. At the same time, however, Uniswap also took proactive steps to try to block trading in leveraged tokens. In fact, after the Commission reached a settlement in its previous “DeFi Cleanup,” Uniswap blocked trading in the specific tokens involved in this settlement.

However, rather than commending Uniswap for paying attention to our enforcement actions and taking steps to respond to our regulatory approach in the DeFi space, we instead filed charges against Uniswap covering the period before its platform blocked these specific tokens. For those in the DeFi community who strive to comply with CEA and CFTC regulations, the only message this settlement sends is the Commission’s estimate of the cost of DeFi trying to do good.

Misplaced Priorities

The decision to devote resources to this case also raises concerns about the Commission’s enforcement priorities. Uniswap did not act as a liquidity provider, nor did it extend credit, actively trade leveraged tokens, or collect transaction fees from related transactions. Moreover, there is no allegation of market or customer harm in this matter. For every case we bring against a DeFi protocol that does not involve allegations of fraud or complaints of customer losses, we risk diverting resources away from cases where there are real innocent victims who have suffered financial losses from true fraud.

In recent testimony to Congress on the CFTC’s budget, Chairman Benham discussed the need to prioritize institutional resources due to the growing fraud targeting the digital asset markets:

“In the digital asset space, where we have the most activity…With many institutional resources not accounted for in our budget allocations and being allocated to an unregulated market, I am concerned that the current trend is unsustainable. That is, we will continue to see rampant fraud and manipulation in the digital asset markets that will harm American customers and may even impact traditional financial markets.”

I share the Chairman’s concern that “current trends are unsustainable,” a concern that is heightened when we devote enforcement resources to investigating DeFi activity where there is no clear harm or clear benefit, especially as we see the protocol proactively taking compliance steps.

We are in the midst of an epidemic of financial fraud. So-called “pig-slinging” scams alone may cost victims up to $75 billion and serve as a significant source of funding for transnational criminal organizations. I commend the Commission for warning customers about pig-slinging and other online fraud, for bringing its first pig-slinging case in December 2023, and especially for hosting the first inter-agency conference to combat pig-slinging scams recently. But we must do more to combat this fraud—and, crucially, we must use our limited resources wisely.

No Room for Innovation

The concept of platform responsibility is complex. While platforms may be held liable for conduct that occurs through their protocols in some cases, the expansion of such liability in the absence of exacerbating facts is worrisome.

With this settlement, the Commission appears to be taking the position that any DeFi platform may be held liable for all conduct that occurs on its protocol. The practical effect of such an approach would be to severely discourage the launch of any DeFi protocol in the United States and significantly increase the likelihood that all DeFi innovation and economic activity will move elsewhere. This theory of liability also raises a broader question of whether the Commission is fulfilling its duty under the Commodity Exchange Act to promote “responsible innovation” (rather than stifle it), a duty that Congress has identified as one of the core principles of the CFTC’s mission.

Congress’s choice of language to place “responsible” before “innovation” in the CFTC’s mission statement was deliberate because, as we all know, innovation can also be exploited by criminals. For example, in the 1930s, newer and faster cars enabled criminals to flee crime scenes and go on crime sprees across multiple states. To curb the growing crime in the so-called “Age of Public Enemies,” Congress, the Department of Justice, and the FBI chose to pass new laws, enact regulations, and strengthen enforcement capabilities, targeting criminals rather than the inventions used to commit their crimes.

However, imagine if J. Edgar Hoover had held Henry Ford responsible for the crimes of John Dillinger and Bonnie and Clyde because the Ford V8 was the key tool that enabled them to commit their crimes. This outcome is the natural endpoint of the logic that the Commission has taken in this settlement.

Continuing to bring and resolve these cases against DeFi platforms is not consistent with the goals and vision of the CFTC. This settlement and the Commission’s previous “DeFi Cleanup” settlement raise transparency questions and concerns about the CFTC’s commitment to its stated goals. Our 2022-2026 Strategic Plan recognizes that “innovations like DeFi require broad stakeholder engagement” and specifically points to DeFi as an area that needs to “increase stakeholder engagement and utilize principles-based regulation.”

I quote again from Chairman Benham’s recent testimony:

“Today, technology is driving change in financial markets, and the CFTC must keep pace to fulfill its mission and Congressional mandate. Customer protection and market resilience are at the heart of our work, while supporting continued growth and innovation to ensure the agency is well positioned for the next 50 years.”

Enforcement actions like this undermine the credibility of our strategic plan and run counter to our statutory mission to promote responsible innovation and our publicly stated core value of being transparent with market participants about our rules and processes.

A Better Way Forward

Unlike the broad regulatory uncertainty in crypto markets, the CFTC has exclusive regulatory jurisdiction over DeFi protocols that involve derivatives trading. This allows the Commission to issue rules that promote responsible innovation while achieving other statutory and regulatory goals by finding the right path for protocols that wish to comply and operate in a regulated environment.

Rulemaking through notice and comment provides the DeFi community, consumer advocates, industry representatives, and the American public with an opportunity to engage with the Commission and use their expertise and experience to suggest how DeFi can be appropriately regulated while complying with the obligations of the Commodity Exchange Act.

Regulation through enforcement is, at best, a stopgap measure. At some point, the Commission must initiate a rulemaking process around DeFi and consider our role in promoting responsible innovation in the future of U.S. derivatives markets.

For these reasons, I dissent.

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