SEC's pending lawsuit against Uniswap is poor policy

It didn’t have to be this way. On Wednesday, the Securities and Exchange Commission signaled it will sue Uniswap, the most important company in the fast-evolving crypto field known as DeFi. This is disappointing not only because the SEC is on shaky legal ground, but because the agency risks stifling one of the most intriguing new technologies to emerge in the field of finance for years.

If you’re unfamiliar, DeFi (decentralized finance) provides a novel twist on the centuries-old model of the exchange and brokerage business. Instead of relying on a centralized authority to arrange a transaction, buyers and sellers trade directly with each other on a platform that provides an automated market maker tied to so-called liquidity pools. The tech is new enough that it’s hard to sum up in a few words (CoinDesk has a good explainer), but the key point is that DeFi makes it possible to trade in a way that’s faster and more secure and efficient than ever before.

Like many other new technologies, DeFi has plenty of problems—most notably hacks, scams, and a plethora of scumbags like the Mango Markets guy I wrote about on Tuesday. The underlying tech, though, is legit. Mainstream publications like The Economist and the Wall Street Journal have touted its long-term promise, and I regularly encounter people from the world of traditional finance who predict DeFi-style platforms will challenge a range of legacy applications in coming years.

Meanwhile, DeFi’s flagship company is the antithesis of a shady, offshore crypto venture. Uniswap’s corporate office sits smack in the middle of SoHo in Manhattan, and its COO is a Harvard Law graduate who spent years working at BlackRock and Goldman Sachs. Its founder and CEO is a soft-spoken and widely respected computer scientist who developed the Uniswap protocol after getting laid off at Siemens. This is precisely the sort of cutting-edge startup that should be hailed as a U.S. success story.

Alas, as is often the case with new technologies, Uniswap and other DeFi platforms don’t fit neatly into existing regulatory models. And while regulators and Congress would have once worked to craft new laws to foster it—as they did 25 years ago in response to the internet—the SEC is instead seeking to smother DeFi as part of a broader ideological campaign to crush crypto. In this case, though, the agency may have picked the wrong fight given that Uniswap is an aboveboard operation with a deep war chest to litigate. The legal fight will likely take years and serve to slow the evolution of a promising new technology. What a shame it has to be this way.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

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