Uniswap vs SEC Power Struggle Cannot Deter DEXs Away From Their Privacy Mandates

Uniswap UNI/USD, one of the biggest decentralized cryptocurrency exchanges (DEX), is in an ongoing fight against the Securities and Exchange Commission (SEC). Amazingly enough, DEXs of the world seem unmoved about it. They are hellbent on sticking with the privacy mandates, one of the main selling points of the DEX cryptocurrency trading universe. Despite their entanglement with the SEC, Uniswap investors are in the black.

“I firmly believe that the next big wave narrative is going to be privacy and we are going to see more DEXs focusing on this. We’ve invested heavily,” said Shahaf Bar-Geffen, CEO and co-founder of COTI, a confidentiality layer built on the Ethereum blockchain and created by Bar-Geffen and his partner Dr. Nir Haloani out of Israel. 

The U.S. has a strict regulatory environment that affects how DEXs operate, especially concerning investor rights and know-your-customer rules.

In 2023, the SEC issued a so-called Wells Notice to Uniswap. These notices typically mean a company has been warned and faces potential SEC enforcement and fines. In simple terms, the SEC wants all digital asset exchanges to follow the same rules that a platform like E*Trade would follow when onboarding customers and transparency regarding how they handle client funds. All of these things are seen impacting the privacy features these anonymous, decentralized systems were built on, and value as a core principle.

According to Cassels, a Canadian law firm specializing in blockchain regulation, Uniswap argues that SECs regulation of DEXs is agency over-reach because DEXs do not have custody of user funds and do not collect personal user data at all. To the SEC, this means ne’er-do-wells and sanctioned entities can move money around on a DEX and bypass traditional financial systems.

DEXs Not Afraid?

If COTI is any example, privacy is crucial to this subset of the cryptocurrency trading and investing market. The SEC also sees DEX’s as a danger to investors and a massive risk to investor capital.

It’s common to find decentralized exchanges offering extremely risky trade positions, like the potential for up to 60x leverage, for example. While others provide special services where taking positions on permissionless markets becomes possible as more gets stored on-chain due to the recent rise in superior Oracle providers. 

Coinbase COIN and Kraken can’t really do anything like that due to their centralized nature.

“Normally, people are not willing to just reveal their bank accounts, their purchase history, who they vote for, their medical records etc. to companies,” said Bar-Geffen. “Even more true if you are a business; you need the infrastructure in place that can keep a secret. We want people to be free to both have ownership of their data and the freedom to be who they are online, without fearing about their privacy.” He recently told The Street that it was a “common misconception that crypto is used to fund illegal activities.”

Privacy and control are often the top two reasons why people trade on a DEX.

DEX platforms allow users to trade directly from their digital wallets without the need to create an account on that platform.  Users are in control of their funds, so DEXs are not holding client money like Coinbase, for example, or traditional finance. This reduces the exchange hacks because no money is there to hack. And if anyone has ever been hacked on a cryptocurrency exchange, good luck getting those coins back.

Vitalik Buterin said that “One of the largest remaining challenges in the Ethereum ecosystem is privacy”. He understood the importance of this issue to those building these platforms, as did Brian Armstrong from Coinbase.

“Brian described privacy Layer 2 as a key upgrade the industry needs to adopt. This is especially true when you consider the biggest ecosystem by volume, Ethereum,” said Bar-Geffen. “With transparent wallet balances and public trading ledgers, individuals can be subject to doxxing, financial scrutiny, and theft. It’s clear that privacy is an integral part of security and safety on exchanges; and that privacy is a foundational requirement for security to be effective,” he said.

COTI launched in 2017. Their token is up 52.73% over the last 12 months. Cardano Venture Fund invested $500,000 in COTI in 2021. The fund is backed by Cardano, the cryptocurrency most retail traders have heard of and are invested in.

Some Top DEXs and 12-Month Performance

As of 2024, the three biggest decentralized exchanges by trading volume are Uniswap, PancakeSwap CAKE/USD, and SushiSwap SUSHI/USD.

None of these top three have performed the same way,  with UNI up 40.27%; CAKE up 22.58%, and SUSHI flat at 0.29% over the same 12-month period.

Investors buying into the DEX theme must be mindful of the SEC's attitude towards them.

In 2018, the SEC and the FBI went after the 1Broker DEX for failing to register as a commodities-based trader. Their website was seized and 1Broker is no longer in business here. That same year, the SEC charged Zachary Coburn, founder of the EtherDelta DEX, $300,000 for failing to register his exchange, marking the first time the SEC went after this type of crypto exchange. In 2021, Uniswap became the next big fish to fry, as they say.

But Uniswap is punching back.

They seem to have the willpower and the financial muscle to challenge the SEC, emphasizing their belief in the privacy mantra within the DEX universe.

The SEC and traditional finance will be a headwind for some and an opportunity for others.

“DEXs will face challenges in gaining more users anyway because traditional financial institutions are entering the space now,” said Diane Dai, CMO at DODO, a DEX with its own on-chain liquidity provider. Dai is on the team behind the Proactive Market Maker algorithm which is popular amongst top cryptocurrency exchange platforms.

For Dai, the encroachment in this market by centralized heavy weights, be it Coinbase or traditional Wall Street, “presents a challenge to the sector. But it is also an opportunity. Competition will drive innovation and collaboration, and that will benefit the entire DEX ecosystem,” she said.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.