With the spotlight shining firmly on decentralised finance (DeFi) and crypto markets in recent times, it comes as no surprise that authorities and governments from across the globe have begun to scrutinise them more closely.  Reports have surfaced in the past week that the U.S. Securities and Exchange Commission (SEC) – a U.S security watchdog – has been investigating DeFi platforms and the parties associated with them.

DeFi platforms have enjoyed an exponential rise in prominence and popularity as they provide users with more independence and are free from central decision-making bodies to impose restrictions. In light of that, there appears to be a heightened regulatory interest from the SEC for DeFi platforms and the digital asset market.

Who is being investigated?

According to recent reports, Uniswap Labs – the developer of Uniswap, the largest decentralised crypto exchange – appears to be in the crosshairs of the SEC. Uniswap is an open network that operates on a peer-to-peer protocol where transactions don’t rely on a centralised system with intermediaries.

The SEC has previously stated that DeFi platforms aren’t immune from legal scrutiny, especially with digital asset trading bypassing many regulations together with the activities of marketing investment promoters who encourage users to trade on these DeFi platforms. With that being said, the SEC appears to have come good on their promise to scrutinise such entities with this investigation taking precedence.

Why is Uniswap Labs being probed?

Uniswap has consistently seen over US $10 billion in weekly trading volumes pass through its networks, making it a prime candidate for such an investigation from the authorities. The SEC is looking to gather details on how crypto investors make use of Uniswap and how the platform is being marketed.

In an address to Congress in August, SEC chair, Gary Gensler, appealed to lawmakers for the agency to be granted greater authority to monitor DeFi platforms that are not particularly well regulated. With this civil investigation, the SEC is probing investor protection concerns, whether the tokens on the platform are classified as securities, and the precise role of centralised parties on this decentralised platform.

Investigators are also said to be investigating money laundering activities and/or tracking the proceeds of crime that might be occurring on Uniswap. With such large volumes of trade passing through its network unregulated, financial watchdogs such as the SEC are looking for new ways to exert their authority over those responsible and curb unlawful activities from taking place.

Uniswap Labs have been fully compliant with the SEC’s investigation – with a representative stating that the company is “committed to complying with the laws and regulations governing our industry and to providing information to regulators that will assist them with any inquiry.” While clarity is still required on whether the investigation is purely for information gathering or if enforcement action will follow, it’s clear that the SEC plans to have a prominent role in its oversight of the crypto market and DeFi platforms going forward.

Who else is being investigated?

While Uniswap has grabbed the headlines in the SEC’s investigation, other unnamed DeFi platforms are also being closely watched. Gabriel Shapiro, General Counsel for Delphi Labs – another DeFi platform – has said that crypto-focused legal practitioners have been anticipating DeFi enforcement from regulatory bodies. Shapiro recently remarked, “Lawyers in the space have been aware and talking for about a month about how DeFi projects are starting to get letters from the SEC, inquiries from other regulators, and this is just it becoming more public.”

Final thoughts

The net certainly appears to be closing in on DeFi platforms that have long operated without regulations. Although these platforms are decentralised, the SEC will undoubtedly be looking at centralised parties that play significant roles in these operations. These centralised role players are salient to both decentralised finance platforms and decentralised crypto exchanges.

The manner in which the SEC proceeds with this investigation will provide a clear indication of how well DeFi platforms will perform in the future. While very few details about the investigation have filtered into the public domain, there is a feeling that as the investigation matures there will be stricter regulations for decentralised finance and its associated parties. As things stand, it appears that a new era of crypto enforcement has dawned!