Regulation Can Play 'Positive Role’ In Where DeFi Goes: dYdX CEO

A Wells Notice sent to Uniswap Labs has reignited the debate

By: André Beganski

April 11, 2024

To regulate, or not to regulate, that is the question — at least in its most basic form concerning decentralized finance, according to dYdX Founder and CEO Antonio Juliano. 

Two weeks ago, Antonio crafted “key principles” for DeFi regulation that were shared on X by dYdX’s Head of Policy Rashan Colbert. Among them were empowering law enforcement to do its job, equal access to DeFi protocols, accurate and complete information, and safe and transparent mechanisms for crypto users.

“I think a lot of my peers in the crypto space would be like, ‘What are you talking about? This is just software. You can't regulate it,’” Antonio said. “But actually, I think there are really important ways that regulation can play a positive role in what DeFi is.”

A willingness to sketch out what principles could apply to DeFi in a regulatory sense is “a really important evolution” in the conversation that members of DeFi’s community are starting to have with regulators, Antonio said. Debating DeFi regulations has been basic for so long, he argued, as a portion of DeFi’s advocates have argued for no regulations at all.

The conversation was partially reignited Thursday when Uniswap Labs, the creators of crypto’s most popular decentralized exchange, said it had received a Wells Notice from the SEC. Effectively, the company was put on notice by regulators that an enforcement action could soon be brought against the firm — in a corner of crypto often compared to the Wild West for its “code is law” ethos.

“I am confident that the products we offer are legal,” Uniswap Labs Founder and CEO Hayden Adams said on X. “It’s been clear for a while that rather than working to create clear, informed rules, the SEC has decided to focus on attacking long-time good actors.” 

The SEC’s Wells Notice to Uniswap Labs comes as DeFi activity heats up in record-setting fashion. In March, for example, decentralized exchanges saw $269 billion in trading volume, topping figures from November 2021, when exchanges saw $240 billion in volume, according to DefiLlama

DYdX is a decentralized exchange that focuses on perpetual futures contracts, a type of derivative that lets traders speculate on an asset’s price in a cash-settled way. The platform has seen $1.7 billion in derivatives volume over the past day, while Uniswap has seen $2.7 billion worth of cryptocurrencies trade hands during the same period.

One DeFi principle that Antonio gets particularly overlooked is the equal access to financial tools that DeFi can provide — something that “fundamentally does not exist” in other pieces of financial infrastructure powering the world today. Giving Wall Street firms the same opportunities as average joes is an “exciting concept that hasn’t existed before,” Antonio said.

Most of his principles are borrowed from best practices that already exist in DeFi today. And on occasion, U.S. courts have weighed how DeFi technology and securities laws intersect, such as decisions delivered by Southern District of New York Judge Katherine Polk Failla. Last year, she dismissed a class action lawsuit brought against Uniswap Labs and its investors.

In that specific case, the lawsuit was brought on behalf of customers who said they were burned by so-called scam tokens on Uniswap. But because token issuers were responsible for the specific smart contracts that allowed the tokens to trade, Judge Failla compared it to trying to hold a company like Venmo or Zelle responsible for a drug deal that occurs on their payments apps.

Regarding a Wells Notice received by Uniswap Labs, the SEC’s Director of the Division of Enforcement, Gubir S. Grewal, said during a speech this month that the crypto industry will be hard-pressed to receive what he considers special treatment.

“A decade’s worth of verbal gymnastics [has been] just a backhanded way of saying, ‘We want a different set of rules than those that apply to everyone else,’” Grewal said. “The federal securities laws apply equally to everyone.”

Whether it’s networks like Solana or Base, a recent uptick in onchain activity has been elevated by meme coins this year. Often too new or novel to be listed on centralized exchanges, most meme coins get their start on platforms like Uniswap, where anyone can list their own token. In practice, these tokens are volatile, with dizzying climbs and falls.

Describing the involvement of financial institutions in DeFi as a pendulum, Juliano said positive price action or an influx of retail-type users can serve as a major draw. Conversely, regulatory pressure can lead active traders to step aside — despite a desire to chase trading volumes to where activity takes place.

“There had been a lot of Wall Street firms that were trading in crypto, and some of [them] were trading on dYdX,” Antonio said. “There's some of that now — a little bit less than there was a few years ago.”


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