Jul 27, 2021
Uniswap Pulls Tokenized Stocks & Derivatives Following Regulatory Warnings
“We’ll go after the person that’s essentially operating an unlicensed exchange”: CFTC Commissioner Dan Berkovitz
Mere days after two speeches by U.S. market regulators warning of potential illegality of certain derivatives contracts and tokenized stocks in the cryptocurrency space, the DeFi protocol Uniswap announced if would restrict access to certain tokens through its main trading interface, the website at app.uniswap.org, which is operated by Brooklyn-based Uniswap Labs.
In a blog post on July 23, Uniswap wrote:
To continue to innovate and provide this tool for the Uniswap community, we monitor the evolving regulatory landscape. Today, consistent with actions taken by other DeFi interfaces, we have taken the decision to restrict access to certain tokens through app.uniswap.org. These tokens have always represented a very small portion of overall volume on the Uniswap Protocol — a full list is available here.
Uniswap’s announcement came two days after SEC Chair Gary Gensler implied in a speech before the American Bar Associaion that tokenized stocks may be security based swaps, which would subject them to reporting and registration requirements:
Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.
If these products are security-based swaps, the other rules I’ve mentioned earlier, such as the trade reporting rules, will apply to them. Then, any offer or sale to retail participants must be registered under the Securities Act of 1933 and effected on a national securities exchange.
The Uniswap change also came three days after an appearance by CFTC Commissioner Dan Berkovitz at a DeFi conference where he said it’s not only unlawful to trade futures (and other derivatives) on an unregistered market; entering into the contract itself is also unlawful. (I covered Commissioner Berkovitz’s interview in greater detail last week).
In a keynote interview on July 20 at the Solidus Labs’ DACOM DeFi 2021 conference, Commissioner Berkovitz said (beginning around min 14):
The Commodity Exchange Act and our regulation don’t just make it unlawful to trade a futures contract not on a registered market. Now typically, that prohibition, we have enforced it against would-be exchanges or entities that are performing the function of an exchange that are not licensed. So we’re saying “you are offering futures contracts in an unlicensed platform” and therefore we bring enforcement actions. And we’ve done that for cryptocurrencies — unlicensed trading of options, unlicensed trading of futures. We’ll go after the person that’s essentially operating an unlicensed exchange.
But at the same time that contract itself — it’s unlawful to enter into the contract. The participant who is entering into the futures contract — that’s an illegal contract. We typically have not gone after those individuals. We’ll go after the person who’s facilitating the trading.
What Did Uniswap Block Access To?
I noticed three interesting categories of tokens that Uniswap is now restricting access to via its main website:
- Tokenized Indexes or Stocks
- Derivatives that appear to have originated at Opyn or PerlinX (two active, the rest expired);
- Synthetic “inverse” products (such as Synth Inverse Perpetual Oil Futures) from Synthetix
Uniswap posted its full list of blocked tokens is on GitHub, in a somewhat unfriendly JSON format. I encourage reading the full file; JOSN is a file format that lists data in a series of key/value pairs, so the content is still readable to non-programmers.
The first category, tokenized stocks, seems to speak to the warnings Chair Gensler made; the latter, to those made by Commissioner Berkovitz. Here’s a deeper dive to some of the restricted tokens that stuck out to me:
Uniswap restricted a number of tokenized indexes and stocks
DeFi protocol Synthetix has a number of tokenized stocks and index products which they advertise on their website. (These still appear tradable on the DeFi exchange Kwneta). Their main site states that “Trades between Synths generate a small fee that is distributed to SNX collateral providers.” (Synthetix full terms and conditions can be found here)
The creator/deployer of all of the following synthetic stock/index contracts appear to be Synthetix, as they all are linked to an address that Etherscan identifies as “The deployer address for Synthetix’s contract.”
Several of these tokenized stocks/indexes appear on the Uniswap restricted token list, including:
- Synth FTSE 100 Index (sFTSE)
Synthetix describes this tokenized index as one that “Tracks the price of sFTSE FTSE 100 Index through price feeds supplied by an oracle” and specify that the “derivative token” has a 0.30% fee. (“Oracles” are data feeds that allow smart contracts to query data, like stock prices. The Ethereum foundation has a longer explainer here.)
You can view the most recently activity on this contract at its Etherscan address (the last trade appears to be about one month ago): https://etherscan.io/address/0x23348160D7f5aca21195dF2b70f28Fce2B0be9fC
- Synth Apple (sAAPL)
Etherscan address (last swap is 2 days ago): https://etherscan.io/address/0x7537AAe01f3B218DAE75e10d952473823F961B87
- Synth Amazon (sAMZN):
Etherscan address (last swap is about 1 month ago): https://etherscan.io/address/0x9CF7E61853ea30A41b02169391b393B901eac457
Here is how Synthetix describes sAPPL and sAMZN on its website:
Uniswap restricted “Inverse” Synthetic assets on oil, cryptos
Like the tokenized stock and indexes listed above, the following “inverse” assets (which are simply two examples from the full Uniswap unsupported tokens list) also appear to be created by Synthetix.
- Synth Inverse Perpetual Oil Futures (iOil)
Etherscan address (last trade 37 days ago): https://etherscan.io/address/0xA5a5DF41883Cdc00c4cCC6E8097130535399d9a3
Here is a description of iOIL from Synthetix’s docs:
Inversely tracks the price of Inverse Perpetual Oil Futures (OIL) through price feeds supplied by an oracle. The entry point is $45.087 (the approximate market price at time of creation). This Synth freezes when it reaches its upper limit of $67.63 (i.e. when Inverse Perpetual Oil Futures’s value reaches $22.54) or its lower limit of $22.543 (i.e. when Inverse Perpetual Oil Futures’s value reaches $67.631). If it reaches either of its limits and gets frozen, it will no longer be able to be purchased on Synthetix.Exchange, but can still be traded for other Synths at its frozen value. At some point after it has reached either of its limits, it will be substituted for another iOIL with different limits.
- Synth Inverse Ether (iETH)
Etherscan address (one pending trade from one day ago): https://etherscan.io/address/0xA9859874e1743A32409f75bB11549892138BBA1E
Inversely tracks the price of Inverse Ether (ETH) through price feeds supplied by an oracle. The entry point is $1548 (the approximate market price at time of creation). This Synth freezes when it reaches its upper limit of $2322 (i.e. when Inverse Ether’s value reaches $774) or its lower limit of $774 (i.e. when Inverse Ether’s value reaches $2322). If it reaches either of its limits and gets frozen, it will no longer be able to be purchased on Synthetix.Exchange, but can still be traded for other Synths at its frozen value. At some point after it has reached either of its limits, it will be substituted for another iETH with different limits.
Uniswap Blocked Active Derivatives from PerlinX
There appear to be at least two options (or another sort of expiring synthetic derivative asset) from PerlinX that Uniswap is blocking from its website as well, synthetic USD and Synthetic Gold, both with a March 2022 expiry (viewable on their website here, bottom left).
PerlinX proclaims on its website that it “will be the interface for the creation of synthetic assets of any kind.”
The contract creator for both the following assets is not PerlinX, however, but listed as UMA. UMA bills itself as “enabl[ing] anyone to build decentralized financial products”. On its page on options, UMA states it enables “Call and Put options” that “allow DAO treasuries to offer yield opportunities to tokenholders, as well as leverage opportunities to speculators”.
Here are the two PerlinX-named tokens now listed on Uniswaps prohibited tokens list:
- pxUSD Synthetic USD Expiring 31 Mar 2022
Etherscan address (last trade 2 days ago): https://etherscan.io/address/0x4b606e9eb2228c70f44453afe5a73e1fea258ce1
- pxGOLD Synthetic Gold Expiring 31 Mar 2022
Etherscan address (last trade 13 days ago): https://etherscan.io/address/0x59fec83ec709c893aedd1a144cf1828eb04127cd
Uniswap blocked expired options from the options DeFi protocol Opyn
Finally, Uniswap has prohibited several option contracts from Opyn, a DeFi protocol that claims on its blog to offer “Leverage, yield, and risk management for decentralized finance”.
The following expired options contracts share the same Contract Creator, the address 0xcc5d905b9c2c8c9329eb4e25dc086369d6c7777c which is labeled on Etherscan as “Opyn: Options Factory”
- oETHp Put 180 SEP2520
https://etherscan.io/address/0xE3A2c34Fa2F59ffa95C4ACd1E5663633d45Bc3AD
- oETHc Call 400 SEP2520
https://etherscan.io/address/0x05977EBC26825C0CD6097E0Ad7204721516711Eb
Broader implications for tokenized stocks and crypto derivatives
Uniswap is one of the leading DeFi protocols, measured by both fees generated and digital assets locked on its platform:
- Measuring by fees generated, Uniswap’s Version 3 protocol is the second-largest in cryptocurrency markets in the last week, second only to the Ethereum blockchain, according to cryptofees.info.
- Measuring by total crypto assets “locked” on its platform, Uniswap is 6th across crypto markets, according to defipulse.com.
Most users are accessing Uniswap via its website, not making programatic calls to its protocol, so Uniswap removing these tokens from its website will likely have a serious impact on their volumes. Because the tokens they restricted span both tokenized stocks and derivatives, including options on crypto assets, it will be interesting to watch what other DeFi sites do next. This move by Uniswap comes, after all, after Binance voluntarily ended its sale of tokenized stocks following international regulatory scrutiny.
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