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A class action lawsuit brought against Uniswap was tossed out by a district judge on Tuesday, who found those associated with the decentralized exchange were not liable for so-called scam tokens that purportedly burned traders.
The lawsuit, brought by trader Nessa Risley last April and on behalf of other Uniswap users, accused the decentralized exchange’s developers and investors of violating securities laws. It alleged the exchange was an unregistered broker and dealer, offered unregistered securities, and allowed token issuers to scam investors.
The tokens in question included Matrix Samurai (MXS), Rocket Bunny (BUNNY), and Alphawolf Finance (AWF). Southern District of New York Judge Katherine Polk Failla, who dismissed the case, said the plaintiffs' “dilemma” is the pseudo-anonymous nature of those token issuers.
“In a perfect (or at least, a more transparent) world, plaintiffs would be able to seek redress from the actual issuers who defrauded them,” she wrote. “In the absence of such information, plaintiffs are left to argue that [Uniswap Labs] facilitated the trades at issue.”
Operating under the umbrella of decentralized finance, or DeFi, Uniswap is a popular example of an application that taps blockchain tech as opposed to banks. According to DappRadar, Uniswap V3 has seen $7 billion in trading volume over the past 30 days.
DeFi’s appeal is partly rooted in its permissionless nature. That includes the ability for anyone to create and list their own tokens on exchanges like Uniswap. While some like PepeCoin go on to see dizzying gains, others, such as BALD, leave investors scratching their heads as they crash.
For example, a report released by the Multidisciplinary Digital Publishing Institute last year claimed that 97% of tokens on Uniswap were “rug pulls,” yet the research was met with pushback within crypto circles.
Judge Failla found that Uniswap’s ability to charge transaction fees, among other aspects, such as a governance token, wasn’t convincing enough to find the exchange’s associates liable.
“The Court declines to stretch the federal securities laws to cover the conduct alleged, and concludes that plaintiffs’ concerns are better addressed to Congress,” she wrote.
Judge Failla's decision said that smart contracts underlying the exchange’s core functions should be viewed separately from code underpinning liquidity pools, which are drafted by token issuers and enable newly created tokens to trade.
“These foundational contracts are distinctive from the token contracts unique to each pool and drafted by issuers,” Judge Failla wrote. “The contracts relevant to Plaintiffs’ claims are not these overarching codes provided by Defendants, but rather the pair or token contracts drafted by the issuers themselves.”
The lack of case law surrounding DeFi protocols was acknowledged by Falia, who said, “No court has yet decided this issue in the context of a decentralized protocol’s smart contract.”
Still, she went on to say that Uniswap’s core smart contracts were not inherently illicit and, regarding other coins, “were themselves able to be carried out lawfully, as with the exchange of crypto commodities ETH and Bitcoin.”
Judge Failla put forth the payment apps Venmo and Zelle as part of an analogy. She said the plaintiff’s lawsuit would be equivalent to trying to hold those companies liable for a drug deal that tapped their platform to facilitate the transfer of funds, instead of the drug dealer.
The lack of clarity surrounding how securities laws apply to DeFi was noted by Judge Falia, referencing a warning from Securities and Exchange Commission Chair Gary Gensler in September 2021 that the class of projects “were under increased scrutiny.”
“Whatever concerns DeFi transactions engender, the law is currently developing around these exchanges,” she wrote. “Regulators may someday address this gray area.”
The class action lawsuit, in addition to bringing federal law claims, sought to pin down Uniswap on laws in North Carolina, Idaho, and New York. Those claims, unlike ones brought under federal laws, were dismissed without prejudice, meaning that the lawsuit could resurface in those jurisdictions.