- The judge dismissed Uniswap’s class action lawsuit, stating decentralized exchange associates were not liable for token fraud.
- DeFi’s open-access appeal, Uniswap’s $7 billion trading volume, offers users token creation freedom.
- Judge Failla’s ruling distinguishes smart contracts, DeFi’s legal uncertainty and state law claims remain.
On Tuesday, a district judge dismissed a class action lawsuit filed against Uniswap, ruling that those connected with the decentralized exchange could not be held responsible for the alleged fraudulent tokens that purportedly harmed traders. This legal action, initiated by trader Nessa Risley in April of the previous year and representing other Uniswap users, made claims against the developers and investors of the decentralized exchange. It asserted that they had violated securities regulations, contending that the exchange acted as an unregistered broker and dealer, offered unregistered securities, and permitted token issuers to defraud investors.
The tokens at the center of this dispute encompassed Matrix Samurai (MXS), Rocket Bunny (BUNNY), and Alphawolf Finance (AWF). Judge Katherine Polk Failla of the Southern District of New York, the judge who ruled in favor of the dismissal, noted that the plaintiffs’ challenge stemmed from the pseudonymous identities of the 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. In the absence of such information, plaintiffs are left to argue that [Uniswap Labs] facilitated the trades at issue.”
Southern District of New York Judge Katherine Polk Failla
Within the realm of decentralized finance, abbreviated as DeFi, Uniswap stands out as a prominent illustration of an application leveraging blockchain technology instead of traditional banking systems. According to DappRadar’s data, Uniswap V3 has recorded an impressive $7 billion in trading volume within the last month.
One of the key attractions of DeFi lies in its open-access nature, which means that anyone has the opportunity to create and list their own tokens on platforms like Uniswap. While some tokens, like PepeCoin, experience meteoric price increases, others, such as BALD, can baffle investors as they plummet in value.
As an illustration, consider a report published by the Multidisciplinary Digital Publishing Institute last year, which asserted that a staggering 97% of tokens featured on Uniswap were categorized as “rug pulls.” Nevertheless, it’s worth noting that this research encountered resistance and criticism within the cryptocurrency community.
As an illustration, consider a report published by the Multidisciplinary Digital Publishing Institute last year, which asserted that a staggering 97% of tokens featured on Uniswap were categorized as “rug pulls.” Nevertheless, it’s worth noting that this research encountered resistance and criticism within the cryptocurrency community. Judge Failla concluded that Uniswap’s capacity to levy transaction fees, alongside other factors like the presence of a governance token, did not provide sufficient grounds to establish liability for those associated with the exchange.
“The Court declines to stretch the federal securities laws to cover the conduct alleged, and concludes that plaintiffs’ concerns are better addressed to Congress. These foundational contracts are distinctive from the token contracts unique to each pool and drafted by issuers. 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.”
Judge Failla
Judge Failla’s ruling highlighted a crucial distinction between the smart contracts governing the fundamental operations of the exchange and the code responsible for liquidity pools. Liquidity pool contracts, drafted by token issuers to facilitate the trading of newly created tokens, were to be considered separately.
She acknowledged the absence of legal precedent concerning DeFi protocols, stating, “No court has yet decided this issue in the context of a decentralized protocol’s smart contract.” Nonetheless, she emphasized that Uniswap’s core smart contracts were not inherently unlawful and clarified that, concerning other cryptocurrencies, they “could be executed lawfully, such as in the case of the exchange of cryptocurrency commodities like ETH and Bitcoin.”
In her analysis, Judge Failla drew an analogy involving payment applications like Venmo and Zelle. She likened the plaintiff’s lawsuit to attempting to hold these companies responsible for a drug transaction that utilized their platform to facilitate fund transfers, rather than holding the actual drug dealer accountable.
Judge Failla also highlighted the lack of clarity regarding how securities laws are applicable to DeFi, referencing a warning issued by Securities and Exchange Commission Chair Gary Gensler in September 2021, indicating increased scrutiny of projects in this category. She observed, “Whatever concerns DeFi transactions may raise, the legal landscape is currently evolving in relation to these exchanges. Regulators may eventually address this ambiguous territory.”
Moreover, the class action lawsuit aimed to establish claims under not only federal law but also state laws in North Carolina, Idaho, and New York. These state-specific claims were dismissed without prejudice, meaning that the lawsuit could potentially be refiled in those jurisdictions.
