Looking at Uniswap and Crypto’s New Favorite Ruling
Applying securities law
A federal judge dismissed an aspiring class action lawsuit filed against decentralized exchange Uniswap and creator Hayden Adams, saying the plaintiffs had filed against the wrong defendants and, perhaps more importantly, that federal securities laws don’t really create a clear avenue for the plaintiffs to sue the real defendants.
Why it matters
This ruling will almost certainly be cited by various parties, particularly entities and individuals facing lawsuits from the U.S. Securities and Exchange Commission.
Breaking it down
Last week’s ruling, by Judge Katherine Polk Failla, of the U.S. District Court for the Southern District of New York, dismissed allegations by a group of crypto investors hoping to hold Uniswap liable for “scam tokens” traded on the decentralized exchange.
In the judge’s words, the issuers of the tokens were really the ones responsible for the investors’ losses. The problem is, the investors can’t sue the issuers because they can’t identify them, and Uniswap does not stand in for them in light of this, she said.
“Due to the Protocol’s decentralized nature, the identities of the Scam Token issuers are basically unknown and unknowable, leaving Plaintiffs with an identifiable injury but no identifiable defendant,” the judge wrote. “Undaunted, they now sue the Uniswap Defendants and the VC Defendants, hoping that this Court might overlook the fact that the current state of cryptocurrency regulation leaves them without recourse, at least as to the specific claims alleged in this suit.”
The judge ruled that the smart contracts underpinning Uniswap and its liquidity pools operated in a way that did not specifically harm the investors, distinguishing them from the token issuers she is holding liable.
One of the lines everyone on the social media platform that’s recently been renamed X seemed to focus on implied that the SEC may not be the right authority to define token issuers or Uniswap’s role within securities law.
“The Court declines to stretch the federal securities laws to cover the conduct alleged, and concludes that Plaintiffs’ concerns are better addressed to Congress than to this Court,” the judge wrote.
And later on she added that few token issuers have registered with the SEC “as Congress and the courts have yet to make a definitive determination as to whether such tokens constitute securities, commodities, or something else.”
A number of token issuers have registered their projects with the SEC, but almost all did so as part of a settlement with the regulator after being sued.
To be clear, the SEC wasn’t a part of this case. This was a group of private investors suing Uniswap and doing so under the Securities Exchange Act of 1934. That said, some, if not many defendants against SEC suits are going to use this ruling to argue that the regulator does not currently have adequate jurisdiction over things like crypto token issuers or third-party trading platforms.
The judge also noted that “regulators may someday address this gray area,” pointing out that SEC Chair Gary Gensler has already “warned that decentralized finance projects were under increased scrutiny,” indicating those who might have incentive structures tied to their development of decentralized exchanges or other tools.
Whether other judges agree, and whether the facts and circumstances of those cases are similar enough to warrant a similar outcome, seem a bit less clear to me.
One other detail that an individual following the case pointed out to me: the judge wrote that “it defies logic that a drafter of computer code underlying a particular software platform could be liable under Section 29(b) [of the Securities Exchange Act of 1934] for a third-party’s misuse of that platform.”
Judge Katherine Polk Failla is also the judge overseeing the DOJ’s case against Tornado Cash developer and co-founder Roman Storm, who prosecutors charged with conspiracy for developing a platform that third parties used to launder a billion in stolen crypto funds. Of course, it’s worth highlighting that the Tornado Cash case isn’t a securities law issue and the specific facts and circumstances are different (prosecutors allege Storm maintained some control over Tornado Cash and stood to directly profit from the mixer’s use because of the TORN token, for example).