Judge dismisses class-action suit against Uniswap over token scam losses

The judge showed rare understanding of DeFi technology and stated the defendants would do better to address their complaints to Congress.

The United States District Court for the Southern District of New York has dismissed a class-action suit against Uniswap Labs and its CEO, foundation and venture capital backers brought by plaintiffs who claimed they lost money due to scam tokens on the decentralized cryptocurrency exchange. Judge Katherine Polk Failla, who handed down the dismissal, is also hearing the Securities and Exchange Commission’s case against Coinbase.

The suit was brought by six individuals who bought tokens on Uniswap between December 2020 and March 2022. They argued on behalf of a “nationwide class of users” that Uniswap Labs controlled liquidity pools on the protocol, including those created by the scammers they lost money to.

The suit was filed in April 2022. The defendants were demanding the recission of the (smart) contracts they entered into to buy the scam tokens, with compensation, under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The plaintiffs argued that their claim was backed up by the fact that Uniswap held “liquidity provider funds and newly created tokens in Uniswap’s proprietary core contracts,” used routers it controlled to process transactions on the protocol and issued liquidity tokens when pools were created. In addition, the plaintiffs held that the defendants “likely” held at least 88% of the Uniswap (UNI) governance tokens, although they had no actual knowledge of token ownership.

Related: Binance CEO warns of phishing scams as Uniswap founder gets hacked

The judge said in her order that neither side knew the identities of the scammers, and in place of suing the scammers for unlawful solicitation, the plaintiffs were suing the defendants for statements made on social media:

“Undaunted, they now sue the Uniswap Defendants and the VC [venture capital] 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 court did not overlook that fact:

“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 commented in more general terms as well. Writing about the plaintiffs’ allegations concerning the core and router contracts, she said:

“[I]t defies logic that a drafter of computer code underlying a particular software platform could be liable under Section 29(b) [ of the Exchange Act] for a third-party’s misuse of that platform.”

The judge cited the unsuccessful class action brought against Coinbase in 2022 for unregulated securities sales in her reasoning. She dismissed the case with prejudice, meaning the case cannot be retried.

Community commenters noted with pleasure that the decision showed a considerable depth of understanding of decentralized finance.

Big Lesson for crypto policymakers and financial regulators (and the administrative state at large):

If you choose to avoid the legal process, if you do not want to engage in good faith rulemaking, the courts will not bail you out. https://t.co/r5RATmiwwq

— Mike Wawszczak (@mikewawszczak) August 30, 2023

Magazine: Get your money back: The weird world of crypto litigation