The U.S. District Court for the Southern District of New York has dismissed a class action lawsuit against Uniswap Labs and its CEO, foundation and venture capitalists brought by plaintiffs who claimed they lost money due to scam tokens on the decentralized cryptocurrency exchange. Judge Katherine Polk Failla, who issued the dismissal, is also hearing the Securities and Exchange Commission's case against Coinbase.
The lawsuit was filed by six people who purchased tokens on Uniswap between December 2020 and March 2022. They argued on behalf of a “nationwide class of users” that Uniswap Labs controlled the liquidity pools on the protocol, including those created by the scammers that caused them to lose money.
The lawsuit was filed in April 2022. The defendants sought cancellation of the (smart) contracts they had entered into to purchase the scam tokens in exchange for compensation under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The order dismissing the lawsuit against Uniswap. Source: U.S. District Court for the Southern District of New York
The plaintiffs argued that their claim was supported by the fact that Uniswap held “liquidity provider funds and newly created tokens in Uniswap’s core proprietary contracts,” used routers it controlled to process transactions on the protocol, and issued liquidity tokens as pools were created . Additionally, the plaintiffs believed that the defendants “probably” owned at least 88% of the Uniswap (UNI) governance tokens, despite having no actual knowledge of the token ownership.
Related: Binance CEO warns of phishing scam as Uniswap founder gets hacked
The judge stated in her order that neither side knew the identities of the scammers, and instead of suing the scammers for unlawful advertising, the plaintiffs sued the defendants for statements made on social media:
“Undaunted, they are now suing the Uniswap defendants and the VC [venture capital] “Defendants hope that this court will overlook the fact that the current state of cryptocurrency regulation leaves them without recourse, at least as it relates to the specific claims asserted in this lawsuit.”
The court did not overlook this fact:
“The Court declines to expand the federal securities laws to cover the alleged conduct and concludes that plaintiffs’ concerns are better addressed to Congress rather than this Court.”
The judge also made more general comments. Regarding the plaintiffs' allegations regarding the core and router contracts, she said:
“[I]t defies logic that an author of computer code underlying a particular software platform could be liable under Section 29(b). [ of the Exchange Act] for the misuse of this platform by third parties.”
In her reasoning, the judge referred to the unsuccessful class action lawsuit against Coinbase in 2022 for unregulated securities sales. She dismissed the case with prejudice, meaning the case cannot be retried.
Community commentators were pleased to note that the decision showed considerable understanding of decentralized finance.
Big lesson for crypto politicians and financial regulators (and the administrative state at large):
If you choose to avoid legal action, if you do not want to participate in lawmaking in good faith, the courts will not bail you out. https://t.co/r5RATmiwwq
— Mike Wawszczak (@mikewawszczak) August 30, 2023
Magazine: Get Your Money Back: The Strange World of Crypto Litigation
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