Judge dismisses class action lawsuit against Uniswap, saying bitcoin and ether are commodities

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(Kitco News) – The U.S. District Court for the Southern District of New York has dismissed a class action lawsuit against a group of five firms, including Uniswap Labs and investment giant Andreessen Horowitz, for alleged securities violations on the decentralized trading platform Uniswap.

Plaintiffs in the lawsuit included six U.S. and Australian residents who claimed they lost money on “scam tokens” listed on the decentralized exchange between December 2020 and March 2022.

They claimed that the platform, in its service as an unregistered securities exchange or broker-dealer, “facilitated the issuance of thousands of fraud tokens” by failing to enforce exchange fees, verification processes and proper token issuance criteria.

Representing a “nationwide class of users,” they said Uniswap Labs controlled the liquidity pools on the protocol, including those created by the scammers they lost money to, that they used routers they controlled to transact on to process the protocol, and issued liquidity tokens when pools were created.

Based on this understanding, the plaintiffs accused the defendants of “unlawful solicitation, offering and selling of unregistered securities” and demanded withdrawal from the (smart) contracts they had entered into to purchase the fraud tokens in return for compensation under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Presiding Judge Katherine Polk Failla’s ruling stated, “Due to the decentralized nature of the protocol, the identities of the scam token issuers are fundamentally unknown and unrecognizable, leaving plaintiffs with identifiable harm but no identifiable defendant.”

Judge Failla said the plaintiffs were not suing the scammers for unlawful advertising, but instead were suing the defendants for statements made on social media. “No plaintiff would sue [NYSE] or NASDAQ for tweeting that their exchange was a safe place to trade after the plaintiff lost money to an issuer’s fraudulent activities,” she wrote.

“Understood, they are now suing the Uniswap Defendants and the VC Defendants in the hope that this court may overlook the fact that the current state of cryptocurrency regulation leaves them no recourse, at least as far as the specific claims made in this lawsuit are concerned will,” she said. “As set out in the remainder of this Opinion, the Court dismisses your complaint in its entirety.”

Judge Failla said the proper audience for plaintiffs’ complaints is Congress. “The court refuses to expand federal securities laws to cover the alleged conduct and concludes that plaintiffs’ concerns should be directed to Congress rather than to this court,” she wrote.

In her reasoning, Judge Failla referred to the unsuccessful class action lawsuit filed against Coinbase in 2022 for unregulated securities sales and dismissed the case with reservations, meaning the case cannot be retried.

As part of her dismissal, Judge Failla also addressed the classification of bitcoin and ether, calling them both “cryptocommodities.” This distinction also played a role in her rationale for dismissing the case, as Failla said she was unconvinced by the argument that Uniswap’s token sales were subject to the Exchange Act.

“This decision is very important in limiting the application of cryptocurrency securities laws in the United States,” said Felix Shipkevich, fintech regulation advocate and associate professor at Hofstra Law School. “Unfortunately, the past few years have proven to be quite difficult for the cryptocurrency community as the SEC and Plaintiff’s Bar Association have filed overwhelming, overblown and unnecessary lawsuits alleging violations of securities laws. I applaud this decision in favor of stating that ETH is a commodity and not a security.”

Aside from the clarity the decision has brought to decentralized finance (DeFi) protocol operators like Uniswap, another reason the crypto community is excited about this ruling is the fact that Judge Failla is also the judge hearing the lawsuit monitored by the SEC against Coinbase. Her decision in this case gives cryptocurrency advocates hope that Coinbase will see a positive outcome as well.

In response to the ruling, Uniswap founder Hayden Adams tweeted, “One of my longstanding fears is the poor legal interpretation of our complex tech industry.” very close to my heart.”

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