DeFi | Sep 1, 2023

Image: Unsplash/Wesley Tingey

In a significant turn of events for the decentralized finance (DeFi) sector, a class-action lawsuit against Uniswap, a leading decentralized exchange, has been fully dismissed.

The Lawsuit

• The lawsuit was spearheaded by Nessa Risley, representing a cohort of Uniswap users, the plaintiffs. They directed their accusations not only at Uniswap’s developers but also at its high-profile investors, including the likes of Andreessen Horowitz.  The five defendants named in the case were originally charged in April 2022 with “unlawful promotion, offer, and sale of unregistered securities.“

See:  SEC Asserts DeFi is Caught Under Securities Rules, Reopens Proposal to Widen Definition of Exchanges

• The group alleged that Uniswap acted as an unregistered broker and dealer, facilitated the offering of unregistered securities, and indirectly enabled token issuers to defraud investors. Tokens such as Matrix Samurai (MXS), Rocket Bunny (BUNNY), and Alphawolf Finance (AWF) were central to this dispute.
• From the investors’ viewpoint, the heart of the matter was the losses they incurred from what they believed were scam tokens. Their contention was that these tokens, acquired between December 2020 and March 2022, were fraudulent, leading to substantial financial setbacks. The group’s primary legal argument hinged on the belief that these tokens were, in essence, securities, implying that Uniswap operated as a platform for trading such securities.

The Verdict

• The United States District Court for the Southern District of New York, under Judge Katherine Polk Failla, dismissed the lawsuit.  Note, Judge Failla is also presiding over the Securities and Exchange Commission’s case against Coinbase.  Read the full verdict here

“As set forth in the remainder of this Opinion, the Court dismisses their complaint in full.”

The Rationale

• Judge Katherine Polk Failla, presiding over the case, emphasized that the decentralized architecture of Uniswap makes it inherently challenging to pinpoint liability (challenging to identify liable parties).
  • Drawing a parallel, she likened it to holding payment apps accountable for illicit transactions rather than the perpetrators.
  • She also wrote, “no plaintiff would sue the New York Stock Exchange or NASDAQ for tweeting that its exchange was a safe place to trade after that
    plaintiff had lost money due to an issuer’s fraudulent schemes.“

See:  DeFi Advocates Call out the SEC (Again) over attempts to define ‘Exchange’

• The court filing declared that just because the investors bought the scam tokens on Uniswap does not mean the decentralized protocol itself is liable.
• Judge Failla mentioned that the lack of regulatory clarity in the crypto industry does not help their case in retrieving funds.
• She referenced the 2022 class action lawsuit against Coinbase, which was unsuccessful due to unregulated securities sales, and dismissed the current case with prejudice, preventing any possibility of a retrial.

DeFi Precedent

• The dismissal of the lawsuit against Uniswap is not just a singular event but a precedent for the DeFi sector. It underscores the complexities surrounding the regulation of decentralized platforms and underscores the urgency for clear regulatory frameworks, while also highlighting the resilience and innovation inherent in the crypto community.

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• Source: https://ncfacanada.org/decentralized-finance-uniswaps-legal-victory-sheds-light/