The U.S. District Court for the Southern District of New York has dismissed a class action lawsuit against Uniswap Labs, its CEO, foundation, and venture capital backers by plaintiffs who claim they suffered losses from scam tokens on the decentralized cryptocurrency exchange. The judge who made the dismissal, Katherine Polk Failla, is also hearing the SEC case against Coinbase.
The lawsuit was filed by six individuals who purchased tokens on Uniswap between December 2020 and March 2022. They argued on behalf of “users nationwide” that Uniswap Labs controls the liquidity pools on the protocol, including the liquidity pools created by the scammers they lost.
The lawsuit was filed in April 2022. The defendants seek rescission and damages under the Securities Act of 1933 and the Securities Exchange Act of 1934 for the (smart) contracts they entered into to purchase the fraudulent tokens.
The plaintiffs argue that their claims are supported by the fact that Uniswap holds “liquidity provider funds and newly created tokens in Uniswap’s proprietary core contracts,” uses routers it controls to process transactions on the protocol, and Liquidity tokens are issued when pools are created. Additionally, the plaintiffs contend that the defendants “probably” own at least 88% of the Uniswap UNI (UNI) governance tokens, even though they have no actual knowledge of token ownership.
Related: Uniswap Founder Hacked, Binance CEO Warns of Phishing Scam
In the order, the judge stated that neither party knew the identity of the scammer, and that the plaintiff was not suing the scammer for illegal solicitation, but rather the defendant for his social media comments:
“They have no fear and are now suing Uniswap defendants and VCs [venture capital] Defendants hope that this court may overlook the fact that the current state of cryptocurrency regulation renders them without recourse, at least for the specific claims alleged in the suit. ”
The Court did not ignore the fact that:
“The Court declined to expand the federal securities laws to cover the alleged conduct and concluded that plaintiffs’ concerns were best addressed with Congress rather than with this Court.”
The judge also made more general comments. Writing about the plaintiff’s allegations regarding the core and router contracts, she said:
“This goes against the logic that drafters of computer code under a particular software platform may be liable under section 29(b). [ of the Exchange Act] Third parties misuse the platform. ”
In his reasoning, the judge cited an unsuccessful class action lawsuit filed against Coinbase in 2022 for unregulated securities sales. She dismissed the case with prejudice, meaning it cannot be retried.
Community commenters happily noted that this decision shows a fairly deep understanding of decentralized finance.
Important lessons for cryptocurrency policymakers and financial regulators (and administrative states as a whole):
If you choose to avoid the legal process, the court will not bail you if you do not want to make the rules in good faith. https://t.co/r5RATmiwwq
— Mike Wawszczak (@mikewawszczak) August 30, 2023
Magazine: Get Your Money Back: The Weird World of Crypto Litigation
