Judge dismisses class action lawsuit against Uniswap, says 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 suit against a group of five firms, including Uniswap Labs and investment giant Andreessen Horowitz, for alleged securities violations on the Uniswap decentralized trading platform.

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

They alleged the platform, in its services as an unregistered securities exchange or broker-dealer, facilitated “the issuance of thousands of scam tokens” by failing to enforce listing fees, vetting processes, and appropriate criteria for issuing tokens.

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

Based on this understanding, the plaintiffs charged the defendants with the “unlawful promotion, offer, and sale of unregistered securities,” and demanded 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.

According to the ruling by presiding Judge Katherine Polk Failla, “Due to the Protocol’s decentralized nature, the identities of the Scam Token issuers are basically unknown and unknowable, leaving Plaintiffs with an identifiable injury but no identifiable defendant.”

Judge Failla said that in place of suing the scammers for unlawful solicitation, the plaintiffs were suing the defendants for statements made on social media. “No plaintiff would sue [NYSE] 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,” she wrote.

“Undaunted, they now sue the Uniswap Defendants and the VC 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,” she said. “As set forth in the remainder of this Opinion, the Court dismisses their complaint in full.”

Judge Failla said the proper audience for the plaintiffs’ complaints is Congress. “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,” she wrote.

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

As part of her dismissal, Judge Failla also touched on the topic of Bitcoin and Ether’s classifications by referring to them both as “crypto commodities.” This distinction also played a part in her reasoning for dismissing the case, as Failla said she wasn’t convinced by the argument that Uniswap’s token sales were subject to the Exchange Act.

“This decision is very important to set limits on the application of securities laws for cryptocurrencies in the United States,” said Felix Shipkevich, a fintech regulatory attorney and Special Professor at Hofstra Law School. “Unfortunately, the past few years have shown to be quite difficult for the cryptocurrency community here as a result of overwhelming, overreaching, and unnecessary lawsuits filed by the SEC as well as by the plaintiff’s bar alleging violation of securities laws. I applaud this decision in favor of finding that ETH is a commodity and not a security.”

Aside from the clarity the decision has provided operators of decentralized finance (DeFi) protocols like Uniswap, another reason the crypto community is excited about this ruling is due to the fact that Judge Failla is also the judge overseeing the SEC’s lawsuit against Coinbase. Her ruling on this case has given cryptocurrency proponents cause for hope that Coinbase will also see a positive outcome.

In response to the ruling, Uniswap founder Hayden Adams tweeted, “One longtime fear of mine has been bad legal interpretation of our complex, technical industry. It’s highly motivating to see US courts hold up arguments I’ve felt deeply for years.”