The U.S. Court of Appeals for the Second Circuit issued a ruling on Wednesday that largely upholds a lower court’s 2023 decision to dismiss a class action lawsuit against Uniswap, a prominent decentralized exchange. This ruling marks a significant legal victory for Uniswap Labs, the company that manages the decentralized protocol, as it continues to navigate challenges in the complex landscape of cryptocurrency regulations.
The lawsuit was initiated in 2022 by a group of investors who alleged that Uniswap Labs, alongside its venture capital backers, was liable for their financial losses due to the issuance of scam tokens on its platform. The plaintiffs claimed that the company should have safeguards in place to protect investors from fraudulent activities occurring on its decentralized protocol.
In 2023, District Court Judge Katherine Polk Failla of the Southern District of New York ruled in favor of Uniswap, dismissing the case before it reached trial. Judge Failla compared the plaintiffs’ arguments to holding a digital payment platform, such as Venmo or Zelle, accountable for a drug deal that utilized the service for transferring funds. This analogy highlighted the fundamental principle that decentralized platforms shouldn’t be held responsible for third-party actions.
Following the dismissal, the plaintiffs appealed Failla’s ruling in September 2023. However, the Second Circuit has largely reinforced the district court’s decision, dismissing the claims under both the Securities Act and the Exchange Act. The judges emphasized that it “defies logic” to hold a creator of smart contract code liable for the misuse of that platform by external users, underscoring the legal uniqueness of decentralized technologies.
While the Second Circuit affirmed the majority of the lower court’s ruling, it did vacate and remand the state law claims back to the district court. This aspect of the lawsuit seeks to address similar allegations under New York, North Carolina, and Idaho state laws, indicating that some legal ground remains for the plaintiffs.
This recent ruling serves as a favorable development for Uniswap, coming on the heels of an announcement from the U.S. Securities and Exchange Commission (SEC) that it would cease its investigation into the decentralized exchange. The SEC investigation, under former Chairman Gary Gensler, had scrutinized Uniswap for allegedly functioning as an unregistered securities broker and exchange, as well as for the issuance of unregistered securities.
As the legal landscape for decentralized exchanges continues to evolve, the Second Circuit’s ruling is a pivotal moment that not only supports Uniswap’s position but also sets a precedent for similar cases in the decentralized finance space.
For further reading, check out the details of the SEC’s decision to drop its investigation into Uniswap here.
