Key Takeaways

• A NY judge dismissed a planned class action lawsuit against Uniswap.
• Plaintiffs say it harmed investors by allowing the trading of fraudulent tokens.
• Disproving SEC, the judge labeled Ether (ETH) as a commodity.
• The same judge will hear the case involving Coinbase and the SEC.

A New York judge dismissed  a planned class action against the top decentralized cryptocurrency exchange Uniswap on Wednesday, August 30, 2023, and classified popular cryptocurrencies Ether (ETH) and Bitcoin (BTC) as “commodities”.

Breach of U.S. Securities Laws

The DeFi platform allegedly breached U.S. securities laws by failing to register as an exchange or a broker-dealer, offering and soliciting securities on an unregistered exchange. It also failed to register as a broker-dealer, according to a complaint brought by a group of investors  in April 2022 against Uniswap and its founder, Hayden Adams.

In the lawsuit , investors who fell victim to scam tokens created and traded on the protocol are seeking to hold Uniswap accountable. Tokens like EthereumMax (EMAX), Bezoge (BEZOGE), and Alphawolf Finance (AWF) are among those named in the lawsuit..

The recent decision to dismiss the lawsuit before trial identified the alleged ‘scam token’ issuers as the defendants, not Uniswap. Judge Katherine Polk Failla of the Southern District of New York recognized ETH as a commodity and declined to apply federal securities laws to the claims against Uniswap.

This was in contrast to Securities and Exchange Commission (SEC) Chief Gary Gensler who has so far refrained from referring to the cryptocurrency as a security.

The court’s decision to dismiss the class action may have an impact on future lawsuits against decentralized protocols and potentially even lawsuits on breaking U.S. securities laws.

Additionally, Judge Polk Failla is in charge of the SEC’s case against Coinbase.

Case Thrown Out

According to Judge Polk Failla’s ruling  published after the order on Wednesday, August 30, 2023, the decentralized architecture of the Uniswap Protocol made it impossible to identify scam token issuers, resulting in the absence of an “identifiable defendant” in the case

“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,” the Judge stated .

“It defies logic that a drafter of computer code underlying a particular software platform could be liable under Section 29(b) for a third-party’s misuse of that platform.”

Plaintiffs claimed  that Uniswap facilitated the trades in question by “providing a marketplace and facilities for bringing together buyers and sellers of securities” for a transaction fee in the absence of “actual issuers” of the “scam tokens,” “hoping that this Court might overlook the fact that the current state of cryptocurrency and especially ETH regulation, leaves them without recourse, at least as to the specific claims alleged in this suit.”

The plaintiffs’ stated  that Uniswap was similar to a self-driving car maker and that the protocol’s developers harmed people by designing a system allowing fraudulent tokens, but the court rejected this.

The Judge asserted: “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.”

In reality, the case is more akin to holding a platform like Venmo or Zelle accountable for facilitating a drug trade via financial transactions, rather than a manufacturing flaw, as the opinion noted.

The court concluded that the investors’ grievances are “more suitable for Congress than this Court,” citing the absence of relevant regulation.

Wrapped BTC Viewed As a Commodity?

ConsenSys regulatory chief, Bill Hughes, on social media that The SDNY (Failla, J.) made it clear in its ruling that Ethereum is classified as a commodity, not a security, in the Risely v. Uniswap case. 

He elaborated  on how, albeit tentatively, this notion suggests that wrapped BTC might be viewed as a commodity. He is quite certain that the adage “Ethereum is a commodity” is true, and he is so convinced of this that he is willing to stake his own home on it. It doesn’t appear like the judge inserted this adage by accident.

Things have improved, Hughes continued, emphasizing  that liquidity providers retain ownership of their tokens when contributing to a pool. He stressed the importance of this concept beyond AMM-related matters, as it influences how courts perceive liquid staking procedures and the taxation of various smart contract transactions.