Uniswap wins again in ‘scam token’ lawsuit

A version of this article appeared in The Decentralised newsletter on March 3. Sign up here.

Court victories come hard and fast for Uniswap right now.

Last month, a judge dismissed a patent infringement lawsuit brought against Uniswap by Bancor, a competing decentralised exchange.

Now, another federal judge has dismissed the final element of a class action lawsuit that targeted Uniswap’s creators.

Unlike the patent infringement case, this one is a win for decentralised finance writ large.

Here’s why.

The lawsuit was brought in 2022 by traders who lost money on “scam tokens” they found on Uniswap. But those scammy tokens weren’t created by Uniswap. In fact, their issuers have never been identified.

Here’s the judge’s take, summed up in a single sentence: “Plaintiffs cannot hold defendants liable for the misconduct of the unidentified third-party issuers.”

This is a recurring theme in crypto litigation. Victims of a purported crime looking for someone to blame often turn to the platform where the crime occurred, rather than the anonymous perpetrators of said crime.

The reason is obvious. True DeFi protocols are permissionless and immutable. That first term means that anybody can use the protocol, no questions asked. The second means that nobody, not even the protocols’ creators, can change the protocols to, say, limit access to “good guys.”

This freedom is a double-edged sword, allowing all kinds of malfeasance in the world of DeFi.

Take, for example, the criminal trial of Roman Storm. The software engineer was charged with conspiracy to launder money and evade sanctions after he released Tornado Cash, a protocol that helps users obfuscate their onchain crypto movements.

One of those users was North Korea, which used the crypto mixer to launder some $500 million in stolen crypto.

Jurors were deadlocked on the money laundering and sanctions evasion charges. But they convicted him of a lesser ofense, operating an unlicensed money transmitting business. He faces up to five years in prison.

In Uniswap’s case, traders from North Carolina, Idaho, New York, and Australia alleged they used a website built by Uniswap Labs to access the Uniswap protocol. There, they found and purchased 38 tokens that turned out to be rug pulls or pump-and-dump schemes.

The traders sued Uniswap, alleging it was functionally an unregistered broker-dealer and that it had aided and abetted fraud.

In 2023, a federal court dismissed the claims, arguing their concerns were “better addressed to Congress than to this Court,” as Judge Katherine Polk Failla put it in her Monday ruling, which included a brief history of the case.

“After all, 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,” the judge’s 2022 ruling read.

Last year, an appellate court dismissed the traders’ appeal. But it asked the lower court to reconsider the allegations made under state law. The traders filed an amended complaint that added fresh state-level charges.

On Monday, Failla said the complaint suffers the same flaw as its predecessors.

“Despite three chances to get it right, Plaintiffs remain unable to allege plausible claims,” she wrote. “Plaintiffs’ theories of liability are still predicated on Defendants having ‘facilitated’ the scam trades ‘by providing a marketplace and facilities for bringing together buyers and sellers of Tokens[.]’”

Uniswap founder Hayden Adams took a victory lap on social media.

“If you write open source smart contract code, and the code is used by scammers, the scammers are liable, not the open source devs,” he wrote. “Good, sensible outcome.”

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Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at [email protected].