The Uniswap DEX (Decentralized Exchange) was found not liable for crypto scams on their platform. A class action lawsuit was filed by a group of investors against the DEX after losing money on tokens purchased.
On Tuesday, August 29, 2023, Judge Katherine Polk Failla of the Southern District of New York ruled the case dismissed. This is on grounds that the DEX was not responsible for money investors lost, but rather the issuers of the scam tokens.
The investors (who are the plaintiffs in this case), allege that Uniswap was responsible for facilitating the scams in which they lost money. Since the token scammers were using the platform to sell their tokens, Uniswap was deemed culpable to the crime. This was also a violation of securities laws in which there was no protection offered to the investors (note: There were other claims of securities law violations like the sale of unregistered securities, but we will not get into that).
The judge saw things another way. The ruling was that software cannot be held liable for what bad actors (i.e. scammers) have done to the investors. Uniswap is basically just computer code called a smart contract that runs on a blockchain platform. No entity or organization fully owns it because it is running on a decentralized network of computers.
Uniswap is free for anyone to use, without any permission. It is available to the public to sell, trade and provide liquidity to digital assets or tokens. The problem is that it can also be used by bad actors who require no sort of vetting or registration.
Uniswap functions as an AMM (Automated Market Maker), which processes order books in an automated manner and records the transactions on a blockchain. There is no formal contract or investment guarantees with tokens being sold on the platform. Uniswap just provides them to anyone who wants to buy, but there is never any guarantee of insurance.
The big issue regarding the case is that it involves the loss of money. Not only that, but since a DEX was used, there is no easy way to get the money back because the token issuers who used the platform are not identified. Uniswap cannot return the funds since that is by the design of a blockchain.
Perhaps the plaintiffs should have been aware or educated on what a DEX is for. You are willing to take a risk by using the DEX, otherwise do not use it.
This ruling is significant to the crypto industry in many ways. It can be a precedent to future rulings regarding cryptocurrency exchanges, where tokens are sold. If the exchange is decentralized enough, it cannot be responsible for any scams since they do not control the blockchain. Investors must do their own due diligence before they buy these tokens.
It can also be a precautionary tale to users who want to invest in tokens. It should make them more careful in the future and to do their best to understand about the way a token works (e.g. tokenomics) and whether it is a possible scam. Not all tokens are outright scams, but investors have to be aware of the risks they are taking when they buy a token.
If the judge ruled in favor of the plaintiffs then it would also put Uniswap's developer and creator Hayden Adams in trouble. That could affect future crypto platforms from launching if developers can be found guilty of bad actors using their smart contract to scam investors.
It is too early to tell at this point if the case has successfully established crypto platforms as free from responsibility in future scams. The plaintiffs can still appeal this case, but the ruling itself has weight because it is coming from a district court that has high regards from much of the legal court system in the US.
The judge declined to make any ruling regarding securities violations, and recommends that it is best to push that towards congress. This shows the complexity involved in this case regarding whether tokens are securities and whether DEXs can be regulated like centralized exchanges (i.e. BInance, Coinbase).
The crypto industry, particularly DeFi (Decentralized Finance) can view this as a small victory at the moment. Computer code like smart contracts should not be the grounds for prosecuting developers, if they were not the ones directly involved with a crime.
The same way software developers are not liable if their software was used by bad actors to cheat accounting records. The law should go after those who committed the crime. If this can translate to becoming a reference to future rulings in the context of crypto, then it can eventually be considered a big victory.
(Photo Credit: EKATERINA BOLOVTSOVA)
Disclaimer: This is not financial advice and is the author's opinion. The information provided is for reference and educational purposes only. Please DYOR to verify information.
