Two law firms, Barton LLP and Kim & Serritella LLP, have filed the suit against the popular DEX’s developers and investors for failing to crack down on “rampant fraud,” inviting anyone who lost money since April 2021 to join the suit. It seeks both monetary damages and legal clarifications concerning cryptocurrency tokens as securities.
The facts of the case
Plaintiff Nessa Risley of North Carolina (on behalf of all others similarly affected) is suing Uniswap Labs, its founder Hayden Adams and investors Paradigm Operations, AH Capital Management, a16z (Andreessen Horowitz) and Union Square Ventures.
The lawsuit alleges that Uniswap’s owners were aware that some tokens listed on the exchange were “scams” but failed to take action to have them removed or to warn customers about the risks of purchasing them.
As a result, Risley purchased various tokens between May and July 2021 for $10,400 that subsequently lost most of their value.
The suit also alleges that Uniswap’s fee structure, which pays liquidity providers a guaranteed percentage of fees charged for every trade, actually encourages fraud.
For example, EthereumMax was launched on May 14, 2021 with heavy promotion on social media platforms. The token’s price rocketed over 500,000 percent within the first 24 hours, peaking at approximately $0.000001. After that, the value fell to slightly below its initial value and is currently worth about $0.000000007828.
In somewhat colorful language, the lawsuit claims that Uniswap “allows the issuance of thousands of scam tokens,” that its lack of KYC verification has led to “rampant fraud,” and the exchange has “siphoned over $1 billion in fees… generating vast profits for Uniswap’s owners.”
Uniswap is the world’s most popular decentralized exchange (DEX). Anyone can trade or list tokens without requiring a middleman to enforce rules and collect a significant fee.
Smart contracts automate all transactions. In fact, there are three sets of Uniswap contracts, v1, v2 and v3. Token swaps are made using liquidity pools of funds provided by investors. The average v3 trading fee is about 0.3%.
Many argue that this decentralization should exempt DeFi platforms from SEC regulatory oversight. However, United States SEC chairman Gary Gensler stated in a 2021 Wall Street Journal interview that the term “decentralized” might be inaccurate, since platform participants receive financial gains, suggesting that projects that reward participants with digital tokens or other incentives should be regulated.
What do they want?
The lawsuit appears to be less about recovering monetary damages and more about forcing the court to resolve legal questions that may be within the purview of the SEC. The plaintiff demands a jury trial and seeks both unspecified damages and a declaration that Uniswap violates federal laws and regulations. Specifically, it asks the court to rule on several legal questions:
- Are the tokens in question securities under Federal law?
- Did Uniswap fail to register tokens as securities?
- Has Uniswap operated as an unregistered broker, and should it be registered as a securities exchange?
- Did Uniswap promote or solicit sales of tokens to customers?
- Is Uniswap effectively controlled by its owners?
Regardless how this case resolves (assuming it goes to court at all), the long-term effects could be immense. A judgment for the plaintiff could set a precedent whereby exchanges are liable for financial losses by customers who invest irresponsibly.
More significantly, a judgment that includes a ruling either way on Uniswap’s legal status could serve to usurp the SEC’s authority to determine whether cryptocurrencies are securities and DEX’s are the same as other brokerages.
Or, the court may rule that Risley should have been more careful before making highly-speculative investments. In either case, it will be well worth watching to see how it turns out.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.