The Breakdown - Judge In Uniswap Suit Says "Ask Congress, Not Me!"

Episode Date: August 31, 2023

A class action lawsuit against Uniswap has been dismissed with prejudice and the decision might have big implications for other ongoing crypto cases. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, August 31st, and today we are talking about the big decision in the uniswap lawsuit. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit.ly. down pod. Well, friends, another day, another good court result for the crypto industry. Anthony Sassano tweeted, the SEC and losing in court, name a more iconic duo. Now, what he was referring to is a class action lawsuit against Uniswop that has been dismissed.

This case was filed in April of last year by a group of plaintiffs who claimed that they lost money due to scam tokens being listed on the decentralized exchange. Uniswap Labs, its CEO, the foundation and VC backers were all listed as defendants who were claimed to be liable for those losses. The argument made by plaintiffs was that Uniswap had a degree of control over liquidity pools on the protocol. They demanded rescission of the contracts entered into to purchase the scam contracts, as well as compensation under the Securities Act of 1933 and the Securities Exchange Act of 1934. Plaintiffs supported their claims by arguing that Uniswap held control over, quote, liquidity provider funds and newly created tokens in Uniswop's proprietary core contracts.

Essentially, they argued that Uniswap had control over assets deposited in smart contracts on the platform. They supported their claims by arguing that Uniswop used routers under its control to process transactions and provided liquidity tokens when pools were created. Plaintiffs also argued that collectively, the defendants likely held at least 88% of Uniswap governance tokens, enough to effectively control the protocol, but ultimately did not advance evidence to support that claim. Now, why people are so excited about this particular decision is not just that Uniswap won. They're excited because the judge's order to dismiss the case speaks to a firm understanding of the underlying functionality of crypto protocols.

Now, on the one hand, maybe we shouldn't be surprised because this is the same judge currently presiding over the Coinbase lawsuit, and so has had a lot of context to learn about crypto law during that proceeding. At the same time, the fact that this judge is the one who is presiding over the coin base lawsuit is part of why people are even more excited than they might otherwise have been. Now, the judge explained in their order that, quote, the identities of the scam token issuers are basically unknown and unknowable, leaving plaintiffs with an identifiable injury but no identifiable defendant. Plaintiffs then sued whoever they could find, according to the judge, who said, quote, 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.

Indeed, this lack of legislation and clarity around the crypto industry was a huge, perhaps, defining theme of the ruling. The judge wrote that, quote, the court declines to stretch the federal securities law to cover the conduct alleged, and concludes the plaintiff's concerns are better addressed to Congress than to this court. Now, that is an absolute bomb of a statement, and we will come back to it in a little bit. The judge rejected the premise that merely deploying code on a blockchain could lead to legal liability, stating that, quote, it defies logic that a drafter of computer code underlying a particular software platform could be liable for a third party's misuse of that platform. The order made it clear that Uniswap's core functionality was not

elicit, stating that, quote, the court finds that the smart contracts here were themselves able to be carried out lawfully, as with the exchange of crypto commodities, ETH and Bitcoin. The defendants had made the argument in their motion to dismiss that the lawsuit was just as absurd as holding the, quote, developer of self-driving cars liable for a third party's use of the car to commit a traffic violation or rob a bank. The judge found some resonance with the argument, making it clear that the individual who committed the crime was liable for the consequences, not the car company. Now, ultimately, the judge referenced the unsuccessful class action brought against Coinbase last year and dismissed the case with prejudice, meaning it cannot be retried.

As I said, the community's reactions were significant. Marvin Amori, chief legal officer at Uniswap rights, another huge victory for the crypto world and software devs. SDNY court tossed out a class action against us, deciding that the self-driving Uniswap protocol has primarily lawful use, and protocol devs aren't liable when others misuse it. it. The trend in courts is obvious. Uniswap founder Hayden Adams said, Overall, I'm extremely happy to see how thoughtful some courts have been recently with regards to defy and crypto, and to see many of the janky legal theories slap down. Defi is here to

stay. Twang Viliye, head of regulatory and policy at Bain said, kudos to the judge and her clerks for doing the work to understand the nuance of this new tech. These opinions keep vindicating what we've been saying all along. It is not clear whether and how security's laws apply, and certain regulatory gaps only Congress can fill. Mike Vavschak, General Counsel at Alliance Dow writes, big lesson for crypto policy makers and financial regulators and the administrative state at large. If you choose to avoid the legal process, if you do not engage in good faith rulemaking, the courts will not bail you out. Attorney Collins-Belton echoed this theme saying, ah, what's that you say? Yet another court able to understand that we don't run roughshod

over civil liberties and seek to airdrop liability to entrepreneurs whose platforms get misused by others? Now, lawyer Stephen Paley, a partner at Brown and Rudd, went a little bit farther in his explanation of just how significant this was. He wrote, Puditative Uniswop class action dismissed by Judge Fahlia and SDNY. Among other things, challenges notion that software platform can be held liable for damage caused by third-party misuse of software code. While this opinion is primarily focused on application of U.S. federal securities laws, we're going to see issue of developer and platform liability for third-party misuse and harm heavily litigated in the coming decades. This isn't a case about products liability

or negligence, but touches on some of the same issues, foreseeability of harm, responsibility for third-party misuse and third-party damage. I predict much of this will be the subject of legislation, but common law decisions will lead the way to start. Mike Vavschak again also wrote a longer thread about a specific footnote in the case, footnote 8. He writes, remember that citation. It undermines a nasty tactic we've seen the SEC, CFTC, and class action plaintiffs use against crypto, namely arguing that designing a protocol to avoid the law is the same as admitting guilt under the law. Quote, particularly given the current state of cryptocurrency regulation, the court is concerned about holding parties liable under the federal securities law for designing a platform that does

not implicate the federal securities laws. Back to Mike, he writes, we saw this in CFTC versus Uki-Dow, where the developers sought to decentralize the protocol explicitly to avoid the reach of commodities exchange regulation. We saw it in a number of SEC actions where good faith disclosures made by projects were used as evidence that those projects were willfully evading securities laws. It's a powerful idea that should be common sense in a rule of law society. If you don't want to comply with regulatory obligations, there's nothing wrong with going through the pain and effort of carefully avoiding its letter and spirit. That's not evidence of illegality, quite the opposite.

It's evidence of careful and deliberate lawfulness. Now, Katie Juan really put a fine point on some of the bigger hammer statements from the decision. She wrote, Today's decision out of STNY highlights the extent to which some in the federal judiciary appreciate the uncharted territory on the applicability of securities, laws to an asset class as broad as crypto. For example, the judge, quote, recognizes although devs could theoretically register tokens with the SEC, Congress and the courts have yet to make

a definitive determination as to whether such tokens constitute securities, commodities, or something else. She also expresses concern about extending liability under securities law to a situation that, quote, does not implicate the federal securities laws, particularly given the current state of cryptocurrency regulation. Finally, suggests any gap is a question for Congress. Quote, the court declines to stretch the federal securities laws and concludes the plaintiff's concerns are better addressed to Congress. Now, others wrote more about the implications of the decision. Contensis lawyer Bill Hughes writes, the SDNY also explicitly found in its August 29th decision that Ethereum is a commodity, not a security. No analysis of the issue, just the conclusion,

but still a pretty definitive statement if you ask me. This part also implies that wrapped Bitcoin is a commodity, but that's much less clearly stated. The Ethereum is a commodity statement is undeniable, and I bet my house on it, not a mistake or an unintentional addition by the judge. Mercurio Legal Counsel Adam Berker writes, here's why it's a huge milestone for defy. Compliance standards for decentralized exchanges have been set, allowing for more innovation and freedom in the space. A Dex won't be liable for listed tokens even if they're recognized as securities. Gabriel Shapiro from Delphi Labs writes some good fodder in here to use against the Treasury broker-dealer proposal in various SEC cases and also says, first technologically literate judge we've

gotten a crypto case, and she's also the judge in the Coinbase suit. Now, it is certainly impossible to read this order without thinking about the SEC's lawsuit against Coinbase being heard by the same judge. The Coinbase lawsuit is primarily about whether token transactions made on the exchange are the sale of unregistered securities, and whether Coinbase's wallet, staking program, and exchange require registration under securities law. The case essentially turns on whether the SEC has clear jurisdiction over the crypto industry and the products offered by it. I don't think it's unfair that some in the crypto industry are seeing some of the judge's comments in this order seem like a veiled, or not so veiled, swipe at that position. So all in all, a pretty significant moment.

Now, as Stephen Paley warns, this doesn't mean that every case like it will be decided in the same way. The facts and considerations of each individual case are going to come into play. But still, if you're looking at good days and bad days, this was a good one. Now, one quick follow-up from yesterday before we get out of here, you'll remember that on Tuesday Digital Currency Group DCG filed a proposal in the Genesis Bankruptcy. The plan would see DCG paying back intercompany loans across a seven-year schedule, with around 275 million being paid in the shorter term. DCG has currently missed payment on $630 million, which was due to be repaid to Genesis in May,

with a further $1.1 billion owed over the next decade. DCG's proposal represented around a $300 million discount on the outstanding debt, as well as a two-year forbearance on the bulk of the shorter term loan. As you heard yesterday, the community response was largely exasperation at what appeared to be yet another stall tactic from DCG. The plan was pitched by DCG as an in-principle deal with unsecured creditors, but most notably lacked the support of secured creditors and the largest individual creditor, Gemini. Gemini claims to be owed $766 million on behalf of its Gemini earned customers. At the time of recording yesterday,

we hadn't gotten any comment from Gemini or their quite vocal CEOs, the Winklevoss twins, but on Wednesday, Gemini's lawyer filed an objection to the proposed plan. The objection was filed alongside an ad hoc creditor organization called the Fair Deal Group. The Gemini filing said the deal, quote, is woefully light on specifics and remain subject to definitive documentation. The limited information provided by the debtors makes clear that the proposal deal is also woefully light in economic consideration. Now, a third group of creditors, the ad hoc group of Genesis lenders, also filed an objection. They said, quote, DCG's contribution to the estate and satisfaction of creditor claims is wholly insufficient to satisfy even the uncontested loan amounts

due, let alone the valuable estate claims asserted by creditors against DCG and its directors and officers, including Barry Silbert. Each of these creditor groups is primarily concerned with blocking any attempt to extend the exclusive period where Genesis has the right to propose bankruptcy plan, which is currently set to expire on October 26th. Once the exclusivity period ends, creditors can propose their own plans to wind up the bankruptcy and distribute Genesis assets. The Gemini filing specifically called attention to just how many delays DCG has already induced during the process. They wrote, quote, debtors have repeatedly promised that a plan that resolves claims against DCG is right

around the corner as they seek extension after extension of mediation periods, hearing dates, and big deadline. The filing noted that DCG has, quote, not paid any of the approximately 630 million in loans that came due to the debtors in May 2023. All of this obviously stands in some contrast to DCG's claims on Tuesday when filing the deal that, quote, constructive discussions were ongoing with the creditors' groups. So all in all, a pretty standard day in late 2023. Intriguing cleanup on the one hand, courts being the final refuge of the industry on the other. In any case, that is going to do it for today's episode. I appreciate you listening as always, and until tomorrow, be safe and take care of each other.

Peace.