- DeFi platform Uniswap has been exempted by a United States court from being liable for users’ losses from scam tokens
- A New York district court said that disgruntled users should sue individual token projects
- The plaintiffs argued that Uniswap should be held liable since it manages liquidity pools involving scam tokens
A New York district court has exempted DeFi platform Uniswap from being liable for losses emanating from users investing in scam tokens available on the protocol. Those seeking to have the decentralized exchange take responsibility for such losses argued that Uniswap manages liquidity pools involving scam tokens. The court has however ruled that scammed users should take it up with individual token projects instead of going after exchanges, something that may be difficult to do since most scam token creators are anonymous and operate in a decentralized world.
No One Knows Their Identities
The case, filed by six entities in April last year, noted that the plaintiffs lost money by investing in dubious tokens on the platform within 15 months ending March 2022. They hinged their case on the Securities Acts of 1933 and 1934 and sought compensation and cancellation of smart contracts powering the tokens.
According to Judge Katherine Polk Failla, Uniswap couldn’t be held responsible since it didn’t knowingly allow the scam tokens on the platform and neither the plaintiffs nor the defendant knew the identities of the scammers.
Failla explained that the Exchange Act exempts creators of computer software from taking responsibility for a “third-party’s misuse of” their creations. In her ruling, she noted that the plaintiffs’ concerns can only be addressed by first having Congress enact new laws.
DeFi is Being Understood
Some in the crypto community commented on the ruling saying that it shows that the masses are getting an in-depth understanding of decentralized finance.
They also noted that the same judge is hearing the case between the United States securities watchdog and Coinbase, predicting a favorable outcome for the crypto exchange. The watchdog had also brought civil investigations against Uniswap in 2021.
Big Lesson for crypto policymakers and financial regulators (and the administrative state at large):
If you choose to avoid the legal process, if you do not want to engage in good faith rulemaking, the courts will not bail you out. https://t.co/r5RATmiwwq
— Mike Wawszczak (@mikewawszczak) August 30, 2023
Although the ruling is a win for Uniswap and other DeFi platforms, it also showcases how scammers are exploiting DeFi’s strengths to their advantage.
