Debevoise & Plimpton LLP has won a motion to dismiss a putative securities class action filed against its clients Universal Navigation Inc. (better known as Uniswap Labs), Uniswap Labs CEO Hayden Adams, and venture capital firm Union Square Ventures, LLC, along with two other venture capital firms and the Uniswap Foundation.
In a landmark decision for the crypto industry, Judge Katherine Polk Failla in the Southern District of New York held that the creators of a decentralized cryptocurrency exchange do not violate the federal securities laws when third parties use the exchange to trade unregistered securities.
The lawsuit was filed by individuals who acquired various tokens on the Uniswap exchange between December 2020 and March 2022 and claimed to have been harmed when those tokens fell in value, allegedly because they were scams. Plaintiffs claimed that Defendants violated Sections 5, 15 and 29(b) of the Securities Exchange Act of 1934 by purportedly operating as an unregistered securities exchange and broker or dealer, and Sections 5 and 12(a)(1) of the Securities Act of 1933 by purportedly selling unregistered securities. Plaintiffs also asserted various state securities and common law claims.
The Court dismissed Plaintiffs’ federal securities claims in their entirety, with prejudice, and declined to exercise supplemental jurisdiction over the state law claims. First, the Court rejected Plaintiffs’ argument that, by utilizing the “smart contracts” that comprise the exchange, they entered to a legal contract with Uniswap, much less a contract that violates the federal securities laws. Second, the Court rejected the argument that Uniswap was a “seller” of the tokens at issue based on allegations that it wrote the underlying computer code for the smart contracts.
More broadly, the decision supports Defendants’ position that a decentralized exchange should not be held responsible if third parties use it for fraudulent purposes. That, the Court held, would be like “attempting to hold an application like Venmo or Zelle liable for a drug deal that used the platform to facilitate a fund transfer.” Regulators, the Court noted, “may someday address this gray area in the securities laws,” but for now, “Plaintiffs’ concerns are better addressed to Congress than to this Court.”
The Debevoise team was led by litigation partners Maeve O’Connor and Elliot Greenfield and included associates Brandon Fetzer and Emily Jenab.