Understanding Landmark Crypto Decisions: Risley v. Uniswap
I. Introduction
This landmark cryptocurrency case is titled: Nessa Risley, James Freeland, Robert Scott, Annie Venesky, Andrew Cardis, and Dean Meyers, individually and on behalf of all others similarly situated, lead plaintiffs, v. Universal Navigation Inc., doing business as Uniswap Labs, Hayden Z. Adams, Paradigm Operations LP, AH Capital Management, LLC, doing business as Andreessen Horowitz, Union Square Ventures, LLC, and Uniswap Foundation., Defendants (hereby referred to as Risley et, al. v. Uniswap).
This case revolves around a dispute between a group of individuals (the plaintiffs) who allege that they lost money after investing in various “scam tokens” that were issued and traded on the Uniswap Protocol trading platform (the Protocol), which is a decentralized cryptocurrency exchange.
II. Legal History
The case began when the plaintiffs filed a class action against a collection of organizations and individuals behind Uniswap. The plaintiff’s argument is fundamentally that various relevant securities laws (Section 29(b) of the “Exchange Act”), 15 U.S.C. § 78cc, and Section 12(a)(1) of “Securities Act”) should apply to Uniswap’s conduct – which would thus hold Uniswap liable for the losses the plaintiffs suffered.
The defendants responded to the plaintiff’s class action by moving to dismiss all of the plaintiffs’ claims. The defendants argued that they are nothing more than an underlying service, and it is not their fault if malicious third-party scammers operate on their platform. The Court agreed with this sentiment and compared the plaintiff’s suit to Venmo being sued for a “drug deal that used the platform to facilitate a fund transfer” (Risley et, al. v. Uniswap, 2023).
The Court also identifies, multiple times, that due to the anonymous nature of crypto exchanges and the Platform, identifying and pursuing claims against the actual scammers is near impossible. As such, the plaintiffs instead chose to pursue remedies against the Platform as it was the only identifiable party with connection to their losses.
III. Technical Background
It is important to briefly outline the technical mechanics of how the Platform operates and how the scams were run. The most significant piece of information to understand is that the Protocol primarily revolved around “liquidity pools”. Liquidity pools are simply a group of tokens locked together into a smart contract.
Liquidity pools typically take the form of two groups of tokens (i.e., Token A and Token B) which have equivalent value but are not numerically equivalent. Most often, this means Token A will be Ether (a token with preexisting value) while Token B is some new token (with little to no value). The issuer of Token B will frequently put over a trillion of their tokens into the pool, along with a small amount of ETH. In the market, liquidity pools function whereby outside buyers trade their Token A for Token B. However, to incentive buyers to do so, (i.e., to create demand) the issuers of Token B require a third party, called “liquidity providers” to place additional Token A into the pool. This insertion of liquidity drives up the price of Token A.
Liquidity providers make their money through interest fees, which are charged to outside traders (like the Plaintiffs) each time they make a transaction in the pool. Furthermore, as this process occurs on a decentralized exchange, all parties depend on smart contracts to execute trades, establish relative prices for the assets, and handle all other necessary technical functions. These smart contracts are crucial to the case, not only because they are what allow all exchanges to happen, but also because they are what connect the plaintiffs to Uniswap. In other words, Uniswap is a collection of code in the form of smart contracts.
IV. Plaintiff’s Losses
Scammers took advantage of the plaintiffs through these liquidity pools in two common ways. The first is a “pump and dump”. In a pump and dump, malicious parties buy up a large amount of an otherwise low worth token, heavily promote the token on social media, and then once the there is sufficient interest and the price of that token rises, they sell their entire stock to make as much profit as possible.
The other common scam is a “rug pull” where a new token is issued, the issuer receives liquidity tokens in exchange, and everything operates normally — until the issuer prematurely withdraws their liquidity tokens from the pool, which makes everyone else’s tokens worthless.
V. Opinion & Ruling
The Court found against the plaintiffs in all matters and dismissed their claims. The Court did so because of three reasons:
The anonymity of crypto prevents the plaintiffs from seeking redress from the groups which listed the scam tokens, so they are instead left to pursue claims against the platform on which the scam was perpetrated.
Crypto-currency and decentralized exchanges are not actually covered by any reasonable reading of the federal securities laws that the plaintiffs allege the defendants violated.
The Court explicitly determines that, according to existing laws, the responsibility for determining the legality of decentralized exchanges and cryptocurrency lies with Congress, not the legal system.