Recent Ruling from the Second Circuit Court of Appeals in a Uniswap Labs Case

A recent ruling from the Second Circuit Court of Appeals in a Uniswap Labs case reaffirms that neutral, decentralized software creators should not be held liable for third-party misuse of that technology.

A recent ruling by the Second Circuit Court of Appeals in a case against Uniswap Labs has no formal precedential value but may carry broader implications for decentralized finance (DeFi) developers, according to the DeFi Education Fund.

The case arose from a lawsuit filed by plaintiffs who purchased various tokens from liquidity providers on the Uniswap decentralized exchange (DEX).

The suit, which was initially dismissed by the US District Court for the Southern District of New York, alleged that certain venture capital investors and Uniswap Labs had committed violations of US securities laws by enabling the trading of “scam tokens” on the exchange.

The plaintiffs asserted that the defendants, through their investments and technology, had contributed to the creation and liquidity of these tokens, which they claimed were sold in violation of federal securities laws.

Their argument focused on whether Uniswap’s smart contracts, which are used to facilitate trades on the DEX, could be deemed contractual agreements for the purposes of Section 12(a)(2) or Section 13(a) of the Exchange Act.

These sections, which are part of the 1933 Securities Act and the 1934 Exchange Act respectively, typically apply to the direct sale of securities or the solicitation of their sale.

However, the plaintiffs contended that these smart contracts should be viewed as overarching user agreements or, in the alternative, that each trade on Uniswap’s DEX could be considered a separate contract.

In their view, this contractual relationship would then fall under the rescission provisions of Section 12(a)(2) or Section 13(a) with respect to any disputed token sold via Uniswap’s protocol.

The Second Circuit ultimately affirmed the lower court’s dismissal of the case, ruling that these contracts do not fall under the Exchange Act’s rescission provisions.

The court also stated that the smart contracts on Uniswap operate as overarching user agreements and that the contractual relationship exists between the token creator or liquidity provider and the purchaser, not between the purchaser and Uniswap Labs.

Furthermore, the ruling emphasized that even if each trade could be considered a separate contract, Uniswap’s technology functions merely as an automated tool for executing trades, similar to how a brokerage executes trades in accordance with a client’s instructions.

It compared holding the DeFi platform liable to holding Nasdaq or the New York Stock Exchange responsible for fraudulent stock purchases on their exchanges.

The ruling underscores that while the technology can be misused, the creators of neutral, decentralized software should not be held liable for third-party misuse of that technology.

This aligns with ongoing discussions regarding the implications of US government actions, such as the sanctions on Tornado Cash and the criminal charges against Samourai Wallet developers.

In these cases, authorities have asserted broad software developer liability for technology used by third parties to conduct illegal activities.

The court’s ruling, issued as a Summary Order and therefore carrying no formal precedential value, focused on existing securities laws and how readily they extend to DeFi infrastructure.

In contrast, the US government’s perspective in the cases against Tornado Cash and Samourai Wallet prioritized the broader effects of the technology on the underlying cryptocurrency ecosystem.

This perspective will likely be crucial for future legal challenges and regulatory discussions concerning the extent of software developers’ liability in decentralized ecosystems.