Why ruling in obscure Uniswap case is latest blow to Gary Gensler’s clampdown on cryptocurrencies

Class action lawsuits brought by investors get dismissed all the time with little significance. But when a US judge this week threw out an action filed by a North Carolina woman against Uniswap, something important happened — the decision stirred the debate over whether digital assets are indeed securities.

In this instance, the ruling was a victory for the crypto community.

And it was a setback for Gary Gensler, the chair of the US Securities and Exchange Commission, who has long argued cryptocurrencies should be regulated the same as stocks and bonds.

Rejected argument

On Tuesday, Judge Katherine Polk Failla of the US District Court in Manhattan dismissed a lawsuit brought by Nessa Risley on behalf of other investors. Risley claimed she’d suffered “substantial losses” after buying tokens on Uniswap, which is the top decentralised crypto exchange.

In the complaint, the plaintiffs alleged that Uniswap had “siphoned” more than $1 billion from its customers by selling “unregistered securities” such as EthereumMax and Rocket Bunny. Taking a cue from the SEC, the plaintiffs argued that Uniswap should have registered as an exchange and a broker-dealer, and ensured that any tokens traded on its platform were recorded with officials as securities.

But Failla rejected the contention that Uniswap, a five-year-old venture founded by Hayden Adams, was a securities exchange and could be held accountable.

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“The Court declines to stretch the federal securities laws to cover the conduct alleged, and concludes that Plaintiffs’ concerns are better addressed to Congress than to this Court,” she said in her ruling.

As a result, the judge appears to be bolstering the position long embraced by crypto leaders such as Brian Armstrong, the CEO of Coinbase, and the Blockchain Association, the industry’s lobbying group in Washington. They say digital assets are not the same as normal securities and deserve to be governed by their own laws, rules, and regulations.

‘It’s highly motivating to see US courts hold up arguments I’ve felt deeply for years.’

—  Hayden Adams, Uniswap

“One longtime fear of mine has been bad legal interpretation of our complex, technical industry,” tweeted Hayden Adams, the founder of Uniswap Labs and one of the defendants in the case. “It’s highly motivating to see US courts hold up arguments I’ve felt deeply for years.”

Even though this decision came in a little-watched case, it’s a big deal. With Wall Street in its jurisdiction, the Southern District of New York is the most influential court in finance and holds sway over cases on trading, asset management, and money laundering and other white collar crimes.

First impression

And Failla, who was appointed to the federal bench by President Barack Obama in 2013, is also presiding over the US Justice Department’s sanctions case against Tornado Cash, the crypto mixer, and the SEC’s lawsuit against Coinbase. Filed last June, the agency alleges Coinbase unlawfully failed to register as an exchange, a broker-dealer, or a clearing agency, and facilitated the trading of unregistered securities.

Those were the same allegations Risley and her fellow plaintiffs made in their failed lawsuit.

Decisions of “first impression,” as lawyers put it, can influence the thinking by jurists in similar cases. And when such rulings come out of the Southern District, they pack even more clout.

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While the SEC was not a party to the class action, the dismissal appears to chip away at the cornerstone of its crypto policy. “Nothing about the crypto markets is incompatible with the securities laws,” Gensler said last September in public remarks.

Gensler’s argument suffered another blow earlier this week when a three-judge US appellate court in Washington ruled unanimously that the SEC had unlawfully rejected an application filed by Grayscale to convert its listed Bitcoin Trust into a spot price exchange-traded fund. The argument in that case was different — Grayscale asserted the SEC had acted in an arbitrary manner by green-lighting Bitcoin ETFs based on futures contracts but barring a spot price offering.

Black eye

Yet the upshot is the same — crypto is winning and Gensler is losing, at least for now.

“There’s definitely a reason for the crypto industry to feel somewhat positive right now,” says Rohan Grey, an assistant professor of law at Willamette University in Oregon, and a frequent crypto critic. “To the extent that this is a black eye for the ‘SEC über alles’ strategy, they’re right.”

The main takeaway from the failure of Risley’s case against Uniswap is how a federal judge focused on the question of whether cryptocurrencies should be defined as securities, said Miller Whitehouse-Levine, the policy director at the DeFi Education Fund, a group that supports the industry in Washington.

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“Particularly given the current state of cryptocurrency regulation, the Court is concerned about holding parties liable under the federal securities laws for designing a platform that does not implicate the federal securities laws,” the judge wrote.

Crypto advocates have long argued blockchain-based assets cannot be held to the same governance standards as traditional assets. As much as Gensler may wish that argument had been won, Judge Failla’s decision shows the debate is far from over.

Update, August 31: Due to an editing error, a previous version of this article incorrectly spelled Willamette University. Hayden Adams’ name was also mispelled in the pull quote.