U.S. district judge in New York City dismisses case regarding ‘scam token’ involving Uniswap.

District Judge states that the decentralized characteristic of the protocol renders the identities of the scam token issuers essentially unknown, resulting in no identifiable defendant for the plaintiffs.

A U.S. district judge has effectively determined that a decentralized protocol cannot be held accountable for the misconduct of third parties. (Credit: Unsplash, Wesley Tingey/Modified by Coindesk)

Key points:

• A federal judge in New York has dismissed all outstanding claims in a proposed class action against Uniswap Labs, its CEO, and venture capital supporters, asserting they cannot be held responsible for purported scam tokens traded on the protocol.
• Judge Katherine Polk Failla concluded that, given Uniswap’s decentralized and permissionless nature operated by autonomous smart contracts, developers and investors are not liable for third-party misuse of the platform.
• Legal analysts indicate that this ruling marks an early, precedent-setting decision for DeFi, highlighting the challenges of attributing civil liability to protocol developers and potentially shaping future court approaches in crypto and criminal matters.

A federal judge has dismissed a proposed class action lawsuit against Uniswap Labs, CEO Hayden Adams, and several venture capital backers, ruling they cannot be held liable for alleged “rug pull” tokens traded on the decentralized exchange’s protocol.

In a ruling delivered Monday by the U.S. District Court for the Southern District of New York, Judge Katherine Polk Failla dismissed the remaining state law claims in Risley v. Universal Navigation Inc., the Brooklyn-based company that operates Uniswap, after previously rejecting the plaintiffs’ federal securities claims. This ruling effectively concludes the case at the district court level.

This decision is among the first to directly consider whether developers and investors associated with a decentralized protocol can be held accountable under current securities and state laws for tokens created and traded by third parties.

“Due to the protocol’s decentralized nature, the identities of the scam token issuers are fundamentally unknown and unknowable, leaving plaintiffs with an identifiable injury but no identifiable defendant,” Failla wrote.

“Undeterred, they now pursue the Uniswap defendants and the VC defendants, hoping this court might overlook the fact that the current state of cryptocurrency regulation leaves them without recourse, at least regarding the specific claims made in this suit,” she added.

Irina Heaver, a UAE-based crypto attorney, informed CoinDesk that “the dismissal indicates that courts are starting to engage more seriously with the realities of decentralization.”

By acknowledging that a permissionless protocol governed by autonomous smart contracts differs significantly from a centralized intermediary exercising control, the court established a crucial distinction for DeFi, she elaborated.

“When code executes automatically and there is no discretionary control, liability cannot simply be reassigned to developers because bad actors misuse the infrastructure,” Heaver stated. “The pressing question now is how this rationale will apply to criminal cases such as Tornado Cash. If decentralization is recognized as a structural reality, prosecutors will need to demonstrate intent and control, not just authorship of the code.”

Brian Nistler, Uniswap’s head of policy, praised the ruling on X, referring to it as “another precedent-setting ruling for DeFi.” He emphasized what he considered his “favorite quote” from the case: “It defies logic that a drafter of a smart contract, a computer code, could be held liable … for a third party user’s misuse of the platform.”

The plaintiffs, a group of investors, asserted they lost an undisclosed sum after acquiring numerous tokens on the Uniswap protocol that they later labeled as scams. Since the token issuers were unidentifiable, the investors instead filed suit against Uniswap Labs, the Uniswap Foundation, Adams, and venture firms Paradigm, Andreessen Horowitz, and Union Square Ventures.

Failla dismissed the claim that the defendants could be held accountable merely for providing the infrastructure where the tokens were issued and traded.

“Plaintiffs’ theories of liability are still based on the premise that defendants ‘facilitated’ the scam trades by supplying a marketplace and facilities for connecting buyers and sellers of tokens,” Failla concluded, determining that the claims failed as a matter of law.

In a prior dismissal of the federal claims, Failla stated it “defies logic” to hold the drafter of a smart contract liable for a third party’s misuse of the platform—a statement that has been frequently referenced by advocates for decentralized finance.