Anyone following the crypto regulatory space likely knows of Grayscale’s recent court victory. However, some may have missed the legal excitement involving decentralized exchange, Uniswap.
With all eyes on the DC Circuit Court of Appeals’ takedown of the US Security and Exchange Commission’s “arbitrary and capricious” attack on Grayscale’s ETF aspirations, the dismissed class action lawsuit against Uniswap flew under the radar of many crypto enthusiasts.
But the court’s decision in the lesser-known case could present important implications for other upcoming rulings, namely the SEC’s lawsuit against Coinbase for allegedly “operating as an unregistered securities exchange, broker, and clearing agency.”
Read more: SEC should ‘expeditiously’ approve GBTC conversion, says Grayscale
On the Empire podcast (Spotify/Apple), Polygon Labs chief policy officer Rebecca Rettig sums up the details of the Uniswap case, which she notes does not involve the SEC. “This was a private class action brought by a number of private persons who supposedly had bought what they called ‘scam tokens’ on Uniswap pools.”
The case only reached the “motion to dismiss” stage, Rettig explains, meaning that “all the plaintiffs did was file a complaint and then the defendants went ahead and filed…motions to dismiss.”
“There was no discovery, no depositions. No documents had changed hands.”
The defendants argued that the allegations, even if accepted as true by the judge, “do not amount to violations of the securities laws,” explaining that they do not control the protocol that facilitates sales.
“And for that reason,” Rettig says, “you need to basically dismiss the entire case — and that is exactly what the judge did.”
Things get a little more interesting when considering some tidbits from the case. Rettig mentions that the judge who oversaw the case, Katherine Polk Failla will also oversee the SEC versus Coinbase case. Regarding the judge’s opinion on the matter, Rettig says “the understanding of the technology and the way that the Uniswap protocol works is really ‘spot-on.’”
“The whole first, maybe 20 pages,” Rettig says, “is about how the protocol works, how the interface works, how somebody could independently create a pool on Uniswap.” The judge appeared to know her stuff, with Rettig observing, “It even has a footnote about how v1 was [ether] ETH to ERC-20 and v2 was ERC-20 to ERC-20.”
“It was very, very impressive.”
The SEC is wrong
The crux of the argument, Rettig points out, was the judge’s takeaway that “the way the law works today does not allow for these types of claims.” Rettig says the judge repeats this theme a number of times throughout the decision, arguing that the courts and Congress “have not weighed in on this issue.”
Rettig sums up Judge Failla’s opinion: “Some of this is not for me to decide, but we need Congress to update our laws to be able to address these kinds of issues.”
Blockchain Association chief policy officer Jake Chervinsky adds that the “SEC is wrong” because it is trying to “extend its own jurisdiction over crypto without Congress having done so explicitly during a time when Congress is considering legislation.”
“When an agency claims to have some authority granted by statute,” Chervinsky explains, “if its claim relates to an issue of vast economic and political significance, Congress must have clearly authorized that assertion of jurisdiction,” he says, “or else the assertion of jurisdiction should be rejected by the courts.” It’s something in legislative law referred to as the “major questions doctrine.”
Chervinsky’s favorite line from the Uniswap opinion, he says, is Judge Failla’s statement that “the court declines to stretch the federal securities laws to cover the conduct alleged and concludes that plaintiff’s concerns are better addressed to Congress than to this court.”
“I could not have written that better myself.”
“If Judge Failla continues to hold this view in the Coinbase case,” Chervinsky says, “I just cannot imagine how Coinbase does not win the core question of whether the SEC regulates it as a trading platform, providing secondary markets and digital assets.”
