How the Dismissal of the Uniswap Class Action Lawsuit Could Impact the DOJ's Criminal Case Against Tornado Cash
The Uniswap Class Action Lawsuit
The crypto space received yet another resounding court win yesterday in the Uniswap class action lawsuit. Coindesk In this case of first impression, SDNY United States District Judge Katherine Polk Failla considered whether the developers of and investors in the Uniswap Protocol trading platform (a decentralized cryptocurrency exchange) are subject to various provisions of the federal securities laws as currently written. As an aside, it’s worth noting that Judge Failla is also presiding over the SEC’s case against Coinbase. Court’s Ruling.
Plaintiffs in the Uniswap class action suit alleged “that they lost money after investing in what turned out to be various “scam tokens” that were issued and traded on the Protocol (the “Scam Tokens” or “Tokens”).” “Due to the Protocol’s decentralized nature, the identities of the Scam Token issuers are basically unknown and unknowable, leaving Plaintiffs with an identifiable injury but no identifiable defendant.”
In dismissing the class action case against Uniswap, Judge Faille noted that “While no court has yet decided this issue in the context of a decentralized protocol’s smart contracts, the Court finds that the smart contracts here were themselves able to be carried out lawfully, as with the exchange of crypto commodities ETH and Bitcoin.” Judge Faille added that “it defies logic that a drafter of computer code underlying a particular software platform could be liable under Section 29(b) for a third-party’s misuse of that platform.” Judge Faille added that “as discussed, smart contracts are self-executing, self-enforcing code that contain the terms of the agreement between the buyer and seller.”
The district court analogized Plaintiff’s claim to the self-driving car theory observing that “Plaintiffs suggest that a failure to impose liability on the drafters of the code here (i.e., Defendants) would be akin to failing to hold “a technology company that creates self-driving cars with flaws leading to harm or death” liable for those injuries, “regardless of whether they were responsible for such flaws.” “As an initial matter, the Court notes that alleged misdeeds on the Protocol are not analogous to the manufacturing defects Plaintiffs hypothesize.”
Plaintiffs’ theory operates on the assumption that the flaw or harm was done by Defendants by dint of their creating a system that could allow for the Scam Tokens, and not by the Token issuers themselves. Indeed, this is less like a manufacturing defect, and morelike a suit attempting to hold an application like Venmo or Zelle liable for a drug deal that used the platform to facilitate a fund transfer. There, as here, collateral, third-party human intervention causes the harm, not the underlying platform.
Could the District Court’s Ruling in the Uniswap Case Impact the DOJ’s Prosecution of the Tornado Cash Decentralized Protocol?
The DOJ announced yesterday that it has returned an indictment charging the founders of Tornado Cash with money laundering and sanctions violations. DOJ Press Release Two individuals, Roman Storm and Roman Semenov, have been charged with operating Tornado Cash Service, a cryptocurrency mixer, which allegedly laundered more than $1 billion in criminal proceeds. The U.S. Department of Justice (DOJ) announced the unsealing of the indictment, detailing multiple charges against the defendants, including conspiracy to commit money laundering, sanctions violations, and operating an unlicensed money transmitting business.The government maintains that the absence of AML or KYC mechanisms meant the Tornado Cash Service could be exploited by criminals to launder substantial sums of money.
I would not be at all surprised to see the defense team in the Tornado Cash case cite the district court’s ruling the Uniswap case as support for an argument that Tornado Cash ( a decentralized computer code underlying a particular software platform) and it such a a code provider could be held criminally liable for how third-party’s misuse the platform to commit in money laundering crimes. Stay tuned for more on this.