Two U.S. law firms have invited anyone who lost money on Uniswap since last April to join a class action suit against the exchange’s developers and investors for failing to crack down on “rampant fraud”.
On April 4, Nessa Risley of North Carolina filed a lawsuit alleging that the decentralized exchange’s lack of identity checks and securities restrictions lets fraudsters list “thousands of scam tokens” associated with rug pulls, pump and dumps, and Ponzi schemes on the platform.
More than that, the lawsuit, filed by US firms Barton LLP and Kim & Serritella LLP, alleged that Uniswap’s fee structure encourages fraud by paying liquidity providers guaranteed fees for every trade. Meanwhile, investors “were left to fend for themselves,” it says.
Risley spent about $10,400 on low capitalization altcoins between May and July of last year. In the same period, the total crypto market cap lost half of its value. Risley cites “substantial losses” in EthereumMax, Matrix Samurai, Rocket Bunny, Alphawolf Finance, Bezoge Earth, and BoomBaby tokens.
Risley’s suing Uniswap Labs, its founder, Hayden Adams, and investors A16z, Paradigm, AH Capital Management, and Union Square Ventures. The lawsuit accused them of abetting Uniswap’s “failure to register as an exchange or broker-dealer,” and selling unregistered securities.
Decentralization Challenge
The lawsuit marches straight past Uniswap’s claims of decentralization. The Uniswap protocol comprises permissionless smart contracts that anyone can interact with, meaning that Uniswap can’t restrict who can use the protocol, or which tokens users trade on its exchange.
Uniswap can only control its front-end website. Last year, Uniswap Labs restricted access to synthetic stock tokens on its website, citing “the evolving regulatory landscape.”
Risley’s complaint alleges that Uniswap and its investors “are well aware of the fraud perpetrated on the Exchange, but have done nothing to stop these activities” The complaint seeks to represent everyone who purchased tokens on the exchange from April 5, 2021 to April 4, 2022.
The lawsuit is not the first to challenge the decentralization of a DeFi protocol. In January, a disgruntled depositor filed a complaint against gamified crypto savings protocol, PoolTogether, claiming the protocol operates an illegal lottery. The SEC also launched an investigation into Uniswap last September.
A court may end up deciding whether Risley should have taken greater care with her investments. Popular crypto commentator ‘Cobie’ tweeted said that BoomBaby’s website “doesn’t even work,” Rocket Bunny’s maximum supply is a staggering 777 quadrillion, and Matrix Samurai’s core use-case is “a token for shilling a shilling service.”
