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Risley v. Uniswap Ruling Carries Massive Implications for DeFi
What happened?
On February 26, the Second Circuit Court of Appeals affirmed the District Court’s ruling in Risley v. Uniswap Labs, which held that neither Uniswap Labs nor its developers could be held liable for plaintiffs’ losses in connection with trading “scam tokens” on the Uniswap platform. The case was brought by a group of private plaintiffs alleging that Uniswap, along with their venture capital investors (VC defendants), violated federal securities law because they were “aware of and do nothing to stop these fraudulent activities.” As the Second Circuit framed the issue: “The threshold issue in this case is whether the developers of automated computer codes that facilitate the transfer of cryptocurrency on a decentralized exchange may be held liable under federal securities laws for the alleged fraudulent conduct of third parties on that exchange.”
In a summary decision that acknowledged certain nuances of the technology, e.g. “The smart contracts are simply standardized computer codes that allow the Protocol to fill in the terms for individual trades between and controlled by its users, the Second Circuit dismissed the federal securities laws claims: “it ‘defies logic’ that a drafter of a smart contract, a computer code, could be held liable under the Exchange Act for a third party user’s misuse of the platform . . . Accepting Plaintiffs’ allegations as true, the district court appropriately determined that Defendants’ smart contracts were, at best, collateral to the third parties’ scam token activities and the type of tangential activity that falls outside of Section 29(b).”
What does this mean?
The Risley decision is a major win for software developers because it reinforces the distinction between front-ends who make it easier for users to engage in peer-to-peer transactions and the actual issuers or creators of tokens. By ruling that Uniswap Labs and the VC defendants could not be held liable for third party’s fraudulent tokens traded on the platform, the Second Circuit recognized that software developers are not responsible for the bad conduct of third parties over whom they have no control and are not financial intermediaries, like broker-dealers or exchanges. DEF applauds the court’s careful consideration of DeFi technology.
House Ways and Means Committee Advances “Broker” CRA Resolution
What happened?
On February 26, the House Ways and Means Committee held a markup of the Congressional Review Act (CRA) Resolution introduced by Representative Mike Carey (R-OH) to overturn the Internal Revenue Service’s (IRS) so-called Broker Rulemaking. The Committee passed the resolution down party lines (26-16).
As a reminder, on December 27, 2024, the Treasury Department & IRS finalized the second portion of their “broker” rulemaking focusing on DeFi. The rule requires DeFi industry participants that are not brokers to act as brokers; Treasury purported to redefine the statutory term “broker,” which Congress defined to reach only those who, “for consideration,” “effectuat[e] transfers of digital assets on behalf of another person,” 26 U.S.C. § 6045(c)(1)(D), to reach anyone who provides a “trading front-end service” or “other effectuating services,” even if they do so for free and even if the service does not itself effectuate transfers. The rule also purports to require DeFi industry participants to follow onerous reporting requirements, which Congress designed for actual brokers, for every transaction. Accordingly, DEF, Texas Blockchain Council, and Blockchain Association (BA) filed suit the same day the rule was finalized.
In the Senate, the companion Broker CRA Resolution has officially reached 13 cosponsors, and is being placed on the legislative calendar; it will proceed to the Senate floor in the coming weeks.
What does this mean?
For detailed background on the CRA, please read DEF’s thread linked here.
Next up: members of the full House and Senate will now vote on the CRA. DEF thanks the Members who voted to move the CRA to the House floor, recognizing the need to push back against unlawful and unconstitutional overreach by the Treasury and IRS and to protect Americans' freedom of choice in how they transact.
SEC Drops Investigations and Enforcement Actions
What happened?
This week, the SEC dropped or paused an array of enforcement actions and investigations against crypto companies as part of their ongoing work to unwind the previous SEC leadership’s regulation by enforcement approach to digital assets.
On February 21, the SEC informed Robinhood Crypto that it has closed its investigation into the online brokerage. This announcement follows the SEC’s May 2024 Wells Notice to Robinhood Crypto, alleging violations of Sections 15(a) and 17A of the Securities Exchange Act. The same day, the SEC informed OpenSea that it was closing its investigation into the NFT platform without pursuing an enforcement action. The probe began in August 2024 when OpenSea received a Wells Notice, suggesting potential securities law violations related to NFT sales on the platform.
On February 24, the SEC informed Gemini that it has closed its investigation into the crypto
exchange. Gemini received a Wells Notice in May 2024 related to a January 2023 lawsuit filed by the SEC accusing Gemini and Genesis Global Capital of offering unregistered securities through Gemini’s “Earn” program.
On February 25, Uniswap Labs announced that the SEC informed them that it is concluding its investigation into the decentralized exchange without pursuing an enforcement action. Uniswap received a Wells Notice in April 2024, indicating that the SEC was investigating the exchange for potentially acting as an unregistered broker and securities exchange. The SEC also announced an agreement in principle to voluntarily dismiss the enforcement action against Consensys.
Concluding the week, on February 27, the SEC officially dismissed its enforcement action against Coinbase after announcing an agreement in principle to do so last week.
What does this mean?
These SEC recent decisions signal a significant shift in the agency’s enforcement strategy under the new administration. We commend the SEC for taking steps to remedy the previous SEC’s unlawful attempts to expand agency jurisdiction beyond its statutory authority.
As we move forward, DEF will be closely tracking crypto-related litigation developments, and will provide updates related to its two pre-enforcement challenges where the SEC is the defendant, Beba v. SEC and States v. SEC.
More Updates from the SEC
What happened?
The SEC announced the creation of the Cyber and Emerging Technologies Unit on February 20, and issued a request for industry feedback via a Press Release from SEC Commissioner Hester Peirce, titled “There Must Be Some Way Out of Here,” on February 21.
The Cyber and Emerging Technologies Unit (CETU) will serve the purpose of “combatting cyber-related misconduct and [protecting] retail investors from bad actors in the emerging technologies space.” The announcement of CETU comes just shy of a month since the announcement of the SEC’s Crypto Task Force to be led by Commissioner Peirce. The CETU will employ dozens of “fraud specialists and attorneys across multiple SEC offices” to efficiently work to protect retail investors from a variety of securities fraud, including but not limited to “[f]raud involving blockchain technology and crypto assets.” The CETU also comes as a replacement for the Crypto Assets and Cyber Unit, which was created under former Chairman Gary Gensler and which brought numerous regulation-by-enforcement actions against the crypto industry by the time it was updated to CETU.
Commissioner Peirce’s press release, “There Must be Some Way Out of Here,” is an invitation to provide insights—from market participants, developers, and even skeptics—to help the SEC solve longstanding legal issues related to crypto assets while adhering to the SEC’s three primary goals: “1) protecting investors, 2) maintaining fair, orderly, and efficient markets, and 3) facilitating capital formation.” The Crypto Task Force is tackling issues such as how to classify crypto assets, determine when they qualify as securities, and refine a workable regulatory framework. Additionally, the task force is exploring frameworks for token offerings, trading platforms, custody solutions, and tokenized securities, all while balancing investor protection, market integrity, and innovation.
What does this mean?
DEF applauds the openness of the Crypto Task Force and the willingness to work with the community to form clear, lasting regulation. As part of the Task Force’s ongoing efforts, DEF participated in one of the first meetings with the Task Force, where we had the opportunity to provide feedback and recommendations on how to effectively provide regulatory clarity to DeFi market participants.
DEF also published a blog with a list of questions from Commissioner Peirce’s recent remarks relevant to the future of DeFi. Stay tuned—over the coming weeks, the DEF team will share insights on how the SEC can foster a future with a harmonious balance between innovation and compliance.
Senate Banking Committee Hearing on Digital Assets Framework
What happened?
On February 26, the Senate Banking committee and industry experts convened for a congressional hearing entitled, “Exploring Bipartisan Legislative Frameworks for Digital Assets.” Key witnesses included Lewis Cohen, partner at Cahill Gordon & Reindel LLP; Jonathan Jachym, Global Head of Policy at Kraken; Jai Massari, Chief Legal Officer at Lightspark; and Timothy Massad, former Chairman of the Commodity Futures Trading Commission (CFTC). The hearing underscored growing consensus on the need for a structured, transparent regulatory framework that fosters innovation while addressing concerns over consumer protection, illicit finance, and financial stability.
A dominant theme of the hearing was the ongoing debate over whether and how digital assets should be classified under existing financial laws. Lewis Cohen strongly criticized the SEC’s enforcement-heavy approach, arguing that the agency’s evolving interpretations of securities law have created legal uncertainty, stifling American innovation and driving crypto businesses offshore. He emphasized that digital assets often lack a centralized issuer, making them fundamentally different from traditional securities.
Jonathan Jachym emphasized the need for regulatory simplicity and jurisdictional clarity. Jachym argued that a well-defined regulatory framework would encourage responsible innovation and prevent further capital flight from the U.S.
Stablecoins were also a major focus of the hearing, particularly their role in payments and financial stability. Jai Massari warned against overly restrictive reserve requirements that could stifle competition and limit new entrants to the market. She highlighted the importance of balancing risk mitigation with fostering a competitive stablecoin ecosystem.
Meanwhile, Timothy Massad took a firmer stance, arguing that the Bank Secrecy Act (BSA) must be updated to impose stronger compliance obligations on stablecoin issuers. He noted that once a stablecoin is issued, it can be freely transferred without oversight, making traditional AML frameworks ineffective. Massad proposed requiring stablecoin issuers to implement transaction monitoring and freezing mechanisms, ensuring that illicit actors cannot exploit the system.
What does this mean?
The hearing highlighted the urgent need for clear and balanced regulations in the digital asset space. While there was broad consensus that the current approach is ineffective, disagreements remain on the best path forward.
DEF Article Arguing Against Subjecting DeFi to the BSA
Last week, DEF published an article entitled, “The Bank Secrecy Act is Broken,” which examines the burdens, costs, and failures of the Bank Secrecy Act (BSA), and the potentially disastrous implications of applying the BSA to decentralized finance.
DEF’s new article was authored by Gavin Zavatone & Henry Michaelson. The article explains how, despite the BSA failing to serve traditional finance, the DOJ is still pushing legal theories extending the BSA’s ineffective and burdensome framework to DeFi, and ultimately, putting American innovation, privacy, and decentralization at risk.
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