Judge dismisses lawsuit claiming DeFi protocol operated illegal lottery

Judge dismisses lawsuit claiming DeFi protocol operated illegal lottery
Legal • June 7, 2023, 6:14PM EDT

A U.S. district court judge in the Eastern District of New York dismissed a widely watched lawsuit against an Ethereum protocol called PoolTogether after ruling that the plaintiff did not have standing to bring the suit. 

Plaintiff Joseph Kent initiated the class action lawsuit over a year ago, claiming that PoolTogether operated an illegal lottery. The case was being watched by many as a bellwether for how decentralized finance networks could be held responsible for allegations brought before courts. 

“While Kent no doubt has genuine concerns about PoolTogether — including its legality under New York law — a suit in federal court is not an appropriate way to address them,” Judge Frederic Block stated in the order. “Therefore, the Court holds that Kent lacks standing to sue and, accordingly, grants the defendants’ motions to dismiss on that ground.”

PoolTogether allows users to aggregate funds in liquidity pools, which are then used to lend out cryptocurrency while collecting interest. Individuals who contributed liquidity funds are randomly chosen to receive a portion of this interest.

“In sum, contributors forgo a guaranteed interest rate in exchange for a chance at a greater return on their investment,” the ruling stated, noting that PoolTogether amassed $122 million in user liquidity pools while doling out $4.3 million to the randomly selected winners.

“The central question on the merits of this lawsuit is whether the PoolTogether protocol constitutes an illegal lottery,” the order continued. “The defendants’ motions to dismiss raise other ancillary issues, such as who is liable for a violation of the statute and whether the statute contemplates secondary liability for aiding and abetting or conspiracy. Those questions are thorny and unanswered, and should probably be resolved by the New York Court of Appeals.”

The judge noted that Kent had participated in the protocol of his own accord and “suffered no concrete harm at the hands of the defendants.”

“Kent is free to pursue his claims in state court,” Judge Block wrote, noting that plaintiffs in federal court must prove that they suffered concrete harm.

Leighton Cusack, the co-founder of PoolTogether and defendant in this case, did not respond to a request for comment from The Block. He said on Twitter that a hearing yesterday had represented a “significant victory.”

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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