Analysis

Order in the Court: How The Crypto Industry Seeks Justice Through Lawsuits

In the face of the US' lack of regulatory clarity, lawsuits are shaping the future of crypto legislation.

Last month, a report by legal analytics firm Lex Machina revealed that the number of lawsuits mentioning the words ‘cryptocurrency’, ‘bitcoin’, or ‘blockchain’ this year has already increased 300 percent from the number of similar cases filed in 2017. 15 such cases were recorded last year; at least 45 are on record in the United States this year, and the number is on track to increase.

Several common themes run through these cases. Many of them are addressing fraudulent activity intended to maliciously harm unsuspecting customers; others have been brought by the SEC and other regulatory bodies to address companies attempting to sell unregistered securities. Some are the result of corporate partnerships gone bad, and others still seem to have been caused by bad cases of buyer’s remorse.

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This rise in securities-related lawsuits has not been unique to the cryptosphere, however. A report published by Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research earlier this year said that “plaintiffs have filed more than 750 federal securities class actions since midyear 2016–the most prolific 24-period since enactment of the Private Securities Litigation Reform Act of 1995.”

Because of how new the cryptocurrency industry is, the relationship between where regulations end and private lawsuits begin is somewhat unclear.

Murky Regulation has Caused a Need for Individual Litigation

Jay Arcata, VP of Client Operations at BX3 capital, says that the “lack of clear regulation in the space has also forced investors to seek protection via securities lawsuits.”

Jay Arcata, VP of Client Operations at BX3.

Regulation in the United States has not yet been clearly established for cryptocurrencies. Lawsuits by individuals and companies have been the most common (and most accessible) form of “enforcement” efforts against alleged illegitimate actors in the crypto space.

According to Corporate Governance Expert and Former Federal Enforcement Counsel Braden Perry, the accusations vary in their severity. “Civil actions [allege] claims ranging from misinformation to downright fraud,” he wrote in an email to Finance Magnates.

Braden Perry, Partner at Kennyhertz Perry, LLC.

Closer to the ‘fraud’ end of the spectrum is BitConnect, a company that promised its users high returns in exchange for participating in its crypto lending platform.

On the other end of the spectrum was the legal battle between R3 and Ripple. Each side accused the other of violating the terms of their agreement; the case was eventually settled privately on undisclosed terms.

A number of cryptocurrency giants also sought to sue Facebook, Google, and other major platforms that banned their advertisements earlier this year.

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Buyer’s Remorse

Some of the lawsuits that have been brought against cryptocurrency companies seem to blur the lines between accusations of misinformation and a powerful human emotion–regret. Indeed, some crypto investors who entered the market during the the massive bubble at the end of 2017 (and subsequently lost much of the value of their investment) have turned to litigation as a method of possible recourse.

Take Tezos. After holding a record-breaking $232 million ICO, the company was accused of selling unregistered securities to investors in the US. At the same time, the company’s founders became embroiled in a highly-publicized spat with one another, causing the Tezos token’s futures value to tumble. When the token value fell, the class-action lawsuits came rolling in; four, to be exact.


This hasn’t been unique to Tezos. “When the virtual currency industry as a whole is in decline, or at law price points, people sue,” Perry explained. “They’ve expected different returns from the time when Bitcoin and other virtual currency values were skyrocketing. I think most industry professionals knew the prices couldn’t maintain the momentum, but many people looking for a massive return jumped in.”

Will these lawsuits be successful? “It’s difficult to determine,” Perry wrote. “Private litigation takes time.” Indeed, the litigation against Tezos–which was originally launched at the end of 2017–is still dragging on.

Regulatory Bodies Crack Down

Regulatory bodies and law enforcement agencies in the United States have stretched existing securities laws to be able to regulate the cryptocurrency industry, to mixed results. Exactly which laws apply to the space vary depending on which agency you ask.

Leading the charge is the US SEC, which has filed more securities-related lawsuits against crypto companies than any other regulatory body or group of private entities. According to the National Law Journal, one-third of the crypto-related cases that have been filed so far in 2018 were filed by the SEC. “That’s the second-most popular filer of such cases, topped only by the law firm Levi & Korsinsky,” the Journal stated.

This is the result of the fact that the massive boom in the cryptocurrency markets that took place last year caused Chairman Jay Clayton to crack down on the sector considerably. In addition to the SEC’s solo efforts, the Commission is one of the participating bodies in Operation Cryptosweep, a comprehensive effort by the North American Securities Administrators Association to eliminate fraud from the crypto space.

What Does this Mean for the Industry?

Even though specific regulations have not been established, these cases are contributing to how cryptocurrencies are treated by the United States’ legal system: “[some] litigation has been successful, and lines between virtual currency as either a security or commodity are becoming more clear,” Perry explained.

While some precedents have been established through the lawsuits, their increasing prevalence has created an air of caution within the industry. On on hand, this has led to a heightening of industry standards; on the other hand, the lack of clarity has caused some caution and wariness among industry participants–factors that, some argue, have stifled industry growth and technological innovation.

Indeed, “While many industry insiders do not want overregulation, the clarity provided by some of the litigation is useful, at least from a legal standpoint. The litigation has also driven out those simply looking to prey on an unclear regulatory regime and unsuspecting individual that are looking for virtual currency investment.”

Still, Perry believes that the long arc of history is bending towards history in this case.“This is new territory where investors have made significant money. And where there are legitimate products, non-legitimate products follow. The slowly clarifying landscape should continue to weed out the wrongdoers.”

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