One ad you probably won’t see at this year’s Superbowl–Larry David dressed as a pharaoh, a monk, and so on, shilling FTX. As 2022 dragged on, winter gave way to spring, but the sun did not come out for crypto.
As in 2018, 2022 marked another another “cryptowinter.” The total value of cryptocurrencies plummeted somewhere around $2 trillion (about the same as the US government’s deficit for 2023), so-called “stablecoins” lost their pegs, bankruptcies were filed, crypto executives were charged with fraud, and class action suits were filed.
2018 was the high watermark for crypto related lawsuits, and indeed there has been a resurgence of lawsuits in 2022 and 2023 in the aftermath of substantial losses from crypto asset holders, many of whom have filed class action suits. However, while the crypto industry has seen substantial monetary losses, they have been winning (so far) in court–crypto exchanges in particular.
Governments Struggle to Guarantee Security
It would be hard to regulate the auto industry if the automobile had never been invented. In a similar way, the crypto industry finds itself in a bit of legal no man’s land. There isn’t yet clear enough (or simply enough) regulation to run afoul of. Many claimants have, therefore, looked to stretch existing laws regulating securities.
But are crypto currencies, in fact, securities–like stocks or bonds? If they were, then crypto exchanges would be offering unregistered securities in violation of the Securities Act of 1933. But so far, the courts haven’t been so sure. In granting summary judgment to Ripple Labs (who offer the XRP token), a federal judge found that the security status of the crypto depended on the kind of investor who purchased it.
For the institutional investors, the judge felt that XRP was, in fact, a security, but not for retail investors. Many feel that this may present a roadblock to future class action suits, since investors cannot be categorized into a single class.
Liability and Litigation Beyond Exchanges
In a class action brought against the Uniswap platform alleging that it facilitated massive fraud on its platform, defendants compared the suit to holding a self-driving car company liable if it were used in a bank robbery. Then, in dismissing the suit, the judge, who felt that cryptos like Ether are commodities rather than securities, described the plaintiff’s claims as akin to holding “an application like Venmo or Zelle liable for a drug deal that used the platform to facilitate a fund transfer.” The same judge is overseeing a class action against the crypto platform Coinbase.
Not only are claimants seeking to stretch existing security laws, they are also looking to sue beyond crypto companies. Class actions have been filed against parties affiliated with the now defunct FTX. Not only are FTX promoters like Larry David and Tom Brady on the receiving end of a class action suit, so too are Youtubers who promoted the platform on their channels, as well as FTX’s own law firm.
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