WWith investors around the world looking at a total of $ 1.5,000 in recent losses on cryptocurrencies, a blizzard of class action lawsuits is being prepared. A big question is: who, if anyone, is to blame – and who can be held accountable?
With inflation and rising interest rates, the most well-known cryptocurrencies have been hit by huge and persistent losses: Bitcoin has lost more than 50% of its value this year; Ethereum, its biggest rival, is down 65%; and the total value of cryptocurrencies has fallen to less than $ 1[ads1]tn from the peak in November 2021 of $ 3tn. US federal regulators say 46,000 people have reported losing $ 1 billion in crypto fraud since January 2021.
Given the millions that were poured in to market crypto – often with celebrity recommendations – legal action after the crash was inevitable. Class actions are already pending. Kim Kardashian and boxer Floyd “Money” Mayweather Jr. are being sued for alleged false statements promoting the smaller cryptocurrency EthereumMax.
The lawsuit alleges that they encouraged followers to join the “EthereumMax community” and that the token itself was a “pump-and-dump” scheme that fooled investors.
Charles Randell, head of the UK Financial Conduct Authority, said in a speech to an economic crime symposium that he could not say whether the particular token was a “scam … but social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation ».
EthereumMax has described the lawsuit as a “misleading story”.
Kardashian and Mayweather were hardly the only celebrities to pitch for crypto. In October last year – at the height of the market, when bitcoin had a market value of 1.14 billion dollars – the actor Matt Damon debuted as Crypto.com pitchman, and advised viewers that “wealth favors the brave”. The ad was seen as a turning point for crypto – a financial investment backed by a Hollywood A-list.
Other digital assets are also under scrutiny. Earlier this month, the Department of Justice charged Nathaniel Chastain, a former employee of NFT Marketplace OpenSeawith bank fraud and money laundering in connection with a scheme for trading with NFT [non-fungible tokens] assets.
“NFTs may be new, but this type of criminal scheme is not,” said U.S. Attorney Damian Williams. He said the allegations demonstrated the prosecution’s determination “to stop insider trading – whether it is on the stock market or the blockchain”.
But prosecuting fraud in the crypto arena is notoriously difficult. A number of lawsuits have been filed for theft, but pursuing digital fraud raises a key, unresolved question: are cryptocurrencies securities?
The US definition of what a security is depends on something called the “Howey test” and is derived from a Supreme Court decision, the Securities and Exchange Commission (SEC) against WJ Howey Co. decided in 1946, long before the crypto era.
There are four pillars that support whether or not a financial asset qualifies as a security: (1) an investment of money; (2) in a joint venture; (3) with the expectation of profit; and (4) that the profits shall be derived from the efforts of others.
If cryptocurrencies are a security, the SEC has the leading financial watchdog in the United States – jurisdiction and the sale of unregistered securities can fraudulently be a crime, with up to five years in prison. But the law is far from clear.
“Crypto is a strange bird – is it a coin, is it buying a dollar, or the right to invest in a dollar?” says Charles Elson, an authority on corporate governance issues. “A lot depends on what was represented to the people, and were some federal laws broken in the exchange of these things. Usually, the SEC will always claim that something is a security and let the courts decide.”
The question of whether celebrity pitch people can be held accountable is open. First, the courts must decide whether crypto is a security, and then whether this security was fraudulently promoted.
“They said, ‘Oh, this is an easy investment, do not worry about it?’ Did they lie in attracting investment? ” says Elson. “There will be lawsuits and courts do not like fraud, and usually they will find a way to punish a fraudulent person.”
“But if the law around the area is unclear, and these things are not a security, how do you get improvement? You can have the pleasure of winning, but you get no money. Where has the money gone? Why do criminals use bitcoin and ransomware? It is not traceable. “
As commentators pointed out this week when the crypto markets crashed, no cryptocurrency has registered as a security; and stock exchanges or lenders through which they can pass are not supported by the government’s Federal Deposit Insurance Corporation (FDIC) insurance guarantees.
The US Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrencies to be legal tender, but considers cryptocurrency exchanges to be money senders on the basis that cryptocurrency tokens are “another value that replaces currency”.
The SEC ruled in a letter in 2019 that bitcoin failed Howey test, which only meets the criteria for “investment”. In 2018, Gary Gensler, former head of the Commodity Futures Trading Commission, said that bitcoin’s biggest rival, Ethereum, would pass the Howey test and that most cryptocurrencies should be registered as securities with the agency. But there are also efforts in Congress to write legislation for the cryptocurrency industry that could compromise regulators’ oversight of the industry.
Since cryptocurrencies work in different ways through different exchanges that charge differently for trading, it is complicated to establish any liability, and most have an army of lawyers who are ready to claim that exchanges are “safe havens” not exchanges.
On Monday, the crypto exchange Binance stopped withdrawing bitcoin for several hours after the crypto lender Celsius Network also blocked customers from withdrawals, exchanges and transfers on its platform. Binance accused a “fixed transaction” of the suspension.
The next day, the SEC launched a study on whether crypto exchanges have the right security measures to prevent insider trading. The inquiry is assumed to include the most well-known exchanges – Binance, Coinbase, FTX and Crypto.com, Kraken, Bitfinex and Crypto.com.
Ultimately, says Elson, the law across cryptocurrencies and their exchange system will come down to disclosure. “Did you tell people the truth about the thing, and was it based on fair trading practice or was it a trading system rigged against the investor?”
However, since crypto exchanges are not regulated by the SEC, and it is notoriously difficult to determine who is on the other side of the trade, it will be difficult to establish liability for losses.
“The lesson to be learned is not to invest in an unregulated market,” said Elson.