OWith investors around the world eyeing a collective $1.5 billion in recent cryptocurrency losses, a storm of class action lawsuits is brewing. A big question is: who, if anyone, is to blame – and who could be held accountable?
With inflation and rising interest rates, the most well-known cryptocurrencies have suffered heavy and continuous losses: Bitcoin has lost more than 50% of its value this year; Ethereum, its biggest rival, is down 65%; and the total value of crypto assets has fallen to less than $1 billion from its November 2021 peak of $3 billion. US federal regulators say 46,000 people have reported losing $1 billion worth of crypto to scams since January 2021.
Given the millions invested in promoting crypto – often with celebrity endorsements – legal action after the crash was inevitable. Class action lawsuits are already underway. Kim Kardashian and boxer Floyd “Money” Mayweather Jr are being sued over alleged false statements promoting the cryptocurrency miner EthereumMax.
The lawsuit alleges that they encouraged subscribers to join “the EthereumMax community” and that the token itself was a “pump and dump” scheme that misled investors.
Charles Randell, head of the UK’s Financial Conduct Authority, said in a speech at an economic crime symposium that he couldn’t say whether the token in question was a “scam…but influencers of the social media are regularly paid by scammers to help them pump and dump”. new tokens on the back of pure speculation”.
EthereumMax described the legal claim as a “misleading narrative”.
Kardashian and Mayweather weren’t the only celebrities to pitch for crypto. In October last year – at the height of the market, when bitcoin had a market capitalization of $1.14 billion – actor Matt Damon debuted as a Crypto.com pitchman, telling viewers that “fortune smiles on the brave”. The announcement was seen as a turning point for crypto – a financial investment backed by a Hollywood A-lister.
Other digital assets are also under scrutiny. Earlier this month, the Justice Department charged Nathaniel Chastain, a former employee of OpenSea NFT Marketplacewith wire fraud and money laundering as part of a scheme to trade NFTs [non-fungible tokens] assets.
“NFTs may be new, but this type of criminal scheme is not,” said US attorney Damian Williams. He said the charges demonstrate prosecutors’ determination “to eradicate insider trading — whether it occurs in the stock market or on the blockchain.”
But prosecuting crypto fraud is notoriously difficult. Many lawsuits have been filed for theft, but prosecuting digital fraud comes up against a central unresolved question: Are cryptocurrencies securities?
The American definition of what a security is is based on something called the “Howey test” and derived from a decision of the Supreme Court, Securities and Exchange Commission (SEC) against WJ Howey Co. decided in 1946, well before the era of cryptography.
Four pillars determine whether or not a financial asset qualifies as a security: (1) an investment of money; (2) in a joint venture; (3) in expectation of profit; and (4) that profit must come from the efforts of others.
If cryptocurrencies are a security, the SEC – the main financial watchdog in the United States – has jurisdiction and fraudulently selling unregistered securities could be a crime, punishable by up to five years in prison. But the law is far from clear.
“Crypto is a weird 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 people, and whether any federal laws were violated when trading these things. Generally, the SEC will always argue that something is a security and let the courts decide.
Whether the people who cast celebrities could be held liable is open to question. First, the courts should decide whether cryptography is a security, and then whether that security has been fraudulently promoted.
“Did they say, ‘Oh, it’s an easy investment, don’t worry?’ Did they lie to attract investment? said Elson. “There will be lawsuits and the courts don’t like fraud and will usually find a way to punish a fraudulent individual.”
“But if the law in the area is unclear and these things are not security, how do you get the recovery? You may have the satisfaction of winning, but you won’t get any money. Where did the money go ? Why do criminals use bitcoin and ransomware? It is not traceable.
As commentators pointed out this week as crypto markets crashed, no cryptocurrency registered as security; and the exchanges or lenders they may go through are not backed 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 does consider cryptocurrency exchanges to be money transmitters on the basis that cryptocurrency tokens are “ another value that substitutes for money”.
The SEC ruled in a 2019 letter that bitcoin failed the Howey test, fulfilling only the “investment” criteria. In 2018, Gary Gensler, former chairman of the Commodity Futures Trading Commission, said Bitcoin’s biggest rival, Ethereum, would pass the Howey test and most cryptocurrencies would have to be registered as securities with the agency. But there are also efforts in Congress to draft legislation for the cryptocurrency industry that could compromise oversight of the industry by regulators.
Since cryptocurrencies operate in different ways across different exchanges that charge in different ways for trading, establishing any liability is complicated and most have an army of lawyers ready to claim that exchanges are “ safe ports” and not exchanges.
On Monday, crypto exchange Binance halted bitcoin withdrawals for several hours after crypto lender Celsius Network also blocked withdrawals, trades and transfers on its platform. Binance blamed a “stuck transaction” for its suspension.
The next day, the SEC launched an investigation into whether crypto exchanges had adequate safeguards in place to prevent insider trading. The survey is supposed to include the most well-known exchanges – Binance, Coinbase, FTX and Crypto.com, Kraken, Bitfinex and Crypto.com.
Ultimately, says Elson, the law around cryptocurrency and their exchange systems will come down to disclosure. “Did you tell people the truth about the thing, and was it based on fair trading practices or was it a trading system that was rigged against the investor?”
But since crypto exchanges are not regulated by the SEC and it is notoriously difficult to track who is on the other side of the trade, it will be difficult to establish responsibility for losses.
“The lesson here is that you don’t invest in an unregulated market,” Elson said.
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Trillion Dollar Crypto Collapse Triggers Wave Of Lawsuits In US – Who Is To Blame? | Cryptocurrencies – Tech Tribune France
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