WAs global investors stare at a collective $1.5 trillion cryptocurrency loss, a storm of class action lawsuits is being prepared. The big question is: Who is to blame – and who can be held accountable?
With soaring inflation and rising interest rates, the most popular cryptocurrencies have suffered huge and prolonged losses: Bitcoin has lost more than 50% of its value this year; Shares of Ethereum, its largest competitor, fell 65%. The total value of crypto assets has fallen to less than $1 trillion from a peak of $3 trillion in November 2021. US government agencies say 46,000 people have reported losing $1 billion in cryptocurrency due to fraud since January 2021.
With millions pouring in to promote cryptocurrencies – often with celebrity endorsements – legal action in the wake of the crash was inevitable. Class action lawsuits are already in the works. Kim Kardashian and boxer Floyd “Manny” Mayweather Jr. are being sued for allegedly making false statements about promoting the EthereumMax micro-cryptocurrency.
The lawsuit alleges that they encouraged followers to join the “EthereumMax community” and that the coin itself was a “pump and dump” scheme that deceived investors.
Charles Randell, head of Britain’s Financial Conduct Authority, said in a speech at a white-collar crime symposium that he could not say whether the token was “a hoax…sold.” He helped pump and dump new tokens based on pure speculation. “
EthereumMax described the legal claim as a “disingenuous narrative.”
Kardashian and Mayweather weren’t the only celebrities who championed cryptocurrency. Last October – at the height of the market when bitcoin’s market cap hit $1.14 trillion – actor Matt Damon debuted as The Pitchman of Crypto.com, advising viewers that “wealth favors the brave.” The announcement was seen as a turning point for crypto – a financial investment backed by Hollywood A-Lister.
Other digital assets are also being put to the test. Earlier this month, the Department of Justice indicted Nathaniel Chastain, a former employee of NFT OpenSea Marketof wire fraud and money laundering in connection with the NFT trading scheme [non-fungible tokens] financial assets.
“No-repetition laws may be new, but this type of criminal system is not,” said US attorney Damien Williams. He said the indictment shows prosecutors’ determination to “root out internal trade – whether it’s on the exchange or on the blockchain.”
But tracking scams in the crypto arena is known to be difficult. A number of criminal cases have been filed for theft, but the digital fraud prosecution raises a major unresolved question: Are cryptocurrencies a security?
The US definition of what a security is is based on what is known as the “Howey test,” derived from a Supreme Court ruling. The Securities and Exchange Commission (SEC) ruled against W.J. Howey in 1946, before the age of crypto.
There are four pillars that support whether or not a financial asset qualifies as security: (i) an investment; (2) in a joint venture. (3) With the expectation of profit; and (4) that profit must come from the efforts of others.
If cryptocurrency is a security, the Securities and Exchange Commission (SEC) – the largest financial regulator in the United States – has jurisdiction, fraudulent selling of unregistered securities could be a criminal offense of up to five years in prison. But the law is not at all clear.
“Cryptocurrency is a strange bird – is it a coin, a buy dollar, or the right to invest in a dollar?” says Charles Elson, who is responsible for corporate governance. Much depends on what was offered to the people and whether any federal laws were broken in the exchange of these things. Usually, the SEC will always argue that something is a security and let the courts decide.”
The question remains whether celebrity shooters can be held responsible. First, courts will have to decide whether the cryptography is security and then whether that security has been fraudulently promoted.
Did they say, ‘Oh, that’s an easy investment, don’t you worry? “Did they lie to attract investment?” says Elson. “There will be trials, and the courts don’t like cheating, and they usually find a way to punish the cheater.”
“But if the law is ambiguous in the area and these matters are not security, how do you get compensation? You can celebrate the prize, but you will not receive any money. Where did the money go? Why would criminals use Bitcoin and ransomware? It is incomprehensible.”
As commentators pointed out this week with the collapse of the cryptocurrency markets, no cryptocurrency has been registered as collateral; The exchanges or lenders that may pass through are not backed by the Federal Deposit Insurance Corporation (FDIC) Insurance Collateral.
The US Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrency to be legal tender, but rather considers cryptocurrency exchanges as money transmitters on the grounds that crypto tokens are “other values to replace currency.”
The Securities and Exchange Commission ruled in a 2019 letter that Bitcoin failed Howey The test that only meets the criteria for “investment”. In 2018, Gary Gensler, the former chair of the Commodity Futures Trading Commission, said that Bitcoin’s biggest competitor, Ethereum, would pass Howey’s 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 jeopardize regulators’ oversight of the industry.
Since cryptocurrencies operate in different ways through different exchanges that charge different fees for trading, determining liability is complicated and has an army of lawyers willing to argue that exchanges are “safe havens” and not exchanges.
On Monday, cryptocurrency exchange Binance suspended Bitcoin withdrawals for several hours after coin lender Celsius Network also banned customers from using its platform for withdrawals, exchanges and transfers. Binance blamed the “stalled deal” in the comment.
The next day, the Securities and Exchange Commission (SEC) launched an investigation into whether cryptocurrency exchanges had sufficient safeguards to prevent insider trading. The investigation is believed to involve the most famous exchanges – Binance, Coinbase, FTX, Crypto.com, Kraken, Bitfinex and Crypto.com.
Ultimately, Elson says, the law on cryptocurrency and its exchange systems will boil down to disclosure. “Did I tell people the truth about the thing and was it based on fair trade practices or was it a fraudulent anti-investor trading system?”
However, since cryptocurrency exchanges are not regulated by the Securities and Exchange Commission (SEC) and it is difficult to know who is on the other side of the trade, assigning responsibility for losses becomes difficult.
“The lesson to be learned is not to invest in an unregulated market,” Elson said.