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Lawsuits triple as regulators take aim at crypto

Crypto is facing record numbers of class action lawsuits, as regulators, lawmakers, and duped investors target organisations already reeling from the recent digital currency sell-off.

The uptick in legal action has been highlighted in a report by legal analytics platform Lex Machina, which draws trends and insights from its extensive database to show a significant rise in the number of securities cases relating to cryptocurrencies.

The stats—which are based on the number of mentions of the keywords blockchain or bitcoin in the database—show that there were 15 such cases in 2017, a figure that rose to 45 in the first half of 2018. This jump makes the period since January 2018 the biggest ever in terms of crypto lawsuits.

"According to our 2018 Securities Litigation Report, many unexpected new trends have emerged," said Lex Machina CEO Karl Harris. "The significant increase in case filings coupled with the higher rate of cases tossed out at the pleading stage should compel securities lawyers on both sides to leverage the data to inform and create new litigation strategies."

SEC enforce crypto crackdown

While federal and state regulators continue to consider how to approach cryptocurrency regulation, cases have already started to hit the courts.

According to the report, the majority of these cases fall under the remit of the Securities & Exchange Commission (SEC), which renewed its commitment to cracking down on crime and corruption in cryptocurrency on the appointment of chairman Jay Clayton early last year.

"[The Sec] was responsible for 30 percent of the cases filed in 2018" according to Laura Hopkins, legal data expert at Lex Machina "That’s the second-most popular filer of such cases, topped only by the law firm Levi & Korsinsky"

This change in tack by the SEC came shortly before a sharp slide in the price of bitcoin solidified anguish among speculators — who are increasingly turning to litigation to recuperate failed cryptocurrency investments.

But it’s not just investors who are challenging companies in the space, and the SEC—along with other regulatory agencies like FinCen and the CFTC—are pursuing a wide range of different complaints.

Ponzis, money laundering, and fraudulent ICOs

As a unregulated financial ecosystem, cryptocurrency provides many opportunities for the unscrupulous to take advantage, and a variety of cases have made their way through the courts—from bitcoin-based investment scams, to fraudulent ICOs and civil disputes.

The most prevalent proceedings are against companies that are alleged to have made spurious claims to consumers, or sold securities improperly. Since ruling in last July that a coin offering by The DAO was akin to selling stock, the SEC have taken legal action against several fraudulent cryptocurrency companies.

One of the most contentious cases was made against Centra, which raised $32 million in its September 2017 ICO to help build a debit card for cryptocurrencies, but was then found guilty of defrauding investors through fake partnerships with Visa and Mastercard,

Many of the cases revolve around Ponzi and pyramid schemes, most famously BitConnect, which pocketed approximately $14.5 million from thousands of participants. Several smaller lawsuits have also been filed by Washington’s consumer watchdog, the US Federal Trade Commission (FTC), which took action against Bitcoin Funding Team and My7Network.

Other cases involve unlawful money transmission, like that involving Los Angeles bitcoin trader Theresa Tetley, and civil disagreements, like the high-profile stand-off between Ripple and enterprise blockchain outfit R3.

A trend set to continue?

Although the data could be skewed by the same actors showing up in multiple lawsuits (like Bitconnect which feature in 10 percent of 2018 cases), the upward trend is likely to continue as the industry matures and cryptocurrency becomes more widely adopted. But, according to Attorney Laura Hopkins, legal data expert at Lex Machina, we are not quite there yet:

"That trend will likely not hold in Q3, since we have less than 30 days left and there have only been 12 cases filed," said Hopkins. "The nomination of SEC Chairman Jay Clayton could have caused a spike in filings, or it could have been caused by the SEC’s crack-down on coins or tokens it deemed to be fraudulent or securities."

In other legal news a U.S federal judge has rejected a motion to dismiss in U.S. v. Zaslavskiy. It its criminal case filed in late 2017, the FBI alleges Maksim Zaslavskiy breached US securities laws with two ICOs – one to create a token back by international real estate purchases (ReCoin, and the other to release a token backed by investment in diamonds (

Lawyers for the defendant filed a motion to dismiss the criminal indictment and the civil complaint on the grounds that the cryptocurrencies in question were not securities. However, Judge Raymond J. Dearie rejected this argument and the case will proceed.

The U.S. Financial Industry Regulatory Authority ( FINRA) has announced it has filed a complaint against Timothy Tilton Ayre of Agawam, Massachusetts, charging him with securities fraud and the unlawful distribution of an unregistered cryptocurrency security called HempCoin. This case represents FINRA’s first disciplinary action involving cryptocurrencies.

Finally, the SEC has issued a cease-and-desist order and a $200,000 fine to Crypto Asset Management LP (CAM) for breaches of the Investment Advisers Act of 1940. The SEC says CAM founder Timothy Enneking raised over $3.6 million for CAM’s Crypto Asset Fund and as such was offering and selling unregistered securities through interstate commerce and "willfully violated Section 5(a) of the Securities Act." The SEC says Enneking was contrite and co-operative and proposed a settlement offer which the commission accepted.


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