Cryptocurrency Litigation

Growing interest in cryptocurrencies has fueled a commensurate rise in litigation.  However, unlike other types of financial transactions, the rules governing digital currencies are still evolving and enforcement is inconsistent.  At the federal and state level, the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Internal Revenue Service (IRS), The Financial Crimes Enforcement Network (FinCEN), and New York State Department of Financial Services are among the governmental agencies that regulate the use of cryptocurrencies.  In addition, intellectual property, contract, and other areas of law may impose requirements on private parties and specific transactions.  The uncertainty in how existing laws may be applied means that anyone offering or purchasing digital currencies should be mindful of potential legal liability and consult an attorney regarding their rights and responsibilities.

There are many types of cryptocurrencies, sometimes referred to as “alt-coins” or “altcoins,” with new ones created every day.  The most well-known cryptocurrencies are:

• One of the earliest currencies to achieve widespread success, today Bitcoin is the world’s largest cryptocurrency by market capitalization.  It relies on blockchain and peer-to-peer technology, whereby a group of individuals and companies are in charge of processing transactions on the blockchain.
• This is the second most popular digital currency by market capitalization.  However, it goes beyond digital currencies and is used to run applications, such as smart contracts.
• Similar to Bitcoin, Litecoin uses some alternative technologies that speed block generation and have other benefits.  It is the third most popular digital currency.
• As its name may suggest, this currency began as a meme to troll other digital currencies.  Unlike other currencies, there is no cap on supply, other programmers cannot add applications to the platform, and there are few merchants accepting it for payment.  However, it has gained popularity due to celebrity endorsements and popular belief in its value as a currency.
• Non-Fungible Tokens (NFTs). An NFT is not a form of currency but can be bought and sold.  It is a digital file containing art, music, video, or similar content that is “minted” on a blockchain.  Once it is part of the blockchain, it has a unique identifier that verifies its authenticity so it can be purchased like other collectibles.

Rising and volatile cryptocurrency prices, as well as increased fraudulent activity involving cryptocurrency, have caught the attention of governmental agencies resulting in increased investigations and enforcement actions.  Likewise, the number of civil lawsuits is also growing because of the complex and evolving status of cryptocurrencies.  Common areas of litigation include:

• Securities Regulation.  The SEC and CFTC regulate cryptocurrency transactions as does New York State.  While these agencies have offer promulgated guidance regarding cryptocurrency, the question of when and how securities regulations apply is still being determined in some cases.  However, parties should take care to comply with registration requirements such as those that apply to investment companies and advisors, broker-dealers, commodity pool operators and trading advisors.  In addition, initial coin offerings may be considered securities offerings that must be registered.  Failure to comply can lead to significant liability.
• New Coin Offerings.  The difficulty in determining valuation can lead to problems with investors.  Those who have suffered a significant loss have sued sellers on the grounds of financial fraud, false advertising, or misrepresentation.  Some claims are filed individually, while others have been class actions.  In addition, governmental agencies have increasingly focused on NCOs and will often investigate claims related to valuation and/or market manipulation.
• Privacy and Cybersecurity.  The private nature of cryptocurrency transactions is considered one of its benefits but also can present problems as it may make it more difficult to enforce data theft laws.  In addition, federal and state data privacy and cybersecurity laws do not address some of the unique concerns with blockchain technology.
• Theft, Financial Fraud and Money Laundering.  The semi-anonymity of certain cryptocurrency transactions makes them susceptible to use by bad actors involved in criminal activity.  The privacy of these transactions can make it difficult to recover funds or for law enforcement to hold individuals criminally responsible.
• Tax Issues.  The IRS has stated that cryptocurrencies are property subject to capital gains taxation.  In addition, there may be reporting obligations for investors who utilized foreign exchanges.  This is still unclear but could result in audits and penalties.
• Intellectual Property.  Digital currencies and blockchain technology tend to be used by technology companies that may deploy them in new ways.  This may result in disputes over ownership and licensing of intellectual property.

• Contractual Issues. Smart contracts were first designed to be used with digital currencies.  They use blockchain technology to create an electronic or digital agreement which is incorporated into a computer program.  Such agreements can be self-executing.  However, since execution is automated, it may raise issues over whether there was valid offer and acceptance of the contract.

Criminal and civil litigation involving cryptocurrency can be challenging on all sides for various reasons. As discussed previously, many legal issues are not settled law and/or introduce new complexities.

Cryptocurrency exchanges are also decentralized and do not operate in a particular geographic location. As a result, it can be difficult to determine which jurisdiction’s laws apply and how to obtain recourse if there is a dispute over a transaction. Further, cryptocurrencies are not subject to the rules of a centralized authority, such as a bank or credit card company.

Digital currencies and blockchain technology are also relatively new and not widely understood. Litigation must necessarily incorporate the use of financial and technology expert witnesses to help investigate and testify regarding the facts of the case. They are also invaluable to determining the best strategy in litigation.

Successfully navigating these challenges requires turning to knowledgeable legal counsel to advise on the best ways to maximize gains and minimize risks.

Our cryptocurrency litigation attorneys have the expertise to represent a wide variety of clients. These include buyers and sellers of cryptocurrencies, cryptocurrency exchanges, lending institutions, technology developers and platforms, and investors in blockchain and cryptocurrency-related companies.

The unsettled legal landscape and regulations associated with cryptocurrencies raise significant risks to anyone getting involved in this field.  Best practice is to be proactive and seek qualified legal advice before moving forward.  Where litigation does result, consulting experienced counsel as soon as possible can mitigate liability and protect your rights.