Even before the recent plunge in crypto prices, the industry already was seeing an uptick in lawsuits, which have come in several forms. Many of the cases have been fueled by investors who allege some digital coins were hyped and sold under false pretenses. Some proposed class-action suits allege pump-and-dump schemes involving celebrity promoters. Others allege that some digital tokens are unregistered securities or that cryptocurrency issuers were deceitful in their marketing.
Collectively, the lawsuits speak to both the troubles and successes of a maturing industry.
‘‘We’re seeing all of the normal kinds of litigation that you would see in more traditional companies.
— Jason Gottlieb, a partner at Morrison Cohen
“We’re seeing all of the normal kinds of litigation that you would see in more traditional companies,” said Jason Gottlieb, a partner at Morrison Cohen LLP who tracks cryptocurrency litigation. Mr. Gottlieb said the industry also was attracting an influx of plaintiff and defense lawyers who realize the crypto market is no longer “some obscure backwater for a small gaggle of techno-libertarian nerds. It’s a real business.”
Among recent lawsuits is a case filed in a California federal court over losses in the stablecoin GYEN. The suit accuses GMO-Z.com Trust Co., the issuer of GYEN, and crypto exchange Coinbase Global Inc. COIN -11.15%▼ of advertising the stablecoin as being pegged to the Japanese yen, thereby providing a safer investment than more volatile cryptocurrencies. But when GYEN began trading on Coinbase in November, it immediately became untethered from the yen, leading the coin to spike in value and then drop 80% in one day, the lawsuit alleges. A similar peg break occurred in May 2021 when GYEN became available on a separate exchange, according to the lawsuit.
Kenneth Donovan, 27 years old and a plaintiff who began investing in cryptocurrency in 2019, said he bought $335,000 worth of GYEN last year after reading its white paper and learning the New York Department of Financial Services had authorized GMO-Z.com to issue stablecoins in the state.
In a matter of hours, he said, his investment plummeted to $3,000, wiping out nearly his entire life savings. Before the loss, he, his wife and their young daughter lived comfortably off his investments and gig work for Uber and DoorDash driving shifts, Mr. Donovan said. “I live paycheck-to-paycheck now.”
Some GYEN investors were risk-averse individuals who saw the cryptocurrency’s purported stability as a way to safely enter the crypto market, said Elizabeth Kramer, a partner at Erickson Kramer Osborne LLP, which filed the suit—its first crypto class-action complaint. GMO-Z.com didn’t respond to a request for comment.
A spokeswoman for Coinbase declined to comment on the litigation. Coinbase said in a blog post in January that the break in parity between GYEN and the yen in November was the result of market conditions specific to GYEN. Coinbase didn’t cause the break, the company said in the post.
John Jasnoch, a partner at Scott + Scott, said his firm has “gotten bullish on crypto” and is handling six cryptocurrency cases, with more in the pipeline. His portfolio includes three proposed class-action suits filed this year over investment losses in SafeMoon, a blockchain-based digital token that charges investors a 10% fee when they sell the asset. SafeMoon founders said the levy—half of which is redistributed to current investors—discourages sales of the token and encourages long-term holding.
The plaintiffs allege that SafeMoon was a pump-and-dump scheme in which it used celebrities such as boxer Jake Paul, musician Nick Carter and rapper Lil Yachty to promote the tokens on social media. SafeMoon founders encouraged purchases of the token while selling off their own holdings as the trading volume remained inflated, the plaintiffs allege.
Lawyers for SafeMoon, Mr. Paul and Lil Yachty didn’t respond to requests for comment. In a court filing in one of the suits, a lawyer for Mr. Carter denied that his client acted as a promoter for SafeMoon and asked a judge to dismiss the complaint. As lawsuits grow, firms that do defense work are seeing increasing demand for representation from crypto companies and trading platforms that want to avoid legal liability and regulatory scrutiny.
Ian McGinley, a partner at Akin Gump Strauss Hauer & Feld LLP, said crypto firms are eager for help navigating “an atmosphere where the rules are not particularly clear.” Facing a lightly regulated environment, some crypto investors have looked to courts to answer core legal questions for the industry, such as whether digital tokens are securities that should be subject to the same regulations as stocks.
In one closely watched federal suit, crypto investors have accused Coinbase of violating securities laws by acting as a seller of unregistered tokens. The platform has asked a judge in New York to dismiss the case, arguing that it matches buyers and sellers but doesn’t transact directly with users. It also says the tokens aren’t securities.
The value of digital money reached a peak of nearly $3 trillion in November before plummeting by about $1.7 trillion in recent months. The crypto market’s volatility over the past six months and the recent plunge of popular cryptocurrencies will likely lead to more suits in the future, lawyers say. Coming litigation will likely focus on alleged misrepresentations around the strength of the technology of certain coins, said Mr. Jasnoch, the Scott + Scott partner.
“It will be cases involving bigger projects that promise the moon and the stars and have just been battered by the market when all these promises didn’t come true,” he said.
Critics by : Sam Skolnik
Cryptocurrency litigation is soaring, prompted by a surge of investors in the space, and US proposals promise more rules to fight over in coming months and years. Crypto has generated more than 200 class action lawsuits and other private litigation as of this month, up more than 50% since the start of 2020, according to Morrison Cohen, which tracks the activity. Half of all crypto litigation are class actions or private suits, according to the firm’s data.
“There’s been a steady stream of cases from regulators, but what’s really exploded is private litigation,” said Jason Gottlieb, chair of Morrison Cohen’s white collar and regulatory enforcement practice group in New York. The rise in litigation is encouraging Big Law operations to bolster their crypto practices. Firms including Jenner & Block, Goodwin Procter, and Morrison & Foerster in the last few months have added new crypto partners to their rosters, including former fraud prosecutors, securities litigators and investment funds lawyers.
The litigation growth comes at a tumultuous time for crypto. A backer of the collapsed TerraUSD stablecoin lost $3 billion in cryptocurrency reserves in a failed effort to restore its peg to the dollar, Bloomberg News reported Monday. Bitcoin on May 12 hit its lowest level since 2020 and was down 50% from its November high, according to Bloomberg. Perkins Coie has so much activity on the crypto front that it holds weekly team calls, typically including 50 to 70 firm attorneys, said Joe Cutler, firmwide co-chair of the firm’s fintech industry group. “We have content coming out of our ears,” he said.
At Latham & Watkins, more than 700 lawyers worked on crypto or blockchain issues in 2021 alone, said Yvette Valdez, co-chair of the firm’s global digital assets and Web3 practice. “The market is exploding, not just at the partner level but at the associate level too,” Valdez said. The result is a buyer’s market for lawyers, as firms see colleagues leave for general counsel positions at crypto companies, said Joshua Ashley Klayman, U.S. head of fintech and head of blockchain and digital assets for Linklaters in New York.
The world’s largest cryptocurrency exchange by trading volume, Binance Holdings Ltd., is looking to hire more than 30 lawyers, Bloomberg Law reported Monday. Another cryptocurrency exchange, Bittrex Global GmbH, hired a Shearman & Sterling senior associate late last year to be its general counsel.