SEC vs. 11 Crypto-Companies: More Lawsuits to Come


On April 3rd, 2020, class-action suits against four major crypto-exchanges and seven ICO projects were filed. The lawsuits allege that the defendants have violated U.S. securities laws.

Exclusively for ForkLog, Sergey Ostrovsky, partner at Aurum law firm, explained the lawsuits and the situation with the blockchain industry in the U.S.

Cases in Question

Recently, when reviewing the SEC v. Telegram case, I wrote that a decision in favor of the regulator may trigger litigation against ICO projects.

Our U.S. colleagues at Selendy & Gay decided not to wait for the Telegram case to be over. Less than two weeks after the New York Southern District Court ordered Telegram to temporarily halt GRAM issuance, the same court received 11 class-action suits against crypto-industry stakeholders at once.

Binance, Bibox, BitMEX, and KuCoin exchanges, as well as projects like TRON, Bancor, (EOS), and others. The founders of the companies involved, such as Binance’s Changpeng Zhao and TRON’s Justin Sun.

Smell of Money

So it happened. After a series of recent moves by the Commission like the Telegram case and forcing regulations onto smaller ICO companies in 2019, the smell of money got out.

It is also important that the case is in the U.S. This only makes the situation more serious, as U.S. litigation is known for being expensive and having large compensations and real terms.

I think that neither plaintiffs nor defendants are interested in going through the entire procedure. These 11 lawsuits involve over forty defendants from over fifteen countries and the number can get bigger as the cases unfold. It can go on for years draining the resources of both parties.

It is likely that the plaintiffs expect the defendants to settle outside of court, which would mean a nice pay for the initiators of the lawsuit.

On the other hand, the companies can reject settlement to demonstrate that nobody will profit from them that way. This means that there are chances for prolonged litigation resulting in a clearer picture of applying U.S. laws to digital assets.

It is clear that these class-action suits aren’t the last and there will be new complaints filed against blockchain companies and their founders.

Compliance Is Necessary

In my opinion, after this story blockchain projects and other companies will learn that compliance is, in fact, necessary.

By compliance, I mean a set of measures aimed at adapting the companies operations to the requirements of the applicable legislation. In other words, you find out what laws apply to your project and make it compliant with all these laws.

There are different types of compliance, but there are four key types for blockchain projects:

  1. AML/CFT. This is a big and complicated topic. In many countries, the laws require companies involved in certain activities with virtual assets to satisfy AML/CFT requirements, including transaction monitoring and KYC measures. Most projects ignore these requirements. I believe that the next wave of lawsuits will revolve around AML/CFT. This is just as serious as securities laws.
  2. Regulatory compliance. This category includes going through all the required government procedures and getting all the licenses and permissions needed for the project to operate. For a fintech project, regulatory compliance may include observing the requirements applicable to money transmissions, payment systems, or financial services. Some developers mistakenly think that a decentralized project doesn’t have to care about regulations. But almost all regulators think that there are no truly decentralized projects and there’s always somebody to blame. In addition, many decentralized business models are only pseudo-decentralized and fit a certain regulatory framework one way or another. There is a lot of nuances and complications to consider to mitigate regulatory risks.
  3. Securities laws. Blockchain projects typically face this aspect when selling tokens to attract funding. This process requires caution, as selling tokens in certain jurisdictions may violate local laws. As it turned out, in the U.S., almost any token can be considered unregistered security. In Switzerland, even e pure utility-token can be considered security in some cases. Each country has its own rules about securities issuance and exemptions from these rules, as well as certain requirements to disclosure, offerings, and even marketing campaigns.
  4. Data protection. While it is about protecting all kinds of information, personal data protection is the priority. Personal data was given a lot of attention over recent years and the regulation is enhanced to cover more aspects of interaction with such sensitive information. The number of cases in this area is growing each year, so I wouldn’t postpone this question either.

Personal Liability

The potential surge in litigation with crypto-companies can have a positive effect on the industry filled with nihilism. I am talking about people who think that laws and regulations are for traditional sectors and crypto is decentralized and there are no laws there.

Crypto is a sector where there’s a lot of projects without registration, grey exchanges, and companies that grew big but haven’t got to build even a basic legal structure. The current situation may give them a reason to think in the form of personal liability for those in charge.

If you run a business without legal structure, you are solely responsible for everything your business does or doesn’t. This means that you will have to respond to all claims yourself and to pay out of your own pocket.

If you have a company, it protects you from personal liability before third parties. This does work this way, but there are exceptions.

The class-action lawsuits in question directly mention founders and CEOs of exchanges and ICO projects meaning that the initiators want to hold the people behind the companies responsible as well. If a company violates laws, it’s directors and operators may face criminal charges, including large fines and real jail terms.

Cryptocurrency Exchanges Regulation

Interestingly, in the BitMEX case, the plaintiffs want to apply classic stock trading rules to XBT/USD contracts trading.

The class-action suit claims that the platform was trading against its users and manipulating the prices to have traders’ positions liquidated for BitMEX’s benefit.

For conventional exchanges, there are lots of procedures, rules, and regulations to observe when organizing and conducting trading. Many of these restrictions are aimed to protect traders, counter market manipulation and insider trading, and so on. The majority of the existing Bitcoin exchanges have been ignoring these rules up until now.

The BitMEX case may form a precedent of applying classic stock trading rules to crypto-exchanges. This will mean that other crypto-exchanges with similar businesses will have to observe the same rules and therefore are violating them right now.

Disclaimer: This article provides a legal professional’s perspective on the matter and doesn’t necessarily reflect the views of the editorial board.

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