While once on the fringe, cryptocurrencies are gaining traction as a payment form and with that follows litigation and regulation. Large corporations, including Xbox, PayPal, CocaCola, Sotheby’s, Restaurant Brands International (the parent company of Burger King, Tim Hortons, and Popeyes) and Yum Brands (operations include: KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill), to name a few,are now accepting payment in cryptocurrencies, according to Business Insider. Others, such as Starbucks, are considering accepting digital currency as an viable payment option.
Cryptocurrency, as defined by Investopedia, is “a digital currency or virtual currency that is secured by cryptography.” Cryptocurrencies “are systems that allow for secure payments online which are denominated in terms of virtual ‘tokens,’ which are represented by ledger entries internal to the system.” Moreover, many cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.” It is important to note that there are differences between cryptocurrencies and other virtual coins or tokens, as explained by Cointelegraph.
Cryptocurrencies, Virtual Currencies and Digital Assets
There are several types of cryptocurrencies, such as Bitcoin, Ethereum, Tether, and XRP, among a myriad of others. For instance, Bitcoin, which launched in 2009, is the first blockchain-based cryptocurrency and is the most popular and most valuable, according to Investopedia. Other alternative cryptocurrencies include: Litecoin, Peercoin, Namecoin, and Ethereum, (Dash, ZCash), among others. While cryptocurrencies can potentially make it easier to transfer funds between two parties without needing a third party (e.g. a bank), they can be a breeding ground for illegal activities, including money laundering and tax evasion because of the semi-anonymity of these types of transactions. Additionally, the value of cryptocurrencies greatly fluctuates.
Cryptocurrencies like Bitcoin are not tied to any entity, which makes tracking litigation for them challenging. For example, a Docket Alarm search for “Bitcoin” shows results for Bitcoin holders or seized Bitcoins, but no Bitcoin entity because none exists. However, litigation can be tracked for cryptocurrency like XRP, which is attached to a company (Ripple).
Ripple Labs and XRP Digital Asset
Blockchain company Ripple Labs faced numerous federal lawsuits since 2020, including Securities and Exchange Commission (SEC) action for allegedly raising more than $1.3 billion through its unregistered digital securities offerings via its digital asset security called XRP. Ripple Labs also faced various suits from XRP purchasers over the company’s alleged securities violations.
Since January 2020, Ripple Labs has faced eight federal lawsuits, including the SEC’s lawsuit. Most of the lawsuits were filed in the Northern District of California, as well as the Southern District of New York and the Middle District of Florida, among others. Five out of the eight lawsuits were for case tags for securities, commodities, exchange in addition to cases regarding fraud and trademark. Ripple Labs is represented by King & Spalding LLP; Ross Pitcoff Law; Debevoise & Plimpton LLP, among others.
XRP II LLC is also a party in most of the lawsuits against Ripple Labs and is represented by the same counsel.
Tether
Tether (originally Realcoin) is a cryptocurrency issued by Tether Limited, which is controlled by the owners of Bitfinex. Additionally, the companies reached an agreement in February with the New York Attorney General to pay $18.5 million to settle false financial claims.
Cryptocurrency Mining
Bit Digital
Bit Digital, a bitcoin mining company, has faced three federal lawsuits since 2020 with two occurring in January 2021 and one in March; all of the cases were filed under the securities case type in the Southern District of New York. For example, one of the lawsuits, covered by Law Street Media, was brought against the company by a securities purchaser on behalf of a putative class of those who acquired Bit Digital securities, claiming that Bit Digital operates a fake cryptocurrency business, as noted in a report. Bit Digital is represented by Kagen, Caspersen & Bogart PLLC.
Cryptocurrency Exchange Platforms
Cryptocurrency exchanges are “platforms that facilitate the trading of cryptocurrencies for other assets, including digital and fiat currencies” effectively acting as the middleman between a buyer and seller, according to the Corporate Finance Institute.
Coinbase
Coinbase, which recently made its historic $99.6 billion public debut, is the largest digital currency exchange marketplace. Coinbase has mostly faced litigation early in 2020 and towards the end of 2020 into the spring of 2021. Four out of the 11 cases were in the Northern District of California and two were in the District of Delaware, the other lawsuits were filed in various courts. The types of lawsuits include contract disputes, stockholder suits, property damage, civil rights claims, and patent suits, among others. Law firms representing Coinbase include Stumphauzer Foslid Sloman Ross & Kolaya PLLC; Gibson, Dunn & Crutcher LLP; Potter Anderson & Corroon LLP; Cooley LLP; and DLA Piper, among others. Some suits that mention Coinbase are procedural criminal matters or in rem jurisidction cases against Coinbase accounts.
Kraken
Global cryptocurrency exchange Kraken, owned by Payward Inc., has faced little federal litigation since January 2020. The three lawsuits that have been filed occurred in the Northern District of California, the Middle District of Florida, and the Southern District of New York. Additionally, the types of suits are categorized as fraud, civil rights (ADA), and statutory actions. Payward Inc. is the defendant in two out of the three suits. Payward sued a former employee for alleged unlawful access and misappropriation of Payward’s confidential business information and trade secrets. Payward Inc. doing business as Kraken is represented by Pierce Bainbridge P.C., Kobre & Kim LLP; and Schlam Stone & Dolan LLP.
Binance.US
Binance has faced six lawsuits since 2020, most of which occurred in the second half of 2020. Three of the cases relate to property damage, one case is for assault, libel and slander (filed against Forbes Media), and another involves securities, commodities, exchanges. The lawsuits occurred in the Northern District of California, the District of New Jersey, and the Southern District of New York. Binance is the defendant in four out of the five lawsuits. Binance was part of an influx of lawsuits against cryptocurrency platforms in April 2020. Binance is represented by Keesal Young & Logan; Paul Weiss Rifkind Wharton & Garrison LLP; Davis Polk & Wardwell LLP; and Walsh Pizzi O’Reilly Falanga LLP.
Government Involvement
The government has taken several initiatives to regulate cryptocurrencies and other digital assets and enforce the law as it relates to these commodities. For example, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) put forth proposed rulemaking in December 2020 for virtual currencies and digital assets, which followed the Department of Justice’s announcement in October 2020 for a framework for cryptocurrency enforcement.
The CFTC launched a securities fraud suit last April against Fintech Investment Group and Compcoin, claiming the companies made false promises regarding their trading algorithm return rates.
The Securities and Exchange Commission (SEC) has filed various lawsuits and conducted investigations involving cryptocurrencies. Litigation includes various actions against Ripple Labs, as well as Telegram, and a lawsuit in conjunction with the New York Attorney General against Coinseed for purportedly skirting state and federal securities and commodities registration laws.
Meanwhile, the New York Attorney General fined two cryptocurrency trading platforms, Bitfinex and Tether, requiring them to cease trading activity with New York residents and to pay $18.5 million in civil penalties over their allegedly false financial claims.
What’s Next?
Currently, most cryptocurrency-related litigation revolves around an initial coin offering (ICO) or securities issue, such as failing to register as a security, as well as issues relating to cryptocurrency exchanges and mining companies. However, this is an emerging legal issue likely to see more litigation as there is more state and federal regulation. In particular, there are questions over trade secrets, disclosures, market manipulation, contracts, and taxes, among others, which will likely be litigated as cryptocurrency evolves and becomes more mainstream. Due to the digital nature of cryptocurrencies, a large-scale hack could also lead to litigation. Furthermore, companies accepting and investing in cryptocurrencies could also face litigation, particularly from stockholders because of the volatile nature of cryptocurrencies leading to questions of companies adhering to their fiduciary duties.