Highly Recommended Legal Report: New York law firm launches crypto litigation tracker » Brave New Coin
(bravenewcoin.com)
David McNickel
The life-cycle of blockchain startups is fraught with legal uncertainty and their volatility makes them particularly prone to claims for compensation both in and outside of the courts. As this new frontier of investing keeps expanding, litigation monitoring could be a useful metric for investors when doing due diligence on crypto assets and used as part of a screening process.
Innovate, propagate, litigate, repeat
Investors may be assisted, in that regard, by the âMoCo cryptocurrency litigation trackerâ, recently unveiled by New York law firm Morrison Cohen (who specialize in cryptocurrency and blockchain litigation).  According to the tracker (which is regularly updated), there are currently 63 ongoing cases in the US, and 24 of those are class action or other private litigation.
There are some significant industry players currently caught up court actions: Coinbase, Ripple Labs, Bitconnect, Bitfinex and Satoshi Dice among them.One of the most recent and egregious charges is against the unregistered Bitcoin-denominated exchange Bitfunder based in Texas and its founder and operator Jon Montroll.
In February this year, the Securities Exchange Commission (SEC) brought charges against them for having âdefrauded exchange users by misappropriating their funds and failing to disclose a cyberattack on BitFunderâs system that resulted in the theft of more than 6,000 bitcoins.
ââMontroll also sold unregistered securities that purported to be Case 1:18-cv-01582-PGG Document 1 Filed 02/21/18 Page 1 of 20 2 investments in the exchange, but from which Montroll also misappropriated investor funds and failed to disclose the cyberattack and bitcoin theft.
âAmong the many charges, Bitfunder and Montroll are also accused of selling âvirtual sharesâ in various virtual currency-related enterprises through the Bifunder platform. One of the âsharesâ was the âUkyo Noteâ, an unregistered security that was purported to be raising funds for private investment purposes.
Montroll sold them with the promise of a 0.05 percent daily return, but in reality the funds were used to repay Montrollâs business expenses and replace some of the misappropriated Bitcoin on the Bitfunder exchange.
Of the cases, Morrison Cohen partner Jason Gottlieb says a pair of cases related to the same ICO - U.S. v. Zaslavskiy (a criminal case) and SEC v. ReCoin and DRC World Inc. (a civil case), are particularly noteworthy, as they will be the âfirst high-profile, well-briefed test of whether cryptocurrency can be classified as anything other than a security.
âIn its U.S. v. Zaslavskiy filing, the FBI alleges Maksim Zaslavskiy breached US securities laws with two ICOs in 2017 - one to create a token back by international real estate purchases (ReCoin https://101recoin.com), and the other to release a token backed by investment in diamonds (https://drc.world).
The FBI records ReCoinâs Whitepaper as stating âReCoin is led by an experienced team of brokers, lawyers and developers, and invests its proceeds into global real estate based on the soundest strategies ⊠100% of our proceeds from ReCoin sales minus maintenance costs are invested into real estate.
âHowever, the agency says after raising $300,000 Â Mr Zaslavskiy had not purchased any real estate and had never hired or consulted any brokers, lawyers or developers - nor had he minted any tokens.
Similarly, he had not purchased any diamonds. Mr Zaslavskiyâs lawyers have filed a motion to dismiss the criminal indictment and the civil complaint on the grounds that the cryptocurrencies in question were not securities, stating:"First, as currencies, these assets are statutorily exempt from the definition of securities â even under the 1933 and 1934 Securities Acts.
Second, cryptocurrencies are not âinvestment contractsâ within the meaning of the law â a key requirement should the SEC argue that cryptocurrencies are securities. Since the cryptocurrencies at issue in this case â REcoin and DRC â are not securities, they are not subject to securities law upon which all of the charges are based. Therefore the indictment charging Mr. Zaslavskiy is defective.â
Customer crypto complaints outside the courts
However, not every crypto investor can afford to go to court and instead consumer watchdog agencies worldwide have seen surges in complaints about crypto-related scams.
Coinbase customer complaints to the Consumer Financial Protection Bureau (CFPB), for example, skyrocketed at the start of the year as the price of Bitcoin broke down from its parabolic rise.
The life-cycle of blockchain startups is fraught with legal uncertainty and their volatility makes them particularly prone to claims for compensation both in and outside of the courts. As this new frontier of investing keeps expanding, litigation monitoring could be a useful metric for investors when doing due diligence on crypto assets and used as part of a screening process.
Innovate, propagate, litigate, repeat
Investors may be assisted, in that regard, by the âMoCo cryptocurrency litigation trackerâ, recently unveiled by New York law firm Morrison Cohen (who specialize in cryptocurrency and blockchain litigation).  According to the tracker (which is regularly updated), there are currently 63 ongoing cases in the US, and 24 of those are class action or other private litigation.
There are some significant industry players currently caught up court actions: Coinbase, Ripple Labs, Bitconnect, Bitfinex and Satoshi Dice among them.One of the most recent and egregious charges is against the unregistered Bitcoin-denominated exchange Bitfunder based in Texas and its founder and operator Jon Montroll.
In February this year, the Securities Exchange Commission (SEC) brought charges against them for having âdefrauded exchange users by misappropriating their funds and failing to disclose a cyberattack on BitFunderâs system that resulted in the theft of more than 6,000 bitcoins.
ââMontroll also sold unregistered securities that purported to be Case 1:18-cv-01582-PGG Document 1 Filed 02/21/18 Page 1 of 20 2 investments in the exchange, but from which Montroll also misappropriated investor funds and failed to disclose the cyberattack and bitcoin theft.
âAmong the many charges, Bitfunder and Montroll are also accused of selling âvirtual sharesâ in various virtual currency-related enterprises through the Bifunder platform. One of the âsharesâ was the âUkyo Noteâ, an unregistered security that was purported to be raising funds for private investment purposes.
Montroll sold them with the promise of a 0.05 percent daily return, but in reality the funds were used to repay Montrollâs business expenses and replace some of the misappropriated Bitcoin on the Bitfunder exchange.
Of the cases, Morrison Cohen partner Jason Gottlieb says a pair of cases related to the same ICO - U.S. v. Zaslavskiy (a criminal case) and SEC v. ReCoin and DRC World Inc. (a civil case), are particularly noteworthy, as they will be the âfirst high-profile, well-briefed test of whether cryptocurrency can be classified as anything other than a security.
âIn its U.S. v. Zaslavskiy filing, the FBI alleges Maksim Zaslavskiy breached US securities laws with two ICOs in 2017 - one to create a token back by international real estate purchases (ReCoin https://101recoin.com), and the other to release a token backed by investment in diamonds (https://drc.world).
The FBI records ReCoinâs Whitepaper as stating âReCoin is led by an experienced team of brokers, lawyers and developers, and invests its proceeds into global real estate based on the soundest strategies ⊠100% of our proceeds from ReCoin sales minus maintenance costs are invested into real estate.
âHowever, the agency says after raising $300,000 Â Mr Zaslavskiy had not purchased any real estate and had never hired or consulted any brokers, lawyers or developers - nor had he minted any tokens.
Similarly, he had not purchased any diamonds. Mr Zaslavskiyâs lawyers have filed a motion to dismiss the criminal indictment and the civil complaint on the grounds that the cryptocurrencies in question were not securities, stating:"First, as currencies, these assets are statutorily exempt from the definition of securities â even under the 1933 and 1934 Securities Acts.
Second, cryptocurrencies are not âinvestment contractsâ within the meaning of the law â a key requirement should the SEC argue that cryptocurrencies are securities. Since the cryptocurrencies at issue in this case â REcoin and DRC â are not securities, they are not subject to securities law upon which all of the charges are based. Therefore the indictment charging Mr. Zaslavskiy is defective.â
Customer crypto complaints outside the courts
However, not every crypto investor can afford to go to court and instead consumer watchdog agencies worldwide have seen surges in complaints about crypto-related scams.
Coinbase customer complaints to the Consumer Financial Protection Bureau (CFPB), for example, skyrocketed at the start of the year as the price of Bitcoin broke down from its parabolic rise.
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Francisco Gimeno - BC Analyst Interesting report. Investors can use it to research about the legal situation of ICOs and individuals. Any tool which shows to be useful for clearing the field from scammers and uncertainties is to be welcomed.