With investors worldwide looking at a $1.5 trillion in recent cryptocurrency losses, a blizzard of class-action lawsuits are being prepared. One big question is: who, if anyone, is to blame?
See: Bitcoin slumps below $20,000 as cryptocurrency rout rolls on
US federal regulators say 46,000 people have reported losing $1bn in crypto to scams since January 2021.
Given the millions poured into promoting crypto – often with celebrity endorsements – legal action after the crash was inevitable. Class-action lawsuits are already in the works, the Guardian reported Saturday.
Kim Kardashian and the boxer Floyd “Money” Mayweather Jr are being sued for alleged false statements promoting the minor cryptocurrency EthereumMax.
The lawsuit alleges they encouraged followers to join “the EthereumMax community” and that the token itself was a “pump-and-dump” scheme that deceived investors.
Charles Randell, head of the UK’s Financial Conduct Authority, said in a speech to an economic crime symposium that he couldn’t say if the particular token was a “scam … but social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation”. EthereumMax has described the legal claim as a “deceptive narrative”.
In October last year the actor Matt Damon made his debut as the Crypto.com pitchman, advising viewers that “fortune favors the brave”. The ad was seen as a turning point for crypto – a financial investment backed by a Hollywood A-lister.
See: Here’s how much money you would’ve lost if you bought crypto during Matt Damon’s ‘Fortune Favors the Brave’ commercial
Other digital assets are also under scrutiny. Earlier this month, the US Justice Department charged Nathaniel Chastain, a former employee with NFT Marketplace OpenSeawith wire fraud and money laundering in connection with a scheme to trade NFT assets.
But prosecuting fraud in the crypto arena is difficult. A number of prosecutions have been brought for theft, but prosecuting digital fraud runs up against an unresolved question: are cryptocurrencies securities?
The US definition of what is a security relies on something called the “Howey test” and derived from a supreme court ruling, Securities and Exchange Commission (SEC) v WJ Howey Co. decided in 1946, long before the era of crypto.
See: SEC chief Gensler says crypto crash has ‘highlighted’ need for regulation
If cryptocurrencies are a security, the US SEC has jurisdiction and selling unregistered securities fraudulently could be a felony, with up to five years in jail.
The question of whether the celebrity pitch people could be held liable is an open one. First, the courts would have to decide if crypto is a security, and then if that security was promoted fraudulently.
As commentators pointed out this week as the crypto markets crashed, no cryptocurrency has registered as a security and exchanges or lenders through which they may pass are not backed by the government’s Federal Deposit Insurance Corporation (FDIC) insurance guarantees.
On Monday, the crypto exchange Binance halted withdrawals of bitcoin for several hours after the crypto lender Celsius Network also blocked customers from withdrawals, swaps and transfers on its platform. Binance blamed a “stuck transaction” for its suspension.
See: Binance resumes bitcoin withdrawals as crypto prices crater
The following day the SEC launched an inquiry into whether crypto exchanges have proper safeguards to prevent insider trading. The inquiry is believed to include the best-known exchanges – Binance, Coinbase, FTX and Crypto.com, Kraken, Bitfinex and Crypto.com, the Guardian reported.