Cryptocurrency Disputes
The world of cryptocurrency involves a lot of money and a lot of players with high risk appetites. The world moves fast and affords a good deal of anonymity. As a result, disputes are inevitable, as is full on fraud. But while courts have heard many cases involving cryptocurrency, lawsuits concerning it pose several challenges.
Why should you read this post about preparing to take cryptocurrency disputes?
You were hoping to receive it as a non-fungible token, but I did not have your wallet address.
You lost a million dollars’ worth of Lite coin and you have no idea if anyone can help you.
You are the Hawk Tuah girl and everyone is suing you and you want to confirm what your lawyers are telling you by reading a blog post.
Image credit: https://en.wikipedia.org/wiki/Cryptocurrency#/media/File:Bitcoin_Teller_SIBOS_Boston_2014_2.jpg
A Major Issue is Anonymity
One of the biggest challenges in cryptocurrency disputes is figuring out who. to sue. In a traditional business dispute, a plaintiff knows who the bad guy is. Often they have a written agreement that identifies the counterparty. And they usually do “due diligence” preparation and investigation to fully understand the business they are dealing with. At the very least, they speak with another person and can identify them somehow. But in the world of cryptocurrency, people often send large amounts of money to a random wallet address without knowing where the money is going.
This makes it hard to sue. People often come to me and say that “someone” stole millions from them and they want to sue. But when I ask “who,” the answer is often a username or an online handle or a wallet address. And that may not be enough since a complaint needs to identify where a defendant is so the court can be satisfied that it has personal jurisdiction over the defendant. And a lawsuit leads to a judgment that needs to identify for a sheriff who the defendant is so the sheriff can seize their assets.
Plaintiffs try to address this issue by serving subpoenas on third parties like internet service providers and banks and cryptocurrency exchanges to identify the people behind cryptocurrency transactions, but these processes can be slow and sophisticated parties outside the United States can often circumvent them.
The Type of Claims People Can Bring
Assuming a plaintiff can identify a defendant, the next question is what to sue them for. While people often sue business parties for breach of contract, many people engage in cryptocurrency transactions without a written agreement.
Many people allege that cryptocurrencies are securities, relying on guidance from the U.S. Securities and Exchange Commission (the “SEC”). And since few people who issue cryptocurrencies register them with the SEC, some plaintiffs bring claims alleging that the issuers violated the law that requires securities to be registered unless they fall under an applicable exemption.
Another possible claim is securities fraud, pursuant to the SEC’s Rule 10b-5, or a state law fraud claim. These claims are harder to make because they require the plaintiff to establish she reasonably relied on a materially false statement the defendant knew was false. Each element of the claim can be difficult to establish.
The Field is Relatively New
Because cryptocurrency litigation is relatively new, judges are not as familiar with it as they are with other kinds of business claims. Some are savvy, while others are skeptical. As a result, lawyers take great care to explain basic concepts in cryptocurrency to judges who may be new to the field so that the judges take the claims seriously instead of dismissing them because they seem strange or nonsensical.
The novelty of the field also means that there is not a ton of precedent that lawyers can cite when advising clients about how to limit their liability, evaluating the likelihood of success of a claim, or even arguing in court about the merits of their arguments.
One area where this comes up is when a plaintiff seeks to freeze assets. Normally, when a plaintiff sues a defendant, the plaintiff may be concerned that the defendant will hide her money so that, when the lawsuit is over, the plaintiff cannot collect it. Under limited circumstances, a plaintiff may convince a court to freeze or “attach” a defendant’s assets so that they can be collected at the end of a lawsuit. The threat of dissipated assets is greater in the world of cryptocurrency since it is very easy to hide assets without formal banks that need to record and disclose transfers. So some courts are willing to make it easier for plaintiffs in cryptocurrency disputes to attach assets, while others follow the more stringent rules that otherwise apply to traditional commercial disputes.