The popularity of cryptocurrency has increased in parallel with the industry’s value and market cap over the last 10 years. Bitcoin increased in value by 193,639.36% between 2012 and 2020, with estimates putting the overall cryptocurrency market size at $1,087.7 million by 2026. As each year seems to bring crypto closer to mainstream adoption, interest can be found everywhere from storied institutional investors to Generation Z TikTok influencers to El Salvador making cryptocurrency legal tender. But what does this mean for litigation, and the many investors and innovators in the industry?
The dramatic increase in value over time makes this space incredibly attractive to investors looking for maximum reward, which is partially fueling innovation and adoption. What used to be a fringe currency exchanged in the shadows of the dark web is now a legitimate form of currency being accepted by corporations like PayPal, Xbox, Coca-Cola, YumBrands, and more. However, despite this broadening user base, there is still a large amount of uncertainty from a legal perspective. As regulation of digital currencies is still developing, and uses are still being explored, cryptocurrency litigation has been on the rise.
The increased popularity of cryptocurrencies and the currently inherent market volatility has been gaining the attention of several federal and state agencies. One of the common features of most cryptocurrencies is decentralization, as these currencies are decentralized networks that use blockchain technology, or a distributed ledger that is executed on by a network of computers. This means that these currencies are not issued by a centralized authority such as a government or bank.
This feature only increases the interest of organizations such as The Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Financial Crimes Enforcement Network (FinCEN), and the Internal Revenue Service (IRS). These agencies are tasked with the regulation of cryptocurrency, and investigating allegations of misconduct, fraud, and lack of compliance. There are also a host of lawsuits being filed on the civil side, as claims of market manipulation, fraud, intellectual property infringement, trade secret misappropriation and securities violations become more prevalent.
At the heart of many conversations regarding the legality of cryptocurrency is the debate of whether some of these digital currencies can be considered a security. The lawsuit against Ripple filed by the SEC takes on this very issue, as the SEC claims Ripple Labs and their executives sold $1.3 billion worth of unregistered securities. The lawsuit was not entirely unexpected, as Ripple has been debating with the SEC about its digital currency, XRP. The question at hand is whether XRP should be treated like a share of stock, which would require registration with the SEC, or a currency that falls outside of the scope of the commission.
Previously, the SEC ruled that two of the world’s most popular cryptocurrencies, Bitcoin and Ethereum are not securities, as they are indisputably decentralized with no singularly identifiable person or organization in control. XRP is different from these two cryptocurrencies, as 100 billion units were created all at once in 2012, and most of the supply is owned and controlled by Ripple using a centralized infrastructure. While this case is still being tried, the result will undoubtedly have significant implications across the industry.
Recently having gone public in May of 2021, Coinbase is the largest digital currency exchange marketplace in operation today. Most of the litigation Coinbase has been facing is relatively new – there have been eleven cases filed against the exchange since 2020. The types of lawsuits that Coinbase is facing include contract disputes, stockholder suits, and patent suits. It will be interesting to follow these cases and see how they progress, as more exchange-related cases in the industry are bound to arise in the future.
The civil case filed against Dapper Labs involves one of their NFT (non-fungible token) products, NBA Top Shot. These are digital collectibles that feature NBA highlight footage that is minted as an NFT and secured/sold via a blockchain. While NFTs are not a form of cryptocurrency, they use blockchain technology enabled smart contracts and are bought and sold using cryptocurrencies, most often Ethereum.
The complaint filed in Virginia alleges that this NFT product should have been registered with the SEC, as it is a security under federal law. The argument coming from the plaintiff is that Dapper Labs restricts certain fundamental ownership rights such as the withdrawal of funds and limits on secondary market placement, which financially benefits the defendant. The allegation asserts that all of this is intentional, as it is meant to inflate the value of the product and aligns with investment contract requirements set forth under Howey.
The required user agreement signed by Dapper Lab customers, establishes that they “are using NFTs primarily as objects of play and not for investment or speculative purposes.” Because of this, and additional language that specifies the arbitration of any disputes, the plaintiff will likely struggle to demonstrate and establish liability.
The litigation that these three companies are facing serves as early examples of what to expect in this emerging industry. While much of crypto-related litigation is currently focused on initial coin offerings (ICOs) and securities issues, the precedent established during the coming years will impact how legal teams reach success for their clients. Attorneys are considering how trade secrets, market manipulation, hacks, contracts, taxes, and other areas will be litigated as blockchain technology sees mainstream adoption, not to mention, the potential exposure to litigation for companies that have cryptocurrency investments.
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