The tide has turned in the crypto industry. The stories in the press concerning announcements of new protocols have increasingly been replaced with announcements around enforcement actions by the Securities and Exchange Commission as they have clamped down on historical Initial Coin Offerings which have now mostly been deemed to have been illegal securities offerings.
The success of these actions by the regulators has started to embolden private sector parties in going after both issuers of new crypto assets as well as crypto-exchanges. In April alone, there were 11 class action suits filed in the Southern District of New York against four crypto-asset exchanges and seven digital token issuers. At the core of these proceedings is the complaint that exchanges including Binance, Bibox, BitMEX and KuCoin, as well as seven issuers of digital tokens: Block.one, Tron, Bancor, Civic, Kybercoin, Quantstamp, and Status failed to comply with federal and state securities laws intended to protect investors from unscrupulous behavior.
While these complaints are varied in nature, they center around the notion that issuers were responsible for illegally offering unregistered securities to U.S. investors, and that crypto-exchanges are guilty of facilitating the trade of securities without the requisite licenses. Moreover, some of the allegations suggest that these exchanges have been involved in elaborate schemes of fraud, manipulation and insider trading.
Earlier in the month, I interviewed Lewis Cohen and Greg Strong from crypto law experts DLx Law to understand more about the arguments that the complainants in these cases are making in their civil lawsuits, their validity and the potential implications of these suits for the blockchain and cryptocurrency sector as a whole.
The Statute Of Liabilities May Not Have Run Out As Originally Suggested
One key challenge that many of the recent civil class action lawsuits will face is that the strict one-year statute of limitations for bringing these cases may have expired. In other words, the plaintiff filed too late according to the statute of limitation provisions in U.S. securities law for the violation of selling an unregistered security, since the sales in question took place more than one year ago. Andrea Tinianow , contributor to Forbes pointed this out earlier in April this year.
Lewis and Greg agree that that this may be a challenge but suggest that the plaintiffs could argue that the law regarding the classification of the various digital tokens as securities has been ambiguous and that it wasn’t until the Securities and Exchange Commission published their framework guidance in April 2019 that a reasonable purchaser had clarity with respect to determining whether the SEC would consider a particular digital asset as a security.
The plaintiffs in the class action suits may argue that the statute of limitations on their claims can only start when someone conducting reasonable due diligence would have been made aware of the violation. Thus, they may argue, the one-year statute of limitation clock should only start running from the time the SEC clarified its position in its April 2019 guidance. If this position is accepted by the court, the class actions would be allowed to proceed as long as they were brought within the applicable statute of repose timeframe, if any.
Many Of The Defendants Are Not Based In The U.S.
Another challenge relates to defendants in the cases that are not based in the U.S., and instead operate from offshore locations where local regulations are more permissive of their activities. These defendants may argue that they do not make their services available to U.S. customers and take reasonable measures to exclude them.
To succeed, the plaintiffs will need to be able to argue that, although these defendants are based outside of the U.S., they are still doing business here. This may be evidenced by U.S. citizens having accounts on their platforms, by job postings for roles in the U.S., through these entities actively participating in conferences in the U.S. and thereby soliciting U.S. users, or by other means – it will be up to the plaintiffs to make this case.
In the case of Bitmex, while it claims to have no operations in the U.S. and has taken steps block users in the country, the suit against them claims that according to “sources close to the company,” nearly 15%, or $138 billion, of the trading volume on the exchange is attributable to U.S. traders. According to Strong, the question therefore becomes the extent to which the exchange has taken measures to exclude U.S. citizens, whether through strong KYC checks or by banning U.S.-based I.P. addresses as well as those accounts using VPNs that could indicate U.S. users seeing to mask their identity.
According to both lawyers, the plaintiffs may have some success in being able to argue the point that the defendants in these cases are subject to U.S. jurisdiction. Historically, courts have had a reason...