What makes fintech firms a bigger target for widespread securities class action lawsuits? The short answer is – little or no regulatory oversight of the way companies operate.
History shows that when the economy is bad, more lawsuits are filed. In fintech, with downward trending markets and various geopolitical events driving increased uncertainty, the drive to legalize is even greater.
It’s no secret that cutting-edge innovation in fintech – such as blockchain, decentralized finance (DeFi) and cryptocurrency (crypto) – has created competition among major players and new entrants. This competition puts companies in a race for market dominance as they compete for an increasing amount of R&D funding.
According to dealroom.co, fintech startups raised $32.4 billion globally in Q1 2022, up 27% year over year. Crypto and DeFi funding, in particular, is growing faster than any other segment, with crypto startups now taking the mantle as the most invested sector in the space.
With VCs flocking to invest in fintech and the unfettered potential for profitability, what makes fintech firms a bigger target for widespread securities litigation?
The short answer is – little or no regulatory oversight of the way companies operate. Over the past few years, the fintech space has undergone a transformation led by disruptive technology innovation. Blockchain, DeFi, crypto and the like have created an undefined category in finance – and one that investors hope will be hugely rewarded for being at the forefront. Because of the limited railings surrounding this modern practice, the fintech space attracts intense scrutiny, especially when an investor’s money is at stake. And with an opportunity to wrangle in well-funded, uncharted territory for damages potentially worth millions to billions of dollars, plaintiffs and prosecutors are gearing up for lawsuits against companies whose practices are suspect.
Meanwhile, from a company’s point of view, these fintech companies are simply trying to “play bigger” and claim a stake in a fast-paced, moving market.
In business, it can be a death sentence to be an “also-driven”. According to The Motley Fool, more than 12K cryptocurrencies exist today, growing at a rate of approximately 1,000 new cryptocurrencies a month. That staggering number and the fact that there are no real barriers to entry in the space makes the competition for investors that much tougher.
Aside from the rapid growth of crypto exchanges, other activity in the financial industry that is provoking competition is coming in the form of partnerships and transactions between traditional institutions and fintech firms. For example SWIFT, the most used platform for traditional cross-border fiat transactions which connects more than 11,000 banks in 200 countries and territories globally, recently announced a plan to partner with Chainlink, a provider of price feeds and other data to the blockchain. In an initial proof-of-concept, SWIFT will use Chainlink’s Cross-Chain Interoperability Protocol (CCIP) to enable the network to communicate across all blockchain environments. If successful, this will have a huge impact on a standard for communicating transactions that include cryptocurrencies and will create yet another foothold for digital assets in the industry going forward.
Nevertheless, despite the allure of a crypto-promised land, a looming recession will prompt investors who suffer financial damage to seek redress for financial loss.
Securities class-action lawsuits against fintech companies aim to prove financial liability under allegations that companies deliberately misled investors. And with unclear regulatory oversight in the crypto wild west, allegations made are likely to involve fraudulent statements about the company’s public filings, misappropriation of company funds, manipulation of business metrics, breach of fiduciary duty and regulatory violations.
To prepare for litigation, attorneys should consult with industry experts, especially former c-suite executives, to support class certification proposals and hearings by providing insider perspectives on the market, the company and the class. These industry insiders can also support counsel in motion practice, settlement and litigation. In addition, technical experts can speak to specific technological issues at the heart of the claims, and academic experts can speak to the industry and whether the issues at hand are specific to the defendant or beyond the defendant’s control.
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
