Kim K and a $4.5 Billion Heist: 10 Great Legal Crypto Dramas
It’s hard to top the recent legal drama between Bored Ape Yacht Club’s allegedly Nazi-sympathizing founders and the concept artist selling replica monkeys to undermine their NFT empire. But as I teased last week, there are a growing number of notable crypto cases that are a must-see for anyone interested in the industry, from Wall Street to Hollywood. Below you will find the ten that I find most exciting and that I am now following closely.
Let me first say that I have never owned any cryptoassets or digital art on the blockchain, and I would like to admit that I have never participated in a DAO (unlike my partner Baratunde Thurston, who tried to buy part of the US Constitution). I’m also not entirely convinced of the value of decentralized finance, or DeFi – at least from an investment point of view. What looks to some crypto fans like a long overdue attempt to reclaim power from the Wall Street banks and the Federal Reserve looks to me like a corporate transfer of power to the techno-elite. And I’m not sure if I trust Tyler and Cameron Winklevoss more than Jamie Dimon.
But from a non-investment point of view, I can also identify innovation when I see it, from DeFi to “Web 3.0”, and especially in the legal arena where so many questions related to this digital frontier – who owns the rights to an NFT character? Is Kim Kardashian responsible for pumping the value of a digital token? – is actively sought. Usually I have a pretty good intuition for legal outcomes. But not with these ten cases. Well, do it nine cases where anything can happen. I wouldn’t bet a single bitcoin against Kim K.
The 10 most interesting cases in Crypto
George Kattula v. Coinbase: I start with a case that is also the newest on this list. Filed on August 15, this putative class-action lawsuit targets a widespread problem that has plagued the crypto world: assets keep slipping out of the “wallets” of Coinbase account holders. The plaintiffs are looking to pin legal liability on Coinbase for “widespread hacking and theft” and also claim that the $16 billion public company should register tokens listed on its platform with the Securities and Exchange Commission. Like some other pending cases (Armijo v. Ozone Networksfor example, related to stolen Bored Apes), the plaintiffs will first have to get around the arbitration provisions of the user agreement, not to mention a class action.
Securities and Exchange Commission v. Ripple Labs Inc: When we talk about crypto assets as alleged unregistered securities, this is the test case – the one that can determine whether the federal agency that oversees public markets plays a strong regulatory role in crypto going forward. The SEC is accusing Ripple and two executives of conducting an illegal $1.3 billion offering, and this proceeding has become so heated that the judge recently allowed the government to keep the identities of the experts secret until further notice. Summary motions are due next month. Meanwhile, the SEC is pursuing other companies and individuals for failing to register securities, such as those behind the Dragon token in a complaint filed this week.
Dan Carman vs. Janet Yellen: When Congress passed a major infrastructure bill last year, lawmakers inserted a provision requiring crypto exchanges like Coinbase to notify the IRS of high-value transactions. The plaintiffs in this Kentucky case argue that this reporting provision constitutes an unreasonable search under the Fourth Amendment and ultimately an unconstitutional invasion of one’s privacy. The dispute may eventually become catnip to the Supreme Court, which may also be intrigued by a First Circuit opinion last week in Harper v. Right about how the tax authorities obtained documents about a lawyer’s crypto holdings. Meanwhile, the Biden administration must respond by Nov. 7.
Free Holdings v. Kevin McCoy: The history and terminology surrounding non-fungible tokens will be explored in this complex slander of title lawsuit that focuses on how auction house Sotheby’s marketed the “first NFT”: Kevin McCoy‘s Quantum, a 2014 blockchain-recorded artwork that sold for $1.472 million last year. The plaintiff (a Canadian holding company) claims to be the rightful owner of McCoy’s first NFT after the artist failed to renew the registration. The case focuses on whether Sotheby’s and McCoy offered a “false narrative” about how Quantum was “burned” or “removed” from one blockchain and then re-minted on another.
Miramax v. Quentin Tarantino: How should Hollywood think about NFTs and fit them into its traditional entertainment framework? Famous film director Quentin Tarantino insisting that he retained the rights to publish Pulp Fiction script and can sell NFTs derived from that script while Miramax claims that Tarantino’s reserved rights are quite limited and do not cover this. A judge is set to rule soon, and while there’s been some inkling of a potential settlement thanks to Miramax reporting “progress” in a recent filing, an insider tells me a deal isn’t actually imminent.
Nike v. StockX: Defendant is an online sneaker marketplace that sells NFTs of Nike shoes. The twist, according to StockX, is that the NFT is the equivalent of a physical shoe in a warehouse and is “effectively a claim ticket” to the stored item. Nike sees infringement of intellectual property. StockX responds that what it does is protected by nominative fair use, which allows certain legal references to trademarks, and the first sale doctrine, which allows the owner of a particular copy of a work to sell that copy. The parties are in the middle of the discovery phase of this case.
Celsius network bankruptcy: If crypto is ever to achieve long-term trust and stability, a successful restructuring where creditors feel protected is likely required. That’s where Celsius, the much talked about and now bankrupt crypto bank, comes into the picture. Celsius customers transferred crypto-assets, earned rewards and took out crypto-backed loans. But in July, the company filed for Chapter 11, prompting customers to worry about what would happen to the bank’s $5 billion in lost assets. However, the debtor continues to operate, and has at least a few months before the cash runs out. Meanwhile, a US trustee recently cited the “relatively new, purposefully opaque and, at best, loosely regulated” crypto market while calling for the appointment of an independent investigator to investigate Celsius and report on what went wrong.
In Re Ethereummax Investor Litigation: When Crypto Assets Implode, Should the Celebrities Who Hyped Them Face Any Consequences? This particular case aims to place legal blame on Kim Kardashian, Floyd Mayweather, Jr., and Paul Pierce to artificially inflate the price of EMAX tokens. Kardashian recently moved to dismiss this investor class action on the grounds, among other things, that the plaintiffs failed to show that EMAX buyers were inspired by her Instagram posts to buy tokens.
Christian Sarcuni, et al., v. bZx DAO, et al. eel: There is remarkably little jurisprudence regarding decentralized autonomous organizations, or DAOs, where a digital token confers certain voting rights taken by the collective. The bZx DAO, for example, ran a protocol that allowed users to trade cryptoassets on margin, but became the target of angry users who lost their money to hackers. Now, a big question is whether bZx DAO token holders are “partners” liable for alleged negligence, or whether these strangers are nothing of the kind and shielded from legal liability. A judge in California is currently hearing arguments about whether the plaintiffs have properly stated a claim.
United States v. Lichtenstein: Finally, there’s this criminal case, which seems destined for adaptation into a future film or TV series. Heather Morgan and Ilya Lichtenstein was a New York couple dabbling in tech entrepreneurship, writing, rapping—yes, really—and as social influencers. In other words, they were fairly typical millennials. But according to authorities, they also quietly tried to launder over 120,000 bitcoin stolen in a 2016 hack. The value of that bitcoin had risen from hundreds of thousands of dollars to about $4 billions at the time they were arrested—making their alleged heist technically the largest in the country’s history. FBI agents found tens of thousands in foreign currency, gutted books, dozens of tablets and a burner phone when they raided their apartment. Their lawyers say the money laundering allegations are “based on a variety of circumstances and assumptions drawn from a complex web of convoluted blockchain and cryptocurrency tracking claims.” The trial, if there is no plea agreement, should be fascinating.
