The Weird World of Crypto Lawsuits – Cointelegraph Magazine

Selling fraudulent crypto occurs when a token is sold to investors based on false claims. A possible (but not tested in court) example is found with the automated market maker protocol SudoRare, which suddenly settled down and disappeared with the investors’ money. Such cases can easily cross the threshold into criminal territory, according to Corbett. He admits, however, that it can be very difficult to pursue the culprits unless the fraudsters are reliably identified.

Illegal securities offering. One way investors in flopped tokens can try to recoup money is by claiming securities fraudwhich demonstrates that the offering was illegal in the first place, such as an unregistered security offering masquerading as a utility token sale. “There are currently several US-based class action lawsuits running against US projects,” which those against Bitconnect and Solana. Corbett explains that such claims fall under securities law, and are civil claims as opposed to those brought by the likes of the SEC that classify projects like Ripple as securities.

Difficult organizations to sue. Another area that can present a legal minefield is DAOs, which often “are not registered anywhere and do not have any kind of legal personality, and individuals only work on their behalf.” Corbett warns that such arrangements could easily expose unsuspecting DAO workers to vicarious liability since the entity they believe they are acting on behalf of may not exist.

Even smart contract disputes can lead to the courtroom. “If two parties agree to act on a certain trigger on a smart contract, but it somehow fails, that can put a lot of responsibility on the coder or smart contract auditing firm,” says Corbett. In such cases, the assurances of the audit companies become critical.

When it comes to Violation of IP, it is easy to imagine NFTs where copyrighted images are minted and sold without permission. However, even code may be protected by copyright or patents, in which case implementing the code into other projects – or even discarding certain tokens – could result in a serious claim. (This is obviously not the case with open source software, which is why Uniswap’s code has been deprecated so often.)

High costs

Irena Heaver, a Dubai-based lawyer specializing in blockchain, explains that while the aggrieved party is responsible for funding civil lawsuits, criminal cases are pursued by the state. Because criminal cases deal with criminal matters rather than mere torts or “wrongs,” such as breach of contract and can result in jail time rather than monetary judgments, the bar is set much higher with respect to proof.

Ideally, a criminal conviction can only be made after all reasonable doubt has been removed, while a civil conviction can be made on a balance of probabilities, meaning that a party is more likely than not. It is also the state, rather than the victim, who decides whether to pursue a criminal case – something that rarely happens when the alleged thieves are far abroad.

If the state won’t finance it and you can’t afford to drop seven figures on the uncertain outcome of a court case, what can you do?

Alternative dispute resolution, which involves either arbitration or mediation, is a cheaper option than formal court proceedings. While arbitration is usually a binding process that can be seen as “court of law,” mediation is a lower-cost, private process in which a third party actively helps the parties reach a mutual understanding and agreement, explains Heaver. “I always recommend mediation,” she says, explaining that she has mediated dozens of crypto disputes where both parties have reached a satisfactory conclusion.

When a case goes to court, Heaver emphasizes that “the judge has to understand what’s going on,” which is far from self-explanatory when it comes to complex issues involving newfangled ape-DeFi derivatives of crypto-metachain tools.

It means that “judges rely on expert testimony, and we all know about the bogus experts in this area.” These experts are selected and paid for by the parties themselves, and Heaver laments that “for the right amount you can find an expert – whatever you want,” and naturally requires the other party to pay for its own expert to rebut the other.

When there are a large number of potential claimants, class actions can combine them into a single case. These are often carried out by law firms as start-ups, where the law firm does not charge the claimants, who instead agree to give the firm a part of any settlement or profit.

An example can be found in a class action lawsuit against a billionaire Mark Cubanwhich the Moskowitz Law Firm claims used its fame to “dupe millions of Americans into investing—in many cases their life savings—in the deceptive Voyager platform and purchasing Voyager Earn Program Accounts, which are unregistered securities.”

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Definance

Another way to raise an army of lawyers without selling both kidneys is legal financing, also known as settlement funding or third-party lawsuit funding, which occurs when a private investor gives a plaintiff money in return for a percentage of a legal settlement or verdict. This is effectively an external investment towards a successful lawsuit, and the funds invested are usually directed towards funding the lawsuit in question.

“It’s about connecting someone with an appetite for risk with a plaintiff who has a lawsuit but no funds,” explains Bill Tilley, managing partner of legal venture fund LegalTech Investor, who has worked in the legal finance industry for 15 years. Funds like his look at an average of 20 cases for each one they take on, with the entire due-diligence process costing up to $100,000 before a decision can be made to fund. This involves not only establishing that a case is likely to succeed, but that the defendant can actually be ordered to pay.

“The big challenge in a crypto case is whether you can find and collect the money, even if you win the case – resources have to be used to trace the money.”

Determining the jurisdiction where a case can be tried can also be a major challenge in itself. In his own research into litigation finance, Tilley has come across a puzzling trend of cryptomystery. “We’ve looked at some crypto cases where just nailing down the jurisdiction is a nightmare — they want multiple entities domiciled in multiple countries,” he recalls. Cryptolaw is not an easy industry to crack.

Enter Nemesis

In recent years, Corbett has planned to create a blockchain-specialized litigation fund. “There was no point launching this when everything went up,” he says, but now with the bear market bringing increasingly disillusioned investors to law offices around the world, things are looking up for crypto legislation. His litigation fund, arch enemy, has now gone live.

“The crowdfunding industry is growing rapidly and is becoming a financial solution for a handful of use cases. Part of the maturity is increasing competition for investments, which requires the financier, in addition to providing capital, to add value to the case. Therefore, there is an increase in domain focus funds, he says.

“Like any investor, it is important to build a trusting relationship with the plaintiffs and ensure that their expectations from the case are reasonable and that their motivations are in the right place. It is also important to have legal teams, consultants and experts with a proven track record in the subject area.

Jurisdiction plays a crucial role. “We can’t enforce judgments against people in certain countries, so we have to forward such cases,” he says, adding that the US and Britain, where enforcement of court orders is relatively easy, are the biggest markets. for the Blockchain Act. “The British Virgin Islands are also interesting because many blockchain projects have used these structures,” he notes. “The EU, US, UK and Australia have mature legal funding industries,” he says, adding that not all jurisdictions allow cases to be funded by third parties.

Like Tilley’s firm, Corbett says his Nemesis team processes cases to select those most attractive from an investment perspective. “We’re looking to earn either multiples or a percentage of the investment,” he says, explaining that much of the potential results are determined by the defendant’s director’s insurance plans, which often become payers of last resort. “If the opponent doesn’t have the money, the action often goes astray,” concludes Corbett.

In addition to making a ton of money, Tilley explains that legal funders “get the added benefit of helping some people who have been wronged who wouldn’t otherwise have access to the legal system today.”

“We can help fix the problem with the bad actors by holding them accountable – so crypto will be bigger, stronger and better 5 or 10 years from now.

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Elias Ahonen

Elias Ahonen is a Finnish-Canadian writer based in Dubai who has worked around the world running a small blockchain consultancy after buying his first Bitcoins in 2013. His book ‘Blockland’ (link below) tells the story of the industry. He has an MA in international and comparative law, whose thesis deals with NFT and metaverse regulation.

Follow the author @eahonen