Cryptocurrency is the latest means through which people can own and transfer money, and no bank regulates it. Instead of carrying physical money, cryptocurrency users depend on online-backed descriptions that detail the value of each crypto. Crypto is kept in digital wallets, which you can only access using specific keys held by the party receiving the money. There are a lot of encryptions involved to improve security in financial transactions. The first cryptocurrency, Bitcoin, was introduced into the market in 2009 and remains the most popular. Kaspersky explains how each cryptocurrency is stored in “units” whose value is dependent on several market variables.
It operates on blockchain technology, where currency owners must “dig out” to get their coins. One can also buy the currency from online brokers, store it in their wallets, and use it to conduct business with companies accepting cryptocurrency payments. As a new means of conducting business payments and storing wealth, it has generated several lawsuits which have significantly shaped the behavior of all regulators in the market. We shall discuss the ten biggest lawsuits in U.S history.
10. Consumer Futures Trading Commission (CFTC) Versus BitMEX, Illegal Cryptocurrency Trading Platform ($100 million)
On August 10, 2021, the plaintiff announced that it had entered into a $100 million consent with five companies it had accused of running illegal BitMEX Cryptocurrency derivatives on their platforms. The matter was being heard in the U.S District Court for the Southern District of New York. The sued companies included 100x Holding Limited, HDR Global Trading Limited, Shine Effort Inc Limited, HDR Global Services (Bermuda) Limited, and ABS Global Trading Limited.
The consent order found that the companies were in serious contravention of the Commodity Exchange Act (CEA) as well as the CFTC’s regulations in that: though the companies were aware that U.S customers were accessing and purchasing the BitMEX digital assets, they failed to register them with the Designated Contract Market, which is the body responsible for regulating such businesses and in they also failed to register with the CFTC year they were running on the idea that they were Futures Commission Merchant(FMC). The affected entities released a joint statement assuring their customers that they will take appropriate actions to prevent the.
9. SEC Versus BlockFi Lending LLC, Failure to Register Crypto Lending Product ($100 million)
The respondent offers different crypto products to investors. The SEC had accused (in February 2022) of violating the Investment Company Act of 1940 by continuing to sell digital assets, BlockFi Interest Accounts, to investors since March 4, 2019, without proper registration. The Act requires that any company trading in the crypto lending business register with the relevant bodies within the first 60 days, yet, it had not done so for more than 18 months. To settle the matter, the respondents agreed to pay the SEC $50 million and an additional $50 million to the 32 affected states. BlockFi released a statement saying the settlement did not amount to an admission of guilt. The entity committed to registering with the SEC Act of 1993 and as per any other relevant law.
8. SEC Versus Barksdale & Others, Fraudulent Offering of Digital Tokens as Security ($124 million)
In march 8, 2022, the SEC sued Atina (Tina) and John Barksdale for defrauding Investors of more than $124 million. When filing the suit, the SEC alleged that the two were marketing the company as a successful crypto mining entity, yet it had stopped doing so in 2019 after only making a profit of $3 million. From June 2017 to April 2018, the siblings sold the “Ormeus Coin” on different cryptocurrency trading platforms. Though they were aware that the coin was not fully registered, through Ormeus Global, they continued to sell it to different parts of the world.
John was responsible for its marketing, while his sister, Tina, was behind the social media recruitment of new investors. She marketed the coin mainly through press releases and YouTube. In different forums, they tricked investors that the Ormeus Coin had a total value of $250 million. To achieve its goal of deceiving customers, it displayed a wallet belonging to another party which showed that as of November 2021, it had assets worth $190 million. According to the SEC, this amounted to clear misrepresentation of facts and obtaining money from investors in a fraudulent manner.
7. SEC Versus Vladimir Okhotnikov & Others, Creation of a Fraudulent Crypto Pyramid and Pyramid Scheme ($300 million)
According to SEC, respondents Mikhail Sergeev, Sergey Maslakov, and Jane Doe launched Forsage in January 2020 as a website that allowed investors to get into smart contracts which operated on Tron, Ethereum, and Binance blockchains. Forsage had elements of a pyramid scheme that allowed investors to profit when they recruited others. Despite being criticized by the SEC of the Philippines in March 2021, the entity continued to operate by bolstering its potential investors with adverts on different social media platforms.
The hell broke loose when it started targeting American customers, which made the SEC launch a lawsuit against it and its 11 promoters on August 1, 2022. Forsage also targeted investors in Russia, Indonesia, and the Republic of Georgia. Two defendants, Samuel E. Ellis and Sarah L. Theissen agreed to settle the matter out of court and be EXCLUDED from further proceedings. The SEC’s Crypto Assets and Cyber Unit was responsible for bringing the matter into the limelight.
6. SEC Versus GTV Media Group & Others, Offering of Unregistered Digital Assets ($539 million)
In September 2021, GTV Media Inc. and Saraca Media Group Inc. announced that they had entered into a $539 million settlement with the SEC to settle a lawsuit in which the latter had accused the former of conducting illegal digital assets, which they termed as G-Dollars or the G-Coins. The companies committed the offenses between April and June 2020. The two respondents had solicited many individuals to buy their digital assets.
During the proceedings, the court heard that the respondents disseminated the sale of the assets through their websites, YouTube and Twitter, and they were able to get 5000 investors who contributed more than $487 million. According to SEC, though the respondent managed to get the investors’ money, they could not provide legal proof that they had obtained registration statements from them. There was no clear definition of when the assets would mature. Acknowledging the deal, the SEC Enforcement Department said that the respondents acted in breach of Section 5 of the Securities Act of 1993, which demands that companies selling digital assets provide full disclosures on the assets they were offering to investors.
5. New York Attorney General (NY, AG) Versus Bitfinex, An Attempt to Stop an Alleged Cover-Up of $850 Loss
To maintain investor flow, crypto companies can manipulate financial and asset statements to portray a positive financial image. When the New York State attorney launched an investigation against the respondent, the latter rushed to court, claiming that the state AG had no jurisdiction over them. However, according to Cointelegraph, the New York State Supreme Court affirmed that state attorneys had the power to investigate any crypto company as far as it affects its residents. The ruling made by Justice Cohen on August 19, 2019, allowed the investigation of the alleged $850 million cover-up by Bitfinex and Tether to continue.
4. The Security and Exchange Commission (SEC) Versus Ripple Labs Incorporated, Sale of Digital Assets Without Registration ($1.3 Billion)
Forbes calls this case the ‘cryptocurrency lawsuit of the century for it involves hearing and determination of weighty legal matters on the new currency. The lawsuit, which was brought by the SEC in December 2021, alleged that Ripple Labs Incorporated raised more than $1.3 billion by selling and distributing digital assets of XRP, which it had not yet registered. Ripple Labs runs both the XRP and RippleNet payment protocols, which some users claim are more powerful than Bitcoin. With the lawsuit, the market value of XRP went down by 25 percent.
The key issues of the case are whether the XRP is a security or a currency, and if investors want to buy shares, should they buy them from Ripple Labs or the XRP? Secondly, the case aims to define whether the SEC has regulatory authority over cryptocurrency companies or whether it is Congress that should formulate new and independent market rules to govern the same. Lastly, the court must determine whether the SEC has the power to protect cryptocurrency customers and, if it does, to what extent it has done so. The matter awaiting determination in early 2023 will shape the crypto market for so many years to come, for it not only defines the market but also guides on how the U.S government should interact with the companies trading in cryptocurrency.
3. SEC Versus Telegram Group Incorporated, Obtaining Orders to Stop the Respondent’s Solicitation of Digital Token From U.S Investors ($1.7 billion)
Through a press release, the SEC reported that on October 11, 2019, it had filled and secured an order restraining two offshore entities that were offering unregistered digital tokens to U.S citizens. The targeted firms were the Telegram Group Inc., which in January 2018, had started to raise money to finance the development of its “TOK Blockchain.” The SEC alleged that, through its subsidiary TON Insurer Inc., the respondent persuaded investors that their money would be safe. After the launch of its blockchain, it promised the investors that they would be able to resell the coins at a higher value and make more profits.
However, the Telegram Group failed to register the offers it made to investors, which amounted to an infringement of the Securities Act of 1993. Commenting on the suit, the Enforcement Department of SEC said that it did so to prevent the respondent from flooding the U.S market with digital tokens, which it fraudulently acquired. In addition, the commission failed to disclose to investors its true financial position and the risk factors involved in such an investment.
2. SEC Versus BitConnect & Others, Defrauding of Investors ($2 billion)
The SEC has been playing a major role in protecting cryptocurrency users. The commission announced that on September 1, 2021, it had filed a lawsuit against Bitconnect and Satish Kumbhani, its founder, for allegedly defrauding investors of more than $2 billion by using fraudulent means and selling digital assets that it had not registered. Filling the lawsuit in the U.S District Court of Southern District of New York, the SEC alleged that the company committed the offenses between the start of 2017 and January 2018. To seek protection under the existing laws, Bitconnect termed the sale of digital assets a “Lending Program.”
To persuade investors into the “Lending Program,” Bitconnect claimed that it had special trading software bots which would ensure that investors would get high returns if they deposited money with them. The SEC further alleged that instead of Bitconnect investing the money in the alleged trading bots, it transferred them into digital wallets, which it solely controlled. In addition, after earning profits, it failed to disclose the total profits to the affected investors, which amounted to fraud. The suit also named BitComet’s U.S promoter, Glenn Arcaro, who created a website named ‘Future Money’ to lure more customers into the scheme.
1. Department of Justice (DOJ) Versus the Manhattan Couple, Conspiracy to Launder $4.6 Billion Stolen Cryptocurrency ($4.6 Billion)
The DOJ released a statement on February 8, 2022, saying that two persons had been arrested for laundering the money which a hacker reportedly stole from the hacking of Bitfinex in 2016. The couple, Ilya Lichtenstein and Heather Morgan, were to be presented to the court on the same day at 1500 Hours. Law enforcement officers detailed how they could trace the money from the couple’s wallet. DOJ officers said they had recovered $3.6 billion of the total $4.6 billion stolen. Commenting on the arrests, the DOJ officers said that the case was a clear demonstration that the U.S government could protect those who were enrolling in cryptocurrency. The case remains one of the greatest bitcoin breaches in U.S history.
From the above lawsuits, there is a consistent character of the involvement of crypto companies to either mislead their customers or fail to adhere to registration regulations. It also shows that no major legislation has been passed to control the crypto market, and the relevant bodies continue to use the existing laws on consumer protection. At the same time, we must appreciate the role of the SEC in protecting crypto investors. With its momentum gain, different governments must take appropriate actions to ensure that investors are not exploited.
You can also read: