With investors worldwide eyeing $1.5 trillion in cryptocurrency losses in recent times, a storm of class action lawsuits is being prepared. A big question is: Who, if anyone, is to blame?
See: Bitcoin breaks below $20,000 as cryptocurrency keeps rolling
US federal regulators say 46,000 people have reported losing $1 billion worth of crypto to fraud since January 2021.
With millions poured into promoting crypto — often with celebrity endorsements — legal action in the wake of the crash was inevitable. Class action lawsuits are already in the works, the Guardian reported on Saturday.
Kim Kardashian and boxer Floyd “Money” Mayweather Jr. are being sued for allegedly making false statements about promoting small cryptocurrency EthereumMax.
The lawsuit alleges that they encouraged followers to join “the EthereumMax community” and that the token itself was a “pump-and-dump” scheme that deceived investors.
Charles Randell, head of the UK’s Financial Conduct Authority, speaking at a symposium on white-collar crime, said he couldn’t say whether the token in question was a “scam…but social media influencers are routinely paid by scammers to help them in the market.” To help pump and dump new tokens on the back of pure speculation. EthereumMax has called the legal claim a “deceptive narrative.”
Last October, actor Matt Damon made his debut as Crypto.com’s pitchman, advising viewers that “fortune favors the brave.” The ad was seen as a turning point for crypto – a financial investment backed by a Hollywood A-lister.
See: This is how much money you would have lost if you bought crypto during Matt Damon’s “Fortune Favors the Brave” commercial
Other digital assets are also put to the test. Earlier this month, the US Department of Justice indicted Nathaniel Chastain, a former employee NFT marketplace OpenSeawith wire fraud and money laundering in connection with a plan to trade NFT assets.
But tracking scams in the crypto arena is difficult. A number of criminal cases have been launched for theft, but the prosecution of digital fraud runs up against an unresolved question: are cryptocurrencies securities?
The US definition of what a security is relies on what is known as the “Howey test,” which stems from a 1946 ruling by the Supreme Court, the Securities and Exchange Commission (SEC) v. WJ Howey Co , long before the crypto era.
See: SEC Chief Gensler Says Crypto Crash “Highlighted” Need for Regulation
If cryptocurrency is a security, the US SEC has jurisdiction, and fraudulently selling unregistered securities could be a criminal offense with up to five years in prison.
The question remains whether the celebrity pitchers could be held liable. First, the courts would have to decide whether crypto is a security and then whether that security was fraudulently promoted.
As commentators pointed out this week, as crypto markets crashed, no cryptocurrency has registered as a security, and exchanges or lenders they might pass are not backed by the government’s Federal Deposit Insurance Corporation (FDIC) Insurance Guarantees.
On Monday, crypto exchange Binance halted Bitcoin withdrawals for several hours after crypto lender Celsius Network also blocked customers from using its platform for withdrawals, exchanges, and transfers. Binance blamed a “stalled transaction” for the suspension.
See: Binance Resumes Bitcoin Withdrawals as Crypto Prices Plunge
The following day, the SEC launched an investigation into whether crypto exchanges have adequate safeguards in place to prevent insider trading. The investigation is believed to include the most prominent exchanges – Binance, Coinbase, FTX and Crypto.com, Kraken, Bitfinex and Crypto.com, the Guardian reported.