2018 February 26 - Volume.2 Issue.8

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2018 February 26 - Volume.2 Issue.8

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Cautioned ICO Investors Look to SEC with Class Action Lawsuits

Crypto-related litigation has seen a surge ever since the chairman of the Securities and Exchange Commission (SEC) announced that most of the ICOs that he has seen qualify as securities. Unsurprisingly, the lawsuits are against the ICOs that have been underperforming financially and they are retrospectively accused of issuing unregistered securities. Only two law firms have been involved in almost all litigation in this space but getting any of the money back is very unlikely due to the nature of cryptocurrencies.


As the awareness of cryptocurrencies and ICOs grew substantially in 2017, the number of people that lost their money investing in extremely risky crypto assets also grew. When people lose their money, even after making bad investment decisions, they turn to lawyers to help them recoup some losses.

The cryptocurrency-related class action lawsuits have seen a rise lately (table). The crypto litigation has revolved around three areas so far - exchanges, mining services and ICOs. The most notable class action lawsuits are against Kraken, Tezos and Bitconnect.

Kraken, a popular cryptocurrency exchange, is being sued for the loss of more than $300,000 due to a flash crash, which liquidated customer’s assets. After raising $232Mn in an ICO, Tezos is being targeted by multiple class action lawsuits claiming that the organizers violated U.S. securities laws and participated in investor fraud. There are also multiple class action lawsuits against Bitconnect, a cryptocurrency ponzi scheme, which collapsed in January.

The latest trend in crypto class action lawsuits is suing the ICOs that underperformed financially and accusing them of violating the securities laws in the United States. The investors, of course, knew that the tokens they invested in were not securities beforehand. But it is their best chance at recouping their losses from bad investment. This trend has especially picked up after the chairman of the SEC Jay Clayton made comments in December where he said that most of the token sales that he has seen, including most of the so-called “utility tokens”, qualify as securities and must be registered with the SEC.

There is substantially less investor protection in ICOs than in the traditional securities markets, which creates more opportunities for fraud and manipulation. The ICO tokens are in most cases bought for either Ethereum or Bitcoin. Even if the lawsuits were successful and ordered the defendants to return the funds, the cryptocurrencies would, because of their nature, be impossible to seize by any authority. Recouping any losses, even in cases where the organizers acted fraudulently, is very unlikely but not unheard of. In 2017, the entrepreneur that ran GemCoin decided to settle with the SEC and liquidate his assets (see table). However, even if the defendants are unable to pay off their obligations, they would still be held responsible.

Levi & Korsinsky, LLP and Silver Miller are representing the majority of plaintiffs against the cryptocurrency companies. Both firms specialize in high-stakes securities and class action lawsuits. This is just another example of polarization in the crypto space. Jay Clayton’s comments combined with many crypto assets underperforming in January have created a litigation wave against ICOs.

Class Action Lawsuits Against Cryptocurrency-Type Operations Gain Traction

Date Company Business Type Law Firm Reason for lawsuit
October 8, 2015 Gemcoin Cryptocurrency The Liu Law Firm Investor Fraud, Ponzi Scheme
June 6, 2016 KnCMiner Bitcoin Mining Law Office of Charlotte C Lin Investor Fraud
June 16, 2016 GAW Miners Cryptocurrency Mining Susman Godfrey, Izard, Kindall & Raabe Violating U.S. Securities Law, Ponzi Scheme
February 1, 2017 Cryptsy Exchange Silver Miller, Wites & Kapetan Fraud
July 5, 2017 Kraken Exchange Silver Miller Flash crash
October 21, 2017 Tezos Smart Contract System (ICO) Taylor-Copeland Law, Restis Law Firm, Silver Miller, Levi & Korsinsky Violating U.S. Securities Law, Investor Fraud
December 15, 2017 Centra Tech Crypto Debit Card (ICO) Levi & Korsinsky, Komlossy Law Violating U.S. Securities Law
December 20, 2017 Monkey Capital Hedge Fund (ICO) Silver Miller Violating U.S. securities law
December 27, 2017 ATBCoin Cryptocurrency (ICO) Levi & Korsinsky Violating U.S. securities law
January 1, 2018 The Crypto Company Cryptocurrency Consultant Brower Piven Misinformation of Investors
January 3, 2018 Giga Watt Bitcoin Mining (ICO) Silver Miller, Terrell Marshall Law Group Violating U.S. Securities Law
January 15, 2018 Vircurex Exchange Levi & Korsinsky Frozen Funds
January 25, 2018 BitConnect Cryptocurrency, Platform (ICO) Silver Miller, Levi & Korsinsky Violating U.S. Securities Law, Ponzi Scheme
January 31, 2018 ParagonCoin Blockchain Marihuana Company (ICO) Levi & Korsinsky Violating U.S. Securities Law

Class Action Lawsuits Against Cryptocurrency-Type Operations Gain Traction

Date Company Business Type Law Firm Reason for lawsuit
October 8, 2015 Gemcoin Cryptocurrency The Liu Law Firm Investor Fraud, Ponzi Scheme
June 6, 2016 KnCMiner Bitcoin Mining Law Office of Charlotte C Lin Investor Fraud
June 16, 2016 GAW Miners Cryptocurrency Mining Susman Godfrey, Izard, Kindall & Raabe Violating U.S. Securities Law, Ponzi Scheme
February 1, 2017 Cryptsy Exchange Silver Miller, Wites & Kapetan Fraud
July 5, 2017 Kraken Exchange Silver Miller Flash crash
October 21, 2017 Tezos Smart Contract System (ICO) Taylor-Copeland Law, Restis Law Firm, Silver Miller, Levi & Korsinsky Violating U.S. Securities Law, Investor Fraud
December 15, 2017 Centra Tech Crypto Debit Card (ICO) Levi & Korsinsky, Komlossy Law Violating U.S. Securities Law
December 20, 2017 Monkey Capital Hedge Fund (ICO) Silver Miller Violating U.S. securities law
December 27, 2017 ATBCoin Cryptocurrency (ICO) Levi & Korsinsky Violating U.S. securities law
January 1, 2018 The Crypto Company Cryptocurrency Consultant Brower Piven Misinformation of Investors
January 3, 2018 Giga Watt Bitcoin Mining (ICO) Silver Miller, Terrell Marshall Law Group Violating U.S. Securities Law
January 15, 2018 Vircurex Exchange Levi & Korsinsky Frozen Funds
January 25, 2018 BitConnect Cryptocurrency, Platform (ICO) Silver Miller, Levi & Korsinsky Violating U.S. Securities Law, Ponzi Scheme
January 31, 2018 ParagonCoin Blockchain Marihuana Company (ICO) Levi & Korsinsky Violating U.S. Securities Law

Steve Chen, the entrepreneur behind GemCoin, was sued by the SEC for running fraudulent operation in 2015. Two years later, Mr. Chen agreed to settle the lawsuit for $71Mn by liquidating his companies’ assets. GemCoin also faced a class action lawsuit filed in state court in Los Angeles.

Gibraltar Token Regulations Slated for 2Q18 Parliament Consideration

The Government of Gibraltar and the Gibraltar Financial Services Commission (GFSC) announced earlier this month that the regulator is working on new legislation to regulate tokenised digital assets that will also address the trading markets and cryptocurrency investment advisors. Should the regulators framework be approved by parliament, this would make it the first encompassing law in the world that governs tokens.


There is no debate from GFSC on whether or not a token will classify as a security. Siân Jones, Senior Advisor to the GFSC tells Diar that “EU Legislation has closely defined what a security is.” The Initial Coin Offering (ICO) framework that the GFSC will handover to government dubbed as “The Token Regulations”, will be provisions that apply to those that are not securities.

The proposed Token Regulations have been split into three main categories to address the various parts of the industry. The Primary Market Activities, which aims to address crowdfunding through ICOs, will establish disclosure rules and include financial crime provisions such as due diligence, anti-money laundering (AML) and countering terrorist financing requirements. The Secondary Market Activities will address the conduct of companies that to ensure transparency and fair price formation. The final part of the proposed framework will be related to cryptocurrency investment advisors – for the time being, this excludes hedge funds.

The proposed regulation seeks to protect investors, but also support the use of tokens as means of crowdfunding, Diar understands. 

|| DIFFERENT INTERPRETATION?

The latest guidelines released by Swiss regulators FINMA seem to have placed the majority of ICOs square into the securities category due to issuing a token and raising capital before its actual application is complete.

The ICO guidelines published by FINMA earlier this month discusses their viewpoint on how to define a token and whether or not it falls into current existing financial market regulations.

And while at this point in time, there is no actual law in place that governs ICOs, many cryptocurrency companies have descended upon the neutral country as the regulator has been accommodating. Companies holding ICOs have found cover under a non-profit foundation umbrella which has been used during fund raising periods.

However, the latest guidelines state that a token will be considered a security when “tokens are already put into circulation at the point of fund-raising. This takes place on a pre-existing Blockchain. In other types of ICO, investors are offered only the prospect that they will receive tokens at some point in the future and the tokens or the underlying Blockchain remain to be developed. This is referred to as pre-financing. Pre-sale represents another possible permutation. In this case, investors receive tokens which entitle them to acquire other different tokens at a later date.”

The fact that FINMA has seemingly placed most ICOs into the securities category, does not mean that GFSC has a different stance from their Swiss counterpart. It does mean, however, that companies seeking to do an ICO under a regulated platform, the only one should it be passed by the Gibraltar parliament, which will inherently give credibility to a space that has witnessed a plethora of failed projects (see story below) will have to work within a new disclosure framework – the details of which this publication will keep its readers posted on.


Wyoming US House of Representatives Pass Blockchain Bills
The Wyoming US House of Representatives last week passed two legislative bills that will be sent to the US Senate for consideration, whereby, utility tokens will neither be considered as traditional money requiring KYC/AML compliance, nor a security token should the developers not market the token as an investment opportunity, the token be exchangeable for goods or services at the point of issuance, and the developer has not entered a repurchase agreement or sought out buyers.

Torrent of Failed ICO Projects in 2017, But Lost Funds Still Minuscule

A study by Bitcoin.com found that a whopping 46% of ICOs launched in 2017 failed. The number shoots up to an eye-balling 59% if one is to include projects that will also most likely fail in the near future. And while the total amount lost is to the tune of $233Mn, the sum only represents 4% of the total funds raised in 2017. Maybe investors are more savvy than meets the eye after all?


While Total Funds Raised of Failed Projects is Small...

...Number of Failed Projects is Staggering 

Total Raised By Initial Coin Offerings in 2017


Source: TokenData.io, Bitcoin.com

Venezuelan Cryptocurrency, Petro, Launches In Peculiar Fashion

Less than 3 months ago, Venezuelan President Nicolas Maduro made a televised announcement that his economically embattled nation will launch its own cryptocurrency, the Petro, backed by its oil & gas, gold and diamond reserves – an approach at possibly circumventing US sanctions through a globally traded digital currency (Diar, 4 December 2017).

Last week saw the first such national cryptocurrency be launched in what appears to be a botched attempt albeit claims by the Venezuelan government of having raised $735Mn. 100Mn Petros (priced at $60 per coin – approx. the market rate for a barrel of crude) were issued, but have not moved from the single wallet address on the blockchain.

While the Petro was initially slated to be launched on the Ethereum blockchain, a last minute switch saw the cryptocurrency land on the NEM platform. A meeting with executives from Zeus, a start-up Russian outfit that aims to launch an exchange marrying traditional securities and cryptocurrencies, and government officials took place just before the launch. Zeus, a NEM Foundation partner, aims to start operations in April 2018, according to its official roadmap.

Which begs the question – is the Petro awaiting to be traded on the Zeus exchange? Possibly the rumoured Venezuelan MonkeyCoin Exchange? Details remain scant as to the success or failure of the cryptocurrency.

Google Continues Rebrand Exercise with Andriod Pay

Followings the branding of Google Wallet, a Peer-to-Peer tool that was limited to US and UK residents to send each other funds in an easy way, Google has rebranded Andriod Pay to Google Pay bringing congruency across its money transfer business.

While the number of countries where major NFC enabled wallets are few (see graph), and almost exclusively in the developed world. And the digitisation of currency is slowly becoming inevitable with the increased use of smart phones.

And while the cryptocurrency user experience has indeed come a long way, it remains in early stages. Google, Apple and Samsung Pay, along side mobile banks like Square Cash, Revolut, N26, among other, are providing a service that is accessible, has wide-acceptance, low cost, and easy to use.

Countries Accepting The Three Major Mobile Payments Providers

Revolut Goes it Alone
Revolut no longer relies on Wirecard as their MasterCard issuer as they now issue their own cards in-house. Revolut experienced payment outages in 2017 caused by technical issues of Wirecard. Revolut added cryptocurrencies to their platform and this move helps bypass any possible cutoffs from issuing banks that other cryptocurrency card operations have faced recently (Diar, 8 January).
Bitfinex Announces SegWit Support
Following Coinbase who last week announced that SegWit support on GDAX was live (as well as batching transactions) for their bitcoin transactions, the largest cryptocurrency exchange, Bitfinex, also announced that they will begin supporting the protocol. Lower congestion on the Bitcoin network will ultimately result in lower fees and faster processing times.
Bank of America – Adapt or Die
In its annual report to the SEC, Bank of America said that cryptocurrencies may be part of a new wave of financial services that the banking behemoth has to adapt to as it looks to expand in new markets where non-US financial institutions have less stringent capital and liquidity requirements. The report did highlight KYC/AML concerns with cryptocurrencies.
Bank of China Patents Blockchain Scaling Solution
Bank of China, the state-owned commercial bank, has filed a patent with China's State Intellectual Property Office (SIPO) to improve the scalability of blockchain systems. The solution proposes to compress the information from multiple blocks to a "data block" without compromising on being tamper-proof and traceable.
Volkswagen partners with IOTA
Volkswagen Group’s Chief Digital Officer (CDO) Johann Jungwirth announced at Bosch Connected World 2018 Conference that Volkswagen has partnered up with IOTA. Mr Jungwirth said that he is a big believer in Tangle, the underlying technology of IOTA.
Putin: Russia Needs Blockchain
Vladimir Putin, President of the Russian Federation, said in a meeting with Herman Gref, the CEO of the largest Russian bank Sberbank, that Russia needs to adopt new technologies and be active in the blockchain industry before it’s too late.
Israeli Tax Authorities Classify Bitcoin
Much like their US counterparts, the Israeli tax authorities classified Bitcoin and cryptocurrencies as property last week. But details (also like the US tax authorities) are scant with no information on what cost basis will be used for the calculations.
Austria Inspired by Gold for Regulating Crypto
Austria’s finance minister Hartwig Löger is considering regulating cryptocurrencies similarly to gold and derivatives in order to prevent them from facilitating money laundering. Investors would have to report trades exceeding 10,000 euros.

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