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Crypto market rife for new areas of litigation

By Rachel Rothwell >>

(8 September 2022)

The highly active cryptocurrency sector will spawn a raft of new areas of litigation, experts told the Law Society’s commercial litigation conference this week.

Barrister Chloë Bell, specialist in digital assets at 3 Verulam Buildings, predicted that crypto exchanges are set to become a new target for claims.

She said: ‘At the moment in this jurisdiction we’ve seen victims of fraud going against the baddies or fraudsters. Crypto exchanges are in the mix because they are the vehicles or platforms through which the fraudsters launder the proceeds of their fraud. But we haven’t seen cases brought by an investor, for example, against an exchange.’

Bell predicted an ‘upturn’ in civil fraud claims brought against exchanges as constructive trustees, where a fraudster has laundered crypto through the exchange. ‘We’ll see greater development of those kinds of claim, with the exchange no doubt claiming to be a bona fide purchaser for value in many instances. Focus will move on to the exchange’s role in these kinds of fraud, and the extent to which they can be held responsible for criminal conduct on their platforms,’ she said.

Bell also predicted more action from regulators against crypto exchanges.

‘We are well behind our American counterparts on regulatory litigation,’ she said. ‘The SEC [Securities and Exchange Commission] and the CFTC [Commodity Futures Trading Commission] have been very active in bringing claims against crypto exchanges under US regulatory laws, whereas our FCA [Financial Conduct Authority] has not really taken up that mantle yet. There is already one [such] claim pending in our courts; one of the first of its kind against an exchange for breach of the FCA perimeter [on regulated activities], but there will be more of that kind of litigation to come.’

Charlotte Hill, senior associate at Penningtons Manches Cooper, added that the decentralised nature of the crypto market, with many start up companies, meant it was an area ‘rife’ for directors’ claims.

Founder of D2 Legal Technology Akber Datoo warned that the fintech sector could be hit by a large number of misselling claims in future.

‘The fintechs are creating this very innovative new product and asset class. Given the very nature of the participants, it comes with the territory that there is a sort of exaggeration of what they are providing to potential investors. In the fintech space, the quote is “fake it ‘til you make it”. That‘s really going to open things up to misselling claims,’ he said.

Datoo added: ‘How much do we really understand what we’re being told about how algorithmically secure these things really are? I can see that being a big problem when things go wrong.’

Datoo added that the size of the cryptocurrency market meant capital markets trade associations were now being pushed by members to address the need for a proper legal framework, with the International Swaps and Derivatives Association (ISDA) currently developing legal standards to support the crypto derivatives market. Crypto assets were valued at $3 trillion in November 2021, but fell dramatically this year as the market entered a period dubbed the ‘crypto winter’.

Datoo said: ‘At the moment there is a lot of fragmented documentation. Everyone is dealing with some of the risk they perceive in digital assets in their own very bespoke way, which is pretty problematic… the suggestions that people are bilaterally putting in place might be sensible in their own right, but we live in a much broader ecosystem and it’s easy for one thing to impact another. It also makes it very difficult to get certainty in terms of what the end result might be.’

(Courtesy: The Law Society Gazette)