The meteoric rise in popularity of cryptocurrency in the investment sphere has generated significant challenges for the legal system. Since 2020, courts have been absorbing the litigation resulting from cryptocurrencies’ reputation as the next “hot investment,” as well as dealing with the litigious fallout from the previous cryptocurrency meltdown in 2018. As such, disputes arising from various transactions involving cryptocurrencies are becoming a permanent fixture in both the courts (see the recent meltdown of Ether and Coinbase) and the administrative state. Indeed, the increased scrutiny of cryptocurrencies by the SEC has created its own cultural zeitgeist, as recently seen in SEC’s actions against Kim Kardashian. Our paper seeks to provide an empirical snapshot of the types of actions the courts have been absorbing from the crypto-sphere. As our paper covers the 2020-present time period, the litigation that we studied mostly reflects disputes that started earlier than 2020. Nonetheless, our results should provide insight on what kinds of actions the current cryptocurrency “meltdowns” may bring in front of the judiciary.
Using the Westlaw database, we used the keyword “crypto!” from the time period of 2020 until July 20, 2022 to draw forth 299 distinct cases from both state (6%) and federal courts (94%). We chose this time period as it captures the litigation developments that began around the last crash of Bitcoin in 2018. Cases were then cataloged in accordance with jurisdiction, year, and causes of action alleged. As most of the cases included several causes of action, our total count of actions was approximately twice the number of cases (573).
When looking directly to what causes of action make up this body of litigation, we discovered quite a robust range of different actions. The courts, both state and federal, have been quite busy parsing through the ramifications of the relative volatility of cryptocurrency investing. While the bulk of litigation centered upon more “traditional” allegations that accompany unsavoury business activities, including fraudulent investment opportunities, regulatory infractions, negligence and unfair business practices, bankruptcy, tax cases, trademark infringements, and contract disputes, there were also criminal and utility actions unique to the crypto-sphere.
Not unexpectantly, the vast majority of causes of action were taken by disgruntled investors alleging fraudulent activity by the cryptocurrency purveyor. Of the cases we catalogued, 18% alleged fraudulent activity against various defendants, with most bringing forth parallel claims of fraudulent misrepresentation and inducement in soliciting investments. This finding gives prominence to the allegations of Ponzi and pyramid schemes surrounding cryptocurrency investment. Most recently the headline-making lawsuit against Elon Musk for his alleged involvement in perpetrating a Ponzi scheme involving the cryptocurrency Doge Coin has brought these cases to the forefront of public consciousness.
In addition to private actions sought by investors, various federal agencies pursuing actions alleging violations of federal statutes represented 10.8% of the causes of action catalogued. Often these actions were taken by the SEC and CFTC. Frequently, these actions arose in response to alleged violations of the Securities Exchange Act (7.33% of our canvassed causes of action) and Commodities Exchange Act (1.57%). Given increased calls for regulation of cryptocurrency this area could be expected to dominate crypto-litigation in the future.
Interestingly, there were several causes of action that seemed rather unique to the cryptocurrency arena. First, with regard to criminal prosecutions, cryptocurrency was often used as a direct substitute for traditional monetary methods in transactions involving the trafficking and financing of illegal substances and activities (6% of causes of action). The prominence of these actions may be owed to the anonymity often thought associated with crypto exchanges.
Additionally, within the criminal realm were several instances of fourth and fifth Amendment challenges related to the seizure of crypto assets. Questions of asset forfeiture and search and seizure are especially unique in regard to crypto given the nebulous nature of its past classifications as property, quasi-property, or currency. Motions to compel discovery of crypto assets, fourth and fifth Amendment challenges, and actions related to search and seizure comprised approximately 3% of our total causes of action.
Eight percent of the total catalogued causes of action fell in the area of contract disputes. While many involved more traditional business operation and employment contract issues, several cases emerged as quite novel to the crypto sphere. These actions involved contract disputes between cryptocurrency mining operations and utility companies. The large energy drains that crypto mining operations place on power companies was central to these disputes regarding the provision and cost of utilities. While utilities’ disputes themselves may not be original, their prominence may be of interest as a greater number of “mining” operations are established.
Given cryptocurrencies’ unique existence online, 3% of the causes of action were taken in relation to allegations of monetary loss following instances of “hacking.” Many allegations related to “traditional” hacking practices such as the use of malware and proxy scanners to steal cryptocurrencies directly. However, there were also a handful of unique hacking cases alleging “SIM-swapping” schemes. In those instances, the plaintiffs alleged that prominent phone companies were negligent in allowing hackers to access and drain their cryptocurrency accounts.
Following the last cryptocurrency collapse, the past two and a half years of cryptocurrency litigation have confronted the judiciary with a wide variety of issues. Although disputes over non-fungible tokens (NFTs) did not appear in our sample, this may be a feature of their nascent litigation existence. As such, we expect that newer popular investment modalities, including NFTs, will emerge to challenge the courts’ understandings. That being said, given the existing and fast developing jurisprudence, the courts appear to have garnered a wide base of knowledge to deal with the fallouts from the vacillating popularity of traditional and novel crypto investments.
Nicole Pecharsky is a J.D. Candidate (2024) at the University of Alberta Faculty of Law
Moin Yahya is a Professor at the University of Alberta Faculty of Law
This post is adapted from their article, “Crypto-Litigation: An Empirical Overview for 2020-Present” forthcoming at SMU Science and Technology Law Review, and SSRN.