On Friday, a barrage of lawsuits were filed against 11 top crypto companies, including Binance, BitMEX, Block.one, Tron Foundation, Civic, Status and Bancor Protocol. They claim that these companies sold securities without a licence—referring to the spate of initial coin offerings (ICOs) conducted over the last few years.
And they’re not without rhyme or reason. The SEC has already argued that all ICOs are, in fact, unregistered security offerings and reached settlement agreements with Block.one, Enigma and other ICO providers—giving the lawsuits some basis.
The EOS token sale raised $4 billion. Now Block.one is getting sued again. Image: Shutterstock.
The lawsuits could have far-reaching implications across the crypto industry. During the ICO boom, $22 billion in tokens were sold to millions of investors. These tokens are being traded daily on crypto exchanges, with volumes in the billions of dollars per day. But could anyone have seen this coming?
“The allegations made in these lawsuits mirror comments that attorneys in the space have made privately among themselves for years,” Preston Byrne, partner at law firm Anderson Kill, told Decrypt. “Many sales of cryptocurrency directed towards the United States in the 2014-18 period likely offended US securities laws.”
While these lawsuits have been a long time coming, it doesn’t seem like they will be over any time soon.
The lawsuits could drag on for years
Several commentators argued that the lawsuits will take a long time to work their way through the courts. “When Roche Freedman filed the barrage of class action lawsuits over the weekend, it certainly caused a stir, alleging that some of the biggest crypto exchanges and token issuers in the world violated securities laws. This will no doubt play out for years in the courts,” said Alexander Blum, COO of fintech company Two Prime.
The exchanges, at least, have deep pockets to fund their legal counsel. Crypto exchange Binance, for example, made $500 million profits in its first year alone—and later shrugged off a $40 million hack as a learning experience. Some of the token issuers are well-funded too; Block.one raised $4 billion in its EOS token sale, a war chest it has already used to fend off the SEC. But the lawsuits will be costly.
“Cutting corners on compliance might look like the quick and easy path today, but it can lead to years of expensive litigation down the road,” Byrne said. “Ensuring compliance is done correctly from the start can help avoid these kinds of headaches.”
How will the class-action lawsuits play out?
While the commentators agreed on how long the class-action lawsuits will take, they were split on how they’ll be resolved.
“One way is that since the cases will be determined by US courts, it will force precedence on what constitutes as a securities offering, who is responsible for it, and under what jurisdiction,” said Blum.
Mati Greenspan, founder of Quantum Economics, agreed. “This will likely be a precedent setting case where the judge draws a much more tangible line between securities and utility tokens in the US,” he said, noting that the ruling will likely come down to the merits of the project and how the court finds that it passes or fails the Howey Test.
“In short, we’re gonna get a lot more clarity from the US judicial system about what crypto projects are legal and which are not,” he added.
Alternatively, the cases could be settled privately.
“There are also companies that may not want to deal with the hassle of a lawsuit and may want to settle out of court,” said Blum. “That is part of the bet the law firm is taking—that there may not be any legal decision, but the law firm will get a piece of the settlements.”
If the cases are settled quietly, they won’t provide any regulatory clarity. Image: Shutterstock.
If this were to happen, then the settlements would be kept private and there would be little clarity on regulation.
Even if some of the cases are settled, others might go to a court ruling. “There are 11 different defendants here, so likely some will triumph and some will fail,” Greenspan pointed out.
Since the lawsuits are being brought by private individuals, rather than the government, the crypto projects have a “fighting chance” to win in court, he said, adding, “This isn’t a red wedding massacre—more like an evenly matched skirmish—but the outcomes could have vast reaching implications.”