Cryptocurrencies Face Rise in Investor Class Actions

After a surge in popularity and an increased interest from regulators, virtual currencies — also known as cryptocurrencies — have entered into a new phase in their relatively short history, with an increase in class actions targeting the emerging assets.

The emergence of cryptocurrency class actions comes after the market witnessed a rapid rise in the number and value of initial coin offerings (ICOs) in 2017, which prompted financial regulatory agencies to ramp up their focus on virtual currencies correspondingly. Most notably, the Chairman of the Securities and Exchange Commission previously announced that cryptocurrencies may be subject to U.S. securities laws — an announcement that has done little to dampen the market’s enthusiasm for cryptocurrencies — and has also secured several emergency freezes against fraudulent ICOs in recent months.

Another emerging cryptocurrency narrative is the launch of several class actions focused on virtual currencies and their ICOs. Perhaps the most prominent of these is blockchain project Tezos, which faces a series of class actions in the wake of its $232 million ICO in 2017, while other cryptocurrencies such as Ripple are also facing litigation from investors. Investment advisers involved with cryptocurrency offerings and other transactions should be aware of these class actions and monitor their progress as the courts begin to determine how securities laws will be applied to virtual currencies.

The first class action against Tezos was filed in California in October 2017. It named multiple defendants, including founders Kathleen and Arthur Breitman and Johann Gevers, the head of the nonprofit Tezos Foundation, alleging they violated U.S. securities law through the sale of unregistered securities, and also alleged defendants committed securities fraud and engaged in false advertising and unfair competition in the form of material misrepresentations and omissions during the ICO. In April of 2018, another class action was filed in California. Significantly, both class actions allege violations of federal and state securities laws, and seek rescission and compensatory damages, demonstrating the complex nature of the risk facing cryptocurrencies that run afoul of investors.

Similarly, fintech startup Ripple Labs Inc. is also facing a slew of class action complaints after its XRP tokens became the world’s third-largest cryptocurrency. The first class action, filed in the Superior Court of California, alleged the company violated state and federal laws by offering unregistered securities to retail investors. It further alleged that Ripple attempted — but ultimately failed — to bribe digital currency exchanges Coinbase Inc. and Gemini Trust Co. LLC in order to get them to list XRP. Although the effort was unsuccessful, plaintiffs argue that Ripple profited from the price increases that resulted from the rumored potential listings. At least three class actions have been filed against Ripple, all arguing the same general allegation that the company violated securities laws and that XRP has the “hallmarks of a security.”

Tezos and Ripple represent only two of the cryptocurrency companies currently facing a class action complaint. Although cryptocurrencies and ICOs still enjoy a high level of popularity, the increased regulatory activity and class action litigation demonstrate they are not without risks. Advisers involved in such products and transactions will be paying close attention as these cases work their way through the courts.