Regulatory uncertainty creates rash of ‘novel’ lawsuits: Legal experts

Regulatory uncertainty surrounding crypto has created a “fertile environment” for crypto-related litigation and enforcement to grow, according to lawyers from Choate Hall & Stewart LLP.

In an analysis piece published on Law360 on June 28, lawyers from Choate Hall & Stewart LLP, including Mike Gass, Diana Lloyd and Alex Bevans, noted increasing evidence that “novel applications of existing laws” are being used to litigate against users and investors of cryptocurrency, predicting this trend to only accelerate over time:

“High market capitalization, alongside widely discussed regulatory uncertainty, has created fertile ground for litigation and enforcement to grow.”

The lawyers cited several cases as examples, including the prosecution of a U.S. citizen for violating sanctions using crypto, several lawsuits brought on by the SEC in recent years, as well a rising number of class action lawsuits and private litigation.

“Cryptocurrency trading platforms and those trading in and using cryptocurrency must recognize that litigation and enforcement activity is likely to accelerate in the current regulatory climate, perhaps in unpredictable ways,” the authors said.

In May, the United States Department of Justice (DOJ) issued its first criminal complaint against an unnamed U.S. citizen through the U.S. District Court for the District of Columbia for using crypto to violate sanctions under the International Emergency Economic Powers Act (IEEPA).

Lawyers from the firm, including Mike Gass, co-chair of the complex trial and appellate practice at the firm, said that this illustrates an “increased willingness of government agencies to pursue criminal charges against those violating old laws with new forms of currency.”

“If this case is any indication, this trend is likely to accelerate.”

Other litigation efforts noted by the lawyers include the Securities and Exchange Commission (SEC) lawsuits against XRP creator Ripple Labs Inc in 2020 and decentralized content sharing platform LBRY in 2021, both for allegedly offering unregistered securities in the form of digital tokens.

More recently, crypto lending platform BlockFi was issued a $100 million fine in February for failing to register its retail crypto lending product, they noted.

The lawyers said the LBRY case in particular “demonstrates the SEC's willingness to target smaller projects like LBRY as much as large projects like Ripple."

The lawyers also noted research that found that the number of crypto enforcement actions between 2019-2021 was greater than every year to that point combined.

Looking ahead, the lawyers believe that the SEC and DOJ are poised to increase their enforcement efforts, and will “likely be willing to pursue novel theories.”

“Crypto-related private litigation also shows no sign of letting up. Increased regulatory certainty may help stem the litigation tide, but it is unclear whether this will happen anytime soon.”