The highly active cryptocurrency sector will spawn a number of new areas of litigation, experts said at the Law Society’s business litigation conference this week.
Lawyer Chloë Bell, a digital assets specialist at 3 Verulam Buildings, predicted that cryptocurrency exchanges will become a new target for claims.
She said: ‘Right now, in this jurisdiction, we’ve seen fraud victims go after bad guys or scammers. Crypto exchanges are in the mix because they are the vehicles or platforms through which fraudsters launder the proceeds of their fraud. But we have not seen cases brought by an investor, for example, against an exchange.’
Bell predicted an “uptick” in civil fraud lawsuits filed against exchanges as constructive trustees, where a fraudster has laundered crypto through the exchange. “We will see further development of those types of claims, and the exchange certainly claims to be a bona fide buyer for value in many cases. The focus will be on the role of the exchange in this type of fraud and the extent to which they can be held liable for criminal conduct on their platforms,” he said.
Bell also predicted more regulator action against cryptocurrency exchanges.
“We are far behind our US counterparts in regulatory litigation,” he said. ‘The second [Securities and Exchange Commission] and the CFTC [Commodity Futures Trading Commission] have been very active in filing claims against crypto exchanges under US regulatory laws, while our FCA [Financial Conduct Authority] he hasn’t 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 FCA perimeter breach trade [on regulated activities]but there will be more of that kind of litigation to come.’
Charlotte Hill, a senior associate at Penningtons Manches Cooper, added that the decentralized nature of the crypto market, with many start-ups, meant it was an “abundant” area for director claims.
The founder of D2 Legal Technology, Akber Datoo, has warned that the fintech sector could be affected by a large number of false selling claims in the future.
“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 kind of exaggeration of what they are providing to potential investors. In the fintech space, the quote is “fake it until you make it.” That’s really going to open things up to mis-selling claims,” she said.
Datoo added: ‘How much do we really understand what they’re telling us about how algorithmically secure these things really are? I can see that’s a big problem when things go wrong.’
Datoo added that the size of the cryptocurrency market meant capital markets trade associations were now coming under pressure from 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 sharply this year as the market entered a more difficult period dubbed a “crypto winter.”
Datoo said: ‘There is a lot of fragmented documentation right now. Everyone is dealing with some of the perceived risk in digital assets in their own way, which is quite problematic… the suggestions that people are implementing bilaterally may be sensible in their own right, but we live in a much larger ecosystem. and it is easy for one thing to affect another. It also makes it very difficult to be certain in terms of what the end result might be.”