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Trillion-dollar cryptocurrency collapse sparks wave of US lawsuits – who is to blame? | Cryptocurrency

WAs investors around the world eye a collective loss of $1.5 trillion in cryptocurrencies, a storm of class action lawsuits is being prepared. One of the big questions is: Who is to blame – and who can be held accountable?

With rising inflation and interest rates, the best cryptocurrencies have experienced massive and continuous losses: Bitcoin has lost more than 50% of its value this year; Shares of Ethereum, its largest competitor, fell 65%. The total value of crypto assets has fallen to less than $1 trillion from the November 2021 peak of $3 trillion. US federal regulators say 46,000 people have reported losing $1 billion in cryptocurrency due to fraud since January 2021.

With millions pouring in to promote cryptocurrencies – often with celebrity endorsements – post-crash legal action was inevitable. Class action lawsuits are already in the works. Kim Kardashian and boxer Floyd “Money” Mayweather Jr. sue her For allegedly false statements promoting EthereumMax secondary cryptocurrency.

The lawsuit alleges that they encouraged followers to join the “EthereumMax community” and that the coin itself was a “pump and dump” scheme that deceived investors.

Charles Rundle, head of the UK’s Financial Conduct Authority, said in a Speech To a seminar on economic crimes he could not determine if the token was “a scam… but social media influencers are routinely paid by scammers to help them pump and dump new tokens on a purely speculative background.”

EthereumMax described the legal claim as a “disingenuous narrative.”

Kardashian and Mayweather weren’t the only celebrities who pursued cryptocurrency. In October of last year — at the height of the market, when the market capitalization of bitcoin reached $1.14 trillion — actor Matt Damon debuted as crypto.comShe advises viewers that “wealth is for the brave.” The announcement was seen as a turning point for crypto – a financial investment backed by Hollywood A-Lister.

Other digital assets are also under scrutiny. earlier this month, The Ministry of Justice in charge Nathaniel Chastain, former employee with NFT OpenSea Marketwith telegraphic fraud and money laundering in connection with the NFT trading scheme [non-fungible tokens] origins.

“NFTs may be new, but this type of criminal scheme is not,” said US attorney Damien Williams. He said the charges showed prosecutors’ determination to “eliminate insider trading – whether it takes place in the stock market or the blockchain”.

But prosecuting cryptocurrency fraud is notoriously difficult. A number of theft prosecutions have been filed, but digital fraud prosecutions face a central unresolved question: Are cryptocurrencies a security?

The US definition of what security is is based on something called the “Howey test” and is derived from a Supreme Court ruling, The Securities and Exchange Commission (SEC) v. W.J. Howey Co. I decided in 1946, long before the age of cryptography.

Floyd Mayweather has been sued for promoting EthereumMax.
Floyd Mayweather has been sued for promoting EthereumMax. Photo: Ethan Miller/Getty Images

There are four pillars that support whether or not a financial asset qualifies as security: (i) the investment of funds; (ii) in a joint venture; (3) With the expectation of profit; and (4) that profit comes from the efforts of others.

If cryptocurrencies are a security, the Securities and Exchange Commission (SEC) – the largest financial watchdog in the US – has jurisdiction, fraudulent selling of unregistered securities can be a felony, with a penalty of up to five years in prison. But the law is far from clear.

“Cryptocurrency is a strange bird – is it a coin, buying a dollar, or the right to invest in a dollar?” says Charles Elson, who is responsible for corporate governance issues. A lot depends on what people were offered, and whether any federal laws were broken in exchanging these things. Usually, the SEC will always argue that something is a security and let the courts decide.”

The question of whether celebrities can be held responsible is an open question. First, courts will have to decide whether encryption is security, and then whether that security has been fraudulently enhanced.

Did they say, ‘Oh, this is an easy investment you don’t have to worry about? “Did they lie to attract investment?” says Elson. “There will be lawsuits and the courts don’t like fraud and usually find a way to punish a fraudster.”

But if the law around the area is ambiguous, and these things aren’t safety, how can you recover? You may feel good about winning, but you won’t get any money. Where did the money go? Why do criminals use bitcoin and ransomware? It can’t be tracked.”

As commentators pointed out this week with the collapse of the cryptocurrency markets, no cryptocurrency has been registered as collateral; And the The exchanges or lenders you may pass through are not supported by the government Federal Deposit Insurance Corporation (FDIC) Insurance Collateral.

The US Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrency to be legal tender but considers cryptocurrency exchanges to be legal money senders On the grounds that cryptocurrency tokens are “another value to replace currency.”

The Securities and Exchange Commission ruled in a message In 2019, That Bitcoin Failed Howey Test, meet only “investment” criteria. In 2018, Gary Gensler, former chair of the Commodity Futures Trading Commission, said that Bitcoin’s biggest competitor, Ethereum, would pass Howey’s test and that most cryptocurrencies would Must be registered as securities with the Agency. But there are also efforts in Congress To write legislation for the cryptocurrency industry It could jeopardize regulators’ oversight of the industry.

Since cryptocurrencies operate in different ways through different exchanges that charge different fees for trading, defining any liability is complicated, and most of them have an army of lawyers willing to argue that the exchanges are “safe havens” and not exchanges.

On Monday, the crypto exchange Binance Withdrawals stopped of bitcoin for several hours after the network of crypto lender Celsius also prevented customers from withdrawing, trading and transferring on its platform. Binance blamed a “deal on hold” for putting it on hold.

The next day, the Securities and Exchange Commission (SEC) launched an investigation into whether cryptocurrency exchanges It has the proper safeguards to prevent insider trading. The investigation is believed to involve the best known exchanges – Binance, Coinbase, FTX, Crypto.com, Kraken, Bitfinex and Crypto.com.

Ultimately, says Elson, the law across cryptocurrency and its exchange systems will come down to disclosure. “Have I told people the truth about this thing, was it based on fair trading practices or was it a trading system that was rigged against the investor?”

But since cryptocurrency exchanges are not regulated by the SEC, and it is difficult to know who is on the other side of the trade, it will be difficult to assign responsibility for losses.

“The lesson to learn is that you don’t invest in an unregulated market,” Elson said.

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