Modern Tulip Mania?
In mid December 2017, I caught up with a friend (who also happens to be a very sensible corporate lawyer), who told me with wide excited eyes that he had recently bought some cryptocurrency and he was monitoring his crypto-market app (Coin Stats) more than his new born child.
My initial response: Everyone is talking about blockchain and crypto-coins, but I don’t even understand how they work… Several weeks later this same friend informed me his crypto coin holding had quadrupled in value over the holiday season.
I was suddenly overcome with intense SIHMO (Scared I had missed out): $100 invested into a new crypto-currency now could become $1M if the currency hits BitCoin heights…what if it was $200… I fully recognised that this line of thinking is precisely the sort of insanity that surrounded Tulip trading in Europe in the 1600s, where one tulip bulb was apparently exchanged for 12 acres of land, before the market crashed in 1637.
Anyway, fast-forward two weeks later and after much research into cryptocurrency, I learned the following things:
- There are many different cryptocurrencies, the most famous being BitCoin – but others include LiteCoin, Ethereum, Eth-Classic, Ripple, BCash.
- Each cryptocurrency has different uses, and most are able to be used to purchase online services without fees (provided the website accepts your cryptocoin).
- Cryptocurrency payments are generally verified through a public online ledger known as ‘the blockchain’. What is the blockchain?? Here is a helpful explainer.
- To trade in cryptocurrencies, you need to open an account on a cryptocurrency exchange and you may also need a cryptocurrency wallet. Some exchanges are hybrids and have a wallet included in the exchange profile.
- Cryptocurrency exchanges are not regulated or part of any official stock exchanges – and it is this problem which has led to significant market collapses and unreliability (more details below).
As far as an Australian cyrptocurrency market, I went for btcmarket.net which had the least invasive verification process (just enter your driver’s licence number). Finally, after attempting to discern between the various cryptocurrencies’ uses and applications, I took the plunge – and for the last three days I have been the clueless owner of a (very) small amount of crypto currency coins.
What. A. Ride.
In the space of 72 hours, I have watched this particular cryptocurrency rise and fall by more than 40% for seemingly no reason, besides a market flooded by novices like myself attempting to get a piece of the action. [Update 18/01/2018: Both South Korea and China announced a crackdown on cryptocurrencies, which has dramatically impacted crypto trading in the last week].
In the last month alone on Australian BitCoin exchanges, the price of BitCoin has fluctuated between $15,876 to $26,999. This sort of movement is not for the faint-hearted. [Update 18/01/2018: BitCoin continued to crash to $11,700 (AUD) on 17 January 2018].
It appears that anyone with an internet connection can launch a digital currency or create a new token. In this environment there will no doubt be individuals (in many corners of the globe) ready to use this market to engage in fraud, ponzi schemes or outright theft.
This led me to think – what avenues of legal recourse do people have for any misinformation, market manipulation and other misdemeanours in the crypto-currency market?
Cryptocurrency collapses and lawsuits
- In February 2014, Mt Gox, the online marketplace that handled 80% of bitcoin trades, suddenly shut down and went into bankruptcy. Over 850,000 bitcoins, worth approximately half a billion US dollars were lost as well as $28M in cash in its accounts. The operators of Mt Gox blamed hackers for the loss. In July 2017, the former head of Mt Gox faced a Tokyo district court, charged with embezzlement, data manipulation – for inflating his own account value on the market and transferring money out of customers accounts into his own name. Creditors of Mt Gox have claimed that they lost $2.4 trillion when the company collapsed. The bankruptcy trustee has only recovered $91M of assets.
- In July 2017, a class action lawsuit was issued against Kraken, a San Francisco crypto-trading platform. The claimants alleged that their Ethereum coin holdings were liquidated during an ethereum market flash crash (70% drop in 60 minutes) on 7 May 2017. It was alleged that the Kraken market crashed due to a denial-of-service (DDoS) attack, which restrained Kraken users from accessing the platform.
- In August 2017, Monkey Capital, a decentralised Hedge Fund based in the US, launched an offering for ‘Monkey Tokens’ (MNY), purportedly for the purpose of fund raising investments into space travel. By December 2017, Monkey Capital was facing a class action lawsuit from various investors alleging that the Monkey Tokens were fraudulently issued securities.
- On 22 December 2017, Coinbase (a global cryptocurrency exchange) halted trading on BitCoin for two hours when the currency was crashing. This shut down may lead to lawsuits by disgruntled traders who consider that Bitcoin exchanges should only be shut down in accordance with the US Securities and Exchange Commission’s guidelines.
The Australian Legal Position
On 29 September 2017, ASIC issued a Guidance on cryptocurrency token sales, warning about the legal difficulties that surround initial coin offerings (ICO) of new crypto-currencies (token offerings). ASIC explained that consumers should be aware that ICOs can be offered for various financial products. An ICO could be offering membership to a managed investment scheme, amount to a share offering, or even a derivative – and buyers should be careful they understand what is being purchased.
The key concern identified by ASIC is that promotional communications about an ICO should not mislead or deceive potential investors and should not contain any false information.
Unfortunately, due to the wild crypto coin market, I suspect that many people plunging in for a flutter on some BitCoin, Ethereum, Ripple or LiteCoins – will not have read the official marketing or promotional material which underpins their virtual coin purchase. If consumers cannot establish that they have read the erroneous promotional material, then they are unlikely to establish the causal link of a nexus between the misleading and deceptive conduct and the purchase.
My research did not uncover any Australian lawsuits that have delved into the murky cryptocurrency market. As lawyers we should all attempt to get our heads around this new area of finance as it has enormous litigation risks. I suspect the rise of cryptocurrency trading in Australia will soon result in clients seeking advice and assistance to understand their legal rights and avenues for pursuing cryptocurrency losses.