The New York litigation office has filed 11 lawsuits against Binance, Bitmex, Block.one, and Tron among some of the best known cryptocurrencies and companies. The suits named 42 witnesses around the globe, primarily in the British Virgin Islands, Canada, Cayman Islands, China, Estonia, Hong Kong, Japan, and more.
Roche Cyrulnik Freedman of the SEC was also apart of the lawsuit against Bitfinex back in October. All of the lawsuits have one thing in common: They all allege that the token issuers took advantage of the market's lack of understanding and awareness of how cryptocurrencies worked, and sold the illegal securities to US citizens.
They were able to find a loophole in the US securities laws that allowed their coins to be sold as "utility" tokens without having to provide any distribution information to the exchange commission. The lawsuit states that US citizens were unaware that these tokens were supposed to be registered with the SEC. The lawsuit also states that the tokens were sold as investment contracts without offering a reasonable expectation of profits.
These exchanges will likely try to argue that US citizens were violating the terms of service by trading within a country that they had listed as restricted, therefore the lawsuit will likely focus on the particular assets that were being sold. If the case is made against them, the exchanges could potentially face liabilities for the sale of securities as unlicensed broker-dealers if the tokens are ultimately classified as securities.
Kucoin for example, is specifically being filed against on the behalf of investors who had acquired a certain list of tokens since 2017, where the exchange had facilitated these transactions. The list of coins/tokens includes: EOS, SNT, QSP, KNC, TRX, LEND, ELF, CVC, and TOMO. If the court does in fact conclude that this list are indeed securities and were sold by Kucoin, then Kucoin could be responsible for paying hefty damages to investors. Regardless of the results of this, Cryptocurrency in general is highly scrutinized to begin with from Federal authorities and other uninitiated parties. The news of this lawsuit certainly doesn't ease that burden.
The allegations against Binance are very similar, also seeking compensation for investors since 2017. The lawsuit against Binance lists 12 tokens including: EOS, Bancor Token, and Status Token. The lawsuit also goes on to dissect each token, explaining why each asset is considered as a security. This accuses Binance of being in violation of Section 5 of the Exchange Act, with the sale of unauthorized tokens, all without operating as a registered Broker-Dealer.
The lawsuit states that Justin Sun "promoted, offered, and sold" Tron's TRX in violation of securities laws. It also challenges the idea that TRX is anything like Bitcoin or any traditional cryptocurrency, saying that Justin Sun issued and controlled the Tron tokens in an entirely centralized fashion.
"...the creation of TRX tokens thus occurred through a centralized process, in contrast to Bitcoin and Ethereum. This, however, would not have been apparent at issuance to a reasonable investor. Rather, it was only after the passage of time and disclosure of additional information about the issuer’s intent, process of management, and success in allowing decentralization to arise that a reasonable purchaser could know that he or she had acquired a security. Purchasers were thereby misled into believing that TRX was something other than a security, when it was a security."
The lawsuit also goes on to paint a caricature of Justin Sun, making it appear that he is nothing more than a Twitter Troll. Citing the fact that he named himself "The Killer of Ethereum" and finding irony in his recent tweets regarding TRX being better than ETH, saying that ETH is not a security while TRX is.
The lawsuit claims that Block.one continued to promote EOS in the US, even after a $24 million settlement with the SEC last year. The company cites an EOS conference in New York as well as an EOS billboard in Times Square, as evidence of promoting an illegal security to US citizens.
The lawsuit against Bitmex is by far the case with the most scrutiny. The lawsuit claims that Bitmex sold unregistered securities like EOS and SNT, without registering themselves with the exchange commission. More importantly, it also asserts that Bitmex traded against its own customers, via trading desk, using internal algorithms to systematically liquidate traders positions for profit. "Bitmex acts like a casino with loaded dice, manipulating both its systems and the market its customers use for its own substantial financial gain." the lawsuit said. Something I have also touched on surrounding Bitfinex and Bitstamp in the link provided below.
On Black Thursday, March 12th, when Bitmex had an "outage" the company did not dip into its insurance fund, rather it liquidated $800 million of its customers positions.
There's a possibility that this entire case is simply hot air and will likely be dismissed by the defendants as lawsuit trolling, but this case doesn't seem to be that black and white. The merits of this lawsuit will have to be assessed for each case individually. Serious or not, these cases will certainly call into question the jurisdiction of the securities commission and will forever impact the applicability of future arbitration clauses.
The merits of these cases are non-trivial. The role of exchanges in this industry has been a hot topic since 2017 and allegations of profit seeking manipulation of the price and volume is nothing new. It will likely take months before we see any kind of outcome or resolution of these cases, a lawsuit of this extent is unprecedented and will play a significant role for cryptocurrencies going into this next decade.
Although it might be months before anything further is released, it will likely result in harsher restrictions for cryptocurrencies in the United States, and it will certainly have an impact on the classification of every cryptocurrency as well as the design of the networks that they are built on. So until the cases are concluded, the verdict is your own. Are these cases simply just hot air or is it time to begin considering getting out of Cryptocurrency?