In the past few years, we have witnessed a dramatic increase in the number of lawsuits, investigations, and disputes related to cryptocurrency and digital assets. Various cryptocurrency companies, including Coinbase, FTX, Kraken, Binance, and others, faced investigations from regulators and legal actions from investors. In some cases, management teams have also been implicated and even criminally charged. These disputes led to an increased demand for experts familiar with the space. As we began working with clients engaged in disputes related to cryptocurrency and digital assets, we were surprised to discover that the best experts for these types of cases were often found beyond the cryptocurrency and digital assets space.
In many disputes involving cryptocurrency companies, the underlying claims are not specific to cryptocurrency. Allegations in these disputes have included insider trading, Ponzi schemes, failure to comply with anti-money laundering (AML) requirements, failure to register properly with regulators, failure to segregate customer assets, lack of internal controls, failure to comply with FINRA requirements, misleading advertising, and misappropriation of investors' monies, among other claims.
Historically, these allegations have applied to traditional market instruments, such as equities, derivatives, and commodities, as well as to conventional players in securities markets, including brokers, exchanges, trading service providers, and banks. Regulations and theories of law governing securities markets were put in place long before cryptocurrency became prolific and available to investors. As a result, these underlying frameworks often have little to do with cryptocurrency. This application of the law has been the subject of ongoing debate, hinging on whether it is proper to classify cryptocurrencies as securities. Yet current enforcement actions are premised on this classification and, as a result, are subject to regulatory frameworks developed to address other types of securities. This is an evolving regulatory landscape that requires a thoughtful and proactive approach.
Prior regulatory responses have played an important role in recent cryptocurrency cases. For example, issues related to the failure to segregate and protect customer assets, which was one of the major issues related to FTX’s collapse, were previously observed in connection with other underlying instruments. As a result, regulators established a robust regulatory framework long before FTX. The same concept applies to other issues mentioned above, such as AML, exchange requirements and compliance, insider trading, and lack of registration. Regulatory frameworks and requirements have been in place for many years to govern and enforce these activities, among others, across various underlying instruments, securities, markets, and market participants, including exchanges, broker-dealers, banks, custodians, etc.
When litigation and disputes related to cryptocurrency picked up, it was reasonable to expect experts retained on such matters to be professionals with cryptocurrency-related experience or, at minimum, with exposure to cryptocurrency and digital assets markets. Our experience as an expert witness services firm has revealed that these experts are not always the best fit. Our clients soon realized that the testifying experts they needed to support their claims were actually professionals with expertise in the underlying issues, such as segregation of customer assets rules and requirements, AML policies and requirements, and exchange trading platforms requirements, regardless of the nature of the underlying instrument. In many situations, this underlying expertise was prioritized over an expert with experience in cryptocurrency markets.
Most disputes and lawsuits around cryptocurrency do not target the underlying instrument itself, i.e., the digital asset, but the regulatory and compliance frameworks imposed on the agents, exchange platforms, brokers, banks, custodians, and other market participants. These requirements apply and are enforced regardless of the underlying asset. Experts with extensive industry experience with these types of enforcement actions are often better positioned than experts with pure cryptocurrency experience and play a critical role in providing meaningful insights into these types of disputes.
There are also disputes in which a mix of expertise and experience in the financial services industry and cryptocurrency is required. For example, there are cases involving termination disputes in connection with collateralized margin loans, in which the collateral is comprised of digital assets, such as bitcoin. In these types of cases, an expert with industry experience dealing with collateralized loans and margin call requirements, as well as dealing with bitcoin trading and liquidation, may be the best option and fit.
Overall, at SEDA Experts we have observed that financial services industry experts, in general, are well positioned to provide independent and relevant opinions and testimony on crypto and digital asset-related matters, given that the underlying fundamental issues are common to both traditional securities and digital securities markets.
EXPERT INVOLVED
Sergio Godinho is a senior professional with diversified experience in both the financial services industry, as well as providing advice in litigation, dispute resolution, mediation, and business consulting matters, including class actions and class certifications. He works closely with senior experts in establishing causation, liability, and damages across a vast array of dispute matters.
Learn more about SEDA at sedaexperts.com
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