Bitcoin and other cryptocurrencies have become increasingly popular over the past few years, which has been caused, in part, by two factors: many legitimate large businesses have begun to accept them as payment options, and the value of Bitcoin, in particular, has substantially increased. Because these cryptocurrencies have evolved so quickly, there are a number of regulatory gaps that exist, and the law has not been able to keep up with the technology. Accordingly, many attorneys have filed or are considering filing lawsuits that are intended to ask the courts to impose some guidelines and regulatory mandates on cryptocurrencies. See, e.g., Samantha Joseph, “Banking on Bitcoin: An Attorney’s Big Stake in Cryptocurrency Litigation,” Daily Business Review, Jul. 5, 2017, at http://www.dailybusinessreview.com/id=1202792292088/Banking-on-Bitcoin-An-Attorneys-Big-Stake-in-Cryptocurrency-Litigation?slreturn=20170619174119 (last visited Jul. 19, 2017).
Litigation regarding what legal treatment courts should give to Bitcoin and similar cryptocurrencies is relatively uncharted territory. See id. One attorney, in particular, has caught national attention, and “[t]here are hints of this in his court filings, where for instance a definition of ‘fiat money’ — currencies established through government regulation — goes alongside a flow chart explaining the alleged movement of millions of dollars’ worth of another type of commodity: the intangible digital or cryptocurrencies increasingly at the center of class actions alleging widespread securities fraud. His filings and subsequent recoveries helped place Silver on the front line of class action lawsuits against financial services providers dealing in cryptocurrencies. It also seems to have caught the attention of leaders in the securities and technology sectors, who’ve booked Silver for three speaking engagements this summer, including a presentation in New York during the Fintech Week conference in August.” Id. The strategy employed by this attorney has been to try to simplify a very complex area of the law—how a cryptocurrency operates and how it should be handled by the government. In essence, there is a growing concern in the legal community that cryptocurrencies do not operate in the same manner as traditional currencies and that they are not subject to the same regulations, which may leave room for extreme volatility and potential securities law violations. See, e.g., id.
One problem that some plaintiffs’ lawyers have encountered is difficulty in simplifying the issues surrounding cryptocurrencies “in the largely mysterious world of digital currency trading.” Id. To get around this difficulty, attorneys should retain expert witnesses, who can better explain how digital currencies function and the prospective legal issues that may arise. In particular, technical, securities, and economic experts will all be valuable, as will experts in digital currencies and trading, computer scientists, and those who specialize in internet-based issues and regulation.
As one of the leading plaintiffs’ attorneys in the field alleges, “‘I believe that everyone can understand what happened. People invested their hard-earned dollars. They believed they purchased a security … and now they’re being told those securities no longer exist…There’s a difference between talking about the tech side and the good old-fashioned theft side. Good old-fashioned theft is the second oldest crime in the world. This is just good old-fashioned theft.’” Id. Because of the anonymity involved in Bitcoin (user accounts are not identified by name and are difficult, if not impossible, to trace for many purposes), it is difficult to understand exactly how it and similar cryptocurrencies are functioning. Unlike with standard currencies and commodities, the purchase and trading of cryptocurrencies is not transparent. This, according to plaintiffs, makes it much easier for fraud to occur, and securities regulation is lacking in the cryptocurrency arena. Many cryptocurrency exchanges, such as the infamous erstwhile Mt. Gox, have claimed to have lost or misplaced substantial amounts of money. See, e.g., The Guardian, “Head of Mt Gox bitcoin exchange on trial for embezzlement and loss of millions,” Jul. 11, 2017. The CEO of Mt. Gox currently faces embezzlement charges for purportedly losing some $28 million, which consisted of money individuals had invested in that particular company in order to buy and sell bitcoins. See id. Mt. Gox was the world’s largest Bitcoin currency exchange prior to its reported loss and ensuing bankruptcy. See, e.g., The Japan Times, “As Mt. Gox trial opens in Tokyo, head of bankrupt bitcoin exchange denies embezzlement,” Jul. 11, 2017.
Examples such as Mt. Gox, which handled some 80% of worldwide bitcoin exchanges, have led critics of Bitcoin and cryptocurrencies in general to emphasize the risks involved in such transactions and to highlight the need for legal intervention. See The Guardian, supra. Proponents of such currencies have argued that the Mt. Gox fiasco was an exception, and that it does not affect the validity of cryptocurrencies themselves.
Many legal issues have arisen and will continue to be raised with respect to cryptocurrencies. The volatility of these currencies, the way in which their tracking (or lack thereof) may allow for major losses to investors, and the potential for embezzlement and securities fraud are just a few of those issues. Because of the slow pace of regulation versus the fast pace of the technology, these issues will likely be resolved in court. Given this fact, attorneys on both sides should be well-prepared to explain the issues in as simple a manner as possible, and it may ultimately be expert witnesses who are able to make such explanations to a court and help determine the outcome of cases of this nature.