{"id":14413,"date":"2022-10-07T14:21:05","date_gmt":"2022-10-07T14:21:05","guid":{"rendered":"https:\/\/nftandcrypto-news.com\/crypto\/get-your-money-back-the-weird-world-of-crypto-litigation-cointelegraph-magazine\/"},"modified":"2022-10-07T14:21:07","modified_gmt":"2022-10-07T14:21:07","slug":"get-your-money-back-the-weird-world-of-crypto-litigation-cointelegraph-magazine","status":"publish","type":"post","link":"https:\/\/nftandcrypto-news.com\/crypto\/get-your-money-back-the-weird-world-of-crypto-litigation-cointelegraph-magazine\/","title":{"rendered":"Get your money back: The weird world of crypto litigation \u2013 Cointelegraph Magazine"},"content":{"rendered":"
\n

Want to sue a crypto project that ripped you off? That will be $1 million, thank you. Luckily, there are options for those who face the daunting prospect of spending a small yacht\u2019s worth of money in lawyer fees for their chance at crypto justice.<\/strong><\/p>\n

In practice, the majority of victims of international blockchain <\/span>scams<\/span> find themselves with little hope of recovering their money. According to crypto law expert Jason Corbett, a normal court case to recover $10 million\u2013$20 million dollars in the blockchain sector can easily cost between $600,000 and $1 million, with an average timeline of 2.5 years.<\/span><\/p>\n

But there are a range of cheaper and better options to get a successful outcome \u2014 if you learn how to work with the system. Legal investment funds can finance your case for a share of the judgement \u2014 sort of like a VC firm for lawsuits.<\/p>\n

\u201cThe vast majority of lawsuits \u2014 up to 95% \u2014 are privately settled before they go to court,\u201d Corbett says.
<\/span><\/p>\n

Common blockchain disputes<\/h2>\n

Corbett has six years of experience in crypto law as a managing partner of international blockchain-specialized boutique law firm Silk Legal. Speaking with Magazine about his new crypto litigation financing project Nemesis, Corbett notes a clear \u201cincrease in disputes stemming from deals gone wrong, contractual breaches and bad actors over the past months\u201d due to the bear market, which has seen many projects go sideways.<\/span><\/p>\n

There are a variety of common disputes involving blockchain, from misuse of funds to smart contract failures, which are listed below.<\/span><\/p>\n

Misuse of investment proceeds<\/strong> happens when \u201cfundraising proceeds go to founders\u2019 Lambos and villas\u201d instead of legitimate business needs, he explains. While the occasional boat party networking or team-building event might be justifiable, salary packages are the main permissible routes by which invested capital can flow to the founders \u2014 even dividends can only be paid from profit, not incoming investments.<\/span><\/p>\n

\n

The sale of fraudulent crypto happens when a token is sold to investors based on false claims. A possible (though not tested in court) example is found with the automated market maker protocol <\/span>SudoRare<\/span>, which suddenly shut down and disappeared with investors\u2019 money. Such cases can easily cross the threshold into criminal territory, according to Corbett. However, he admits that pursuing the culprits can be very difficult unless the scammers have been reliably identified.<\/span><\/p>\n

Illegal securities offering.<\/strong> One way that investors in flopped tokens can attempt to claw back money is by claiming <\/span>securities fraud<\/span>, demonstrating that the offering was illegal in the first place, such as an unregistered securities offering masquerading as a utility token sale. <\/span>\u201cThere are currently several U.S.-based class action lawsuits running against U.S. projects,\u201d such as those against <\/span>Bitconnect<\/span>\u00a0and <\/span>Solana<\/span>. Corbett explains that such claims fall under securities law, being civil claims as opposed to those brought by the likes of the SEC classifying projects like Ripple as securities.<\/span><\/p>\n

Difficult organizations to sue.<\/strong> Another area that can present a legal minefield is <\/span>DAOs<\/span>, which are often \u201cnot registered anywhere and don\u2019t have any kind of legal personality, and individuals are just working on their behalf.\u201d Corbett warns that such arrangements can easily expose unsuspecting DAO workers to vicarious liability since the entity they believe they are acting on behalf of may not actually exist.<\/span><\/p>\n

Even <\/span>smart contract disputes<\/strong> can lead to the courtroom. \u201cIf two parties agree to act according to a certain trigger on a smart contract, but it somehow malfunctions, that can put a lot of liability on the coder or smart contract audit firm,\u201d Corbett says. In such cases, the insurance policies of audit firms become critical.<\/span><\/p>\n

\n
There are many areas of law by which blockchain companies can find themselves in trouble. Source: Nemesis<\/em><\/figcaption><\/figure>\n<\/div>\n

When it comes to <\/span>IP infringement<\/strong>, it is easy to imagine NFTs where copyrighted images are being minted and sold without permission. Even code, however, can be protected by copyright or patents, in which case implementing the code of other projects \u2014 or even forking certain tokens \u2014 may result in a serious claim. (This is obviously not the case with open-source software, which is why Uniswap\u2019s code has been forked so often.)<\/span><\/p>\n

High costs<\/h2>\n

Irena Heaver, a Dubai-based lawyer specializing in blockchain, explains that while the aggrieved party is responsible for funding civil lawsuits, criminal cases are pursued by the state. As criminal cases deal with criminal matters rather than mere torts or \u201cmistakes,\u201d like a breach of contract and can result in prison instead of monetary judgements, the bar is set much higher in regard to evidence.<\/span><\/p>\n

As an ideal, a criminal conviction can happen only when all reasonable doubt is removed, whereas a civil judgement can be made on a balance of probabilities, meaning that one party is at fault more likely than not. It is also the state, instead of the victim, that decides whether to pursue a criminal case \u2014 something that happens infrequently when the alleged thieves are far overseas.<\/span><\/p>\n

If the state isn\u2019t going to fund it and you can\u2019t afford to drop seven figures on the uncertain outcome of a court case, what can you do?<\/span><\/p>\n

Alternative dispute resolution, involving either arbitration or mediation, is a cheaper option than formal courtroom proceedings. While arbitration is usually a binding process that can be viewed as \u201ccourt lite,\u201d mediation is a lower-cost private process in which a third party actively helps the parties come to a mutual understanding and agreement, Heaver explains. \u201cI always recommend mediation,\u201d she says, explaining that she has mediated dozens of crypto disputes where both parties have reached a satisfactory conclusion.<\/span><\/p>\n

\n
\"Sometimes
Sometimes conflicts can be amicably settled through cost-effective mediation. Source: Pexels<\/em><\/figcaption><\/figure>\n<\/div>\n

When a case does go to court, Heaver emphasizes that \u201cthe judge needs to understand what is going on,\u201d which is far from self-explanatory when it comes to complex questions involving newfangled monkey-DeFi derivative crypto meta-chain utility tokens.<\/span><\/p>\n

That means \u201cjudges rely on expert testimony, and we all know about the fake experts in this space.\u201d These experts are selected and paid for by the parties themselves, and Heaver laments that \u201cfor the right amount of money, you can find an expert \u2014 whatever you want,\u201d naturally requiring the other party to pay for their own expert to refute the other.<\/span><\/p>\n

\n

When there are a large number of potential claimants, class-action lawsuits can pool them together into a single case. These are often undertaken by law firms as entrepreneurial undertakings, where the law firm does not charge claimants, who instead agree to give the firm a share of any settlement or winnings.\u00a0<\/span><\/p>\n<\/blockquote>\n

An example can be found in a class action against billionaire <\/span>Mark Cuban<\/span>, who Moskowitz Law Firm argues used his fame to \u201cdupe millions of Americans into investing \u2014 in many cases, their life savings \u2014 into the deceptive Voyager platform and purchasing Voyager Earn Program Accounts, which are unregistered securities.\u201d<\/span><\/p>\n

\n
\n
\n
\n

Subscribe<\/p>\n

The most engaging reads in blockchain. Delivered once a
\n week.<\/p>\n<\/p><\/div>\n

\n \n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

DeFinance<\/h2>\n

Another way to raise an army of lawyers without selling both kidneys is legal financing, also known as <\/span>settlement funding<\/span> or third-party litigation financing, which happens when a private investor gives a plaintiff money in return for a percentage of a legal settlement or judgement. This is effectively an outside investment toward a successful lawsuit, and the invested funds are generally directed toward funding the lawsuit in question.<\/span><\/p>\n

\u201cIt\u2019s about pairing someone with a risk appetite with a plaintiff who has a lawsuit but no funds,\u201d explains Bill Tilley, managing partner of legal venture fund LegalTech Investor, who has been working in the legal financing industry for 15 years. Funds like his look into an average of 20 cases for each one they take on, with the full due-diligence process costing up to $100,000 before a decision can be made to fund. This involves not only determining that a case is likely to succeed but that the defendant can actually be made to pay.<\/span><\/p>\n

\n

\u201cThe big challenge in a crypto case is whether you can find and collect the money, even if you win the case \u2014 resources need to be spent to trace the money.\u201d\u00a0<\/span><\/p>\n<\/blockquote>\n

Determining the jurisdiction in which a case can be tried can also be a huge challenge in itself. In his own litigation funding research, Tilley has come across a perplexing trend of crypto-mystery. \u201cWe\u2019ve looked at some crypto cases where just nailing down the jurisdiction is a nightmare \u2014 they\u2019ll have multiple entities domiciled in multiple countries,\u201d he recalls. Crypto law is not an easy industry to crack.<\/span><\/p>\n

\n
\n
\n

\ud83d\udea8Breaking:\ud83d\udea8 In a lawsuit funded by Coinbase, crypto investors are suing the US Treasury to block the sanctions it issued which bar Americans from using Tornado Cash.<\/p>\n

\u2014 Mario Nawfal (@MarioNawfal) September 8, 2022<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n

Enter Nemesis<\/h2>\n

For the past several years, Corbett has been planning to create a blockchain-specialized litigation fund. \u201cThere was no point launching this when everything was going up,\u201d he says, but now with the bear market bringing increasingly disappointed investors to law offices around the world, things are looking up for crypto law. His litigation fund, <\/span>Nemesis,<\/span> has now gone live.<\/span><\/p>\n

\u201cThe litigation funding industry is growing fast and becoming a financial solution for a handful of use cases. Part of its maturity is increasing competition on investments, which requires the funder to, in addition to providing capital, add value to the case. Therefore, there is a rise in domain focus funds,\u201d he says.<\/span><\/p>\n

\n

\u201cLike any investor, it is important to build a trustable relationship with the plaintiffs and make sure their expectations from the case are reasonable and their motivations are in the right place.<\/span> It is also important to have legal teams, consultants and experts with a proven track record in the subject matter.<\/span><\/p>\n<\/blockquote>\n

Jurisdiction plays a decisive role. \u201cWe can\u2019t enforce judgements against people in certain countries, so we have to pass on matters like that,\u201d he says, adding that the United States and the United Kingdom, where enforcement of court orders is relatively straightforward, are the biggest markets for blockchain law. \u201cThe British Virgin Islands are also interesting because a lot of blockchain projects have used those structures,\u201d he notes. \u201cThe EU, U.S., U.K. and Australia have mature legal funding industries,\u201d he says, adding that not all jurisdictions allow for cases to be financed by third parties.<\/span><\/p>\n

\n
\"An
An overview of Nemesis\u2019 investment criteria. Source: Nemesis<\/em><\/figcaption><\/figure>\n<\/div>\n

Similarly to Tilley\u2019s firm, Corbett says that his Nemesis team vets cases to select those which are most attractive from an investment perspective. \u201cWe look to earn either multiples or a percentage of the investment,\u201d he says, explaining that much of the potential outcomes are determined by the defendant\u2019s director\u2019s insurance plans, which often become the payers of last resort. \u201cIf the opponent has no money, the action often goes by the wayside,\u201d Corbett concludes.<\/span><\/p>\n

In addition to making oodles of money, Tilley explains that legal funders \u201cget the added benefit of helping some people that have been wronged that wouldn\u2019t otherwise have had access to the justice system today.\u201d<\/span><\/p>\n

\n

\u201cWe can be part of fixing the problem of the bad actors by holding them accountable \u2014 so crypto will be bigger, stronger and better 5 or 10 years from now.<\/span><\/p>\n<\/blockquote>\n

Have an idea for a kickass story? Find me at eliasahonen@cointelegraph.com, or on Twitter<\/a><\/strong><\/p>\n

\n

Read also<\/p>\n

\n
\n

Columns<\/span><\/p>\n

Wall Street disaster expert Bill Noble: Crypto spring is inevitable<\/p>\n<\/p><\/div>\n

\n

Hodler’s<\/span><\/p>\n

Putin gives Snowden citizenship, Interpol elicits help in Do Kwon search and FTX US buys Voyager: Hodler\u2019s Digest, Sept. 25-Oct. 1<\/p>\n<\/p><\/div>\n<\/div>\n<\/div>\n

\n
\n\t\t\t\n\t\t\t<\/div>\n
\n

Elias Ahonen<\/h2>\n

Elias Ahonen is a Finnish-Canadian author based in Dubai who has worked around the world operating a small blockchain consultancy after buying his first Bitcoins in 2013. His book \u2018Blockland’ (link below) tells the story of the industry. He holds an MA in International & Comparative Law whose thesis deals with NFT & metaverse regulation.<\/p>\n