Can You Sue a Cryptocurrency Exchange? - Romano Law

Can You Sue a Cryptocurrency Exchange?

Can You Sue a Cryptocurrency Exchange?

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Investments in cryptocurrency have seen an astronomical rise over the last decade.  This rise has been fueled by the growing acceptance of cryptocurrencies, like Bitcoin and Ether, among mainstream investors and companies, such as Tesla Inc., Mastercard Inc., and BNY Mellon.  Bitcoin has also been deemed legal tender by at least one country, and others are likely to follow.   

An increase in the number of cryptocurrency exchanges have made it easier for the common investor to trade crypto assets.  Just this year, the value, traded volume, and market capitalization of some cryptocurrencies hit record highs, although 2021 was also an example of just how risky crypto investing can be.  

With higher rates of cryptocurrency investments, we have seen a corresponding increase in governmental enforcement and litigation, and some are increasingly asking, “can you sue a cryptocurrency exchange?” 

Can You Sue a Cryptocurrency Exchange?

The general answer is yes, a cryptocurrency exchange can be sued.  In doing so, an initial step is determining the proper claims against the exchange.  Equally important is determining in what forum or jurisdiction the exchange can be sued.  As to both inquiries, it is important to understand the difference between a centralized and decentralized exchange.

What Are the Differences Between Centralized Cryptocurrency Exchanges (CEXs) and Decentralized Cryptocurrency Exchanges (DEXs)?

Centralized exchanges are private companies that offer platforms to facilitate the buying and selling of cryptocurrency, either for fiat currencies, like the US dollar, or between digital assets, like Bitcoin and Ether.  CEXs act as trusted intermediaries in trades, and often act as custodians by storing and protecting your funds.  Centralized exchanges are the most common type of cryptocurrency exchange, and the most common CEXs are Coinbase, Kraken, and Gemini.

Centralized exchanges are subject to laws and regulations of the jurisdictions in which they operate.  In the United States, there is no single central regulatory body for cryptocurrency.  Instead, U.S. regulation of cryptocurrency exchanges comes from a mix of federal and state laws.  For example, licensing is managed on a state-by-state basis, as well as by the Financial Crimes Enforcement Network (FinCEN).  CEXs are also subject to Know Your Customer (KYC) and other Anti-Money Laundering requirements promulgated by the federal government.

Decentralized exchanges provide for the secure exchange of crypto assets by using smart contracts to facilitate direct peer-to-peer transactions without the need for a trusted intermediary.  A true decentralized exchange has no central point of control.  Instead, DEXs are distributed across a wide network of computers and governed by their stakeholders.  DEXs also do not act as custodians because transactions are peer-to-peer.  Some of the better-known DEXs are Uniswap (and its clones, SushiSwap and PancakeSwap), 1inch, and MDEX.

Because of their decentralization, true DEXs are generally not subject to the rules of any regulatory body, as no specific person or entity is controlling the system.  The participants in the DEX come and go, and thus government or regulatory enforcement of a particular entity, individual, or group is a little more complex.  Similarly, a user seeking to “sue” the DEX will face a number of issues arising from the decentralized nature of the exchange, including determining a proper forum.    

How to Sue a Cryptocurrency Exchange

Centralized cryptocurrency exchanges can typically be sued in court like any other business entity.  A plaintiff’s claims against a CEX will normally be a function of the terms and conditions of use of the exchange at issue and/or applicable federal and state laws.  The proper forum for a lawsuit depends on the state of incorporation, the exchange’s physical presence, or the terms and conditions of the exchange. 

As a recent example, Coinbase was hit with multiple class action lawsuits in California brought by Coinbase investors for violations of federal securities laws based on allegations that the investors were misled about company financial health during Coinbase’s April initial public offering.  In another class action, Coinbase users sued the company for violations of California laws and for other common law claims, including breach of fiduciary duty, based on allegations that their Coinbase wallets were either hacked or frozen without warning and their pleas to release their accounts so they could access funds were ignored by the company.

The recent efforts to sue Binance, the company that operates the Binance exchange, are an example of the issues related to finding a proper forum to sue a decentralized entity.   Earlier this year, a group of investors sought to pursue formal claims against the cryptocurrency exchange Binance for allegedly causing millions in damages through an unanticipated outage.  However, Binance does not have a listed headquarters that could place it in a specific jurisdiction.  Instead, investors will pursue their claims per the company’s terms of service, which provide that all legal proceedings be handled through the Hong Kong International Arbitration Centre.  It is unclear exactly what law will govern the dispute, but the investors claims will be founded on consumer protection.

Conclusion

Given the complexity of these issues, it is important for a cryptocurrency exchange user or investor to consult with an attorney concerning their potential claims and the best way to pursue them.

Photo by Clay Banks on Unsplash

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This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.

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