June 03, 2020
by Daniel M. Payne

The Murphy & McGonigle Blockchain Litigation Database categories each case into one of five "case types": criminal, civil enforcement action, cease and desist order, private civil action, or derivative action.  By tracking all crypto litigation in the U.S., it is therefore straightforward to track the mix of crypto cases.  In the earliest years of crypto, between 2011 and 2016, criminal cases made up 33% of the cases filed, while private civil actions made up only 16%.  This reflects the earliest use case of bitcoin: exchange of illicit goods and services.  And bitcoin was the only cryptocurrency available for much of this period.  We could call this the "Silk Road" period of crypto litigation. A small share of the criminal actions reflect a somewhat less culpable mens rea than purchasing illegal goods with bitcoin: for example, the Charlie Shrem money laundering action in which Mr. Shrem was not charged with buying or selling anything illegal, but for facilitating others' illegal purchases.  

There has been a tremendous shift over time, both in the mix of crypto case types and in the kind of criminal actions being brought.  First, as seen in the graph above, criminal actions have been squeezed down to only 14% of the crypto cases in the Database.  At the same time, private civil actions have increased their share from 16% to 43%.  This shift in the types of cases in the Database reflect the exit from the "Silk Road" period and an entrance into the "ICO" period.  Many ICOs from late 2016 to early 2018 failed during the crypto winter of 2018, when cryptocurrency prices plunged.  As investors lost money, they brought private civil actions to try to recoup their losses.  Enforcement agencies likewise took action, bringing enforcement actions and cease and desist orders in response to the ICO craze.  Enforcement actions and cease and desist orders now collectively account for 41% of the cases in the Database.

The criminal actions also look different today than during the "Silk Road" period.  One example is the OneCoin scandal, which has led to a sprawling, ongoing federal criminal probe.  This is the new wave of criminal crypto activity:

  • International in scope
  • Crypto is the linchpin of the scheme
  • Bigger- OneCoin raised billions of dollars in its scheme

A New York-based attorney, Mark Scott, was hired by OneCoin to assist with managing its cash flow.  In response to the conspiracy and money laundering charges, he argued that he was unaware that OneCoin was a fraud and that he was assisting a client with moving money.  He insisted his involvement was limited to this banking work.  The jury disagreed, though, as he had to defend suspicious bank transfers and contend with allegedly making tens of millions of dollars in fees, which suggested a premium for illegal work.

This new kind of criminal activity offers lessons to practitioners.  It is imperative not to go too far out on a limb for new clients, especially in an area you are not familiar with.  The ring-leader of the OneCoin scandal, a Bulgarian who calls herself the "CryptoQueen," has disappeared and remains at large. 

One final post script: Mark Scott has unfortunately been whipsawed recently.  He remained out of jail on bond after his trial last fall, pending his sentencing hearing.  On March 12 he was remanded back to jail after his bond guarantor backed out and he was found to have violated the terms of his release.  Then on March 30 he was ordered released from jail due to the high risk of coronavirus infection.

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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.