The astonishing bitcoin bubble may have burst over the last several days. From its intraday peak in December 2017 of $19,783, the price for bitcoin had fallen as of Saturday to $8,524, a decline of over 60%. (Price declines continued on Monday.) Bitcoin’s price has fallen before and it has generally proven to be volatile. The price may yet escalate again. But if it has always been hard to specify a reason for the phenomenal price movements of bitcoin and other cryptocurrencies, there certainly have been recent developments aplenty to undermine the price for these digital assets.
Probably the most high profile develop that might shake investors’ confident in cryptocurrencies is the news from the Japanese cryptocurrency exchange Coincheck of the theft of over $530 million of the cryptocurrency NEM from its customers’ accounts. Coincheck is in the business of facilitating cryptocurrency trades and storing customers’ deposits. The thieves didn’t hack the blockchain code to complete the heist, they penetrated Coincheck’s online customer wallet. The continuing stream of these kinds of incidents by themselves could be enough to undermine investor confidence. The news of the Coincheck heist follows closely on the heels of January 22, 2018 report from Ernst and Young that nearly $400 million of the $3.7 billion raised in 2017 ICOs had been stolen by hackers.
Even if security concerns alone were not sufficient to raise investors’ concerns, the quickening pace of regulators’ enforcement efforts could also undermine investors’ confidence. The most important recent development in this regard is the January 30, 2018 news that the SEC had halted an ongoing ICO offering, calling it an “outright scam.” As reflected in the agency’s press release (here), as part of its ICO, AriseBank had used social media, a celebrity endorsement, and other tactics to raise over $600 million of its intended $1 billion offering. If the company had indeed raised $600 million, it would be the largest ICO ever. Even before the SEC’s recent action, AriseBank had attracted regulators’ concerns; in a January 5, 2018 Consumer Alert, the Texas Department of Banking had warned consumer’s about AlertBank’s activities.
Among other things, the SEC alleges that AriseBank had falsely claimed that it purchased an FDIC-insured bank from which it would offer its customers a wide range of banking services, including the availability of a VISA-backed credit card to use to spend over 700 different types of cryptocurrencies. The SEC alleges that the neither AriseBank nor the depositary institution it allegedly purchased had been insured by the FDIC.
The complaint also alleges numerous omissions from the company’s materials promoting the offering, including the fact that one of the company’s officials is on probation from a prior felony conviction for theft and for tampering with government records. The complaint also alleged that the company’s President had multiple undisclosed arrests and convictions, including a prior conviction and imprisonment for felony robbery.
The agency obtained an emergency freeze of the company’s assets and appointed a receiver to secure various cryptocurrencies held by AriseBank. Among other things, the agency alleged in its complaint (a copy of which can be found here) that the ICO was “illegal” because there was no registration of the offered securities with the SEC, nor is there an applicable exemption. The complaint alleges “fraud” in connection with the purchase or sale of securities or in the offer to purchase or sell securities.
The SEC’s action against AriseBank and its officials is only the latest regulatory action against ICO companies. In addition to regulator’s regulatory initiatives, investors themselves also increasingly are pursuing claims against the issuer organizations and their top officials. As I have noted before investors have filed a number of securities class action lawsuits against ICO companies. This past week investors filed yet another securities suit in connection with an ICO.
As reflected in a January 31, 2018 Law 360 article (here), investors have filed a securities class action lawsuit in the Northern District of California against ParagonCoin, Inc. and certain of its directors and officers, alleging that the company unlawfully failed to register the coins it was offering in its ICO with the SEC. The company is a startup focused on the marijuana industry. The complaint alleges that the defendants marketed the ICO as “offering a path towards legalization of cannabis and a way to solve nearly every problem facing the cannabis industry.” Among other things, the plaintiffs’ complaint (a copy of which can be found here) alleges that the company and its principals hired the rapper The Game to promote its offering.
By my count, the Paragon complaint is the seventh securities class action lawsuit filed in connection with cryptocurrency companies, five of which were filed in the final weeks of 2017 and two of which have been filed so-far in 2018. As I recently noted in connection with the prior 2018 cryptocurrency securities class action, I have predicted that we will see more of this type of litigation activity – a projection I continue to believe is valid.
While it is interesting to think about what we may see next with respect to ICO regulatory activity and litigation, there is the larger question of what all these development mean for the trading and use of cryptocurrencies, particularly in light of the very high profile volatility in the price of bitcoin. It remains to be seen whether the whole cryptocurrency singularity will prove to have been a temporary phenomenon driven by sky-rocketing prices or whether it is a longer-term phenomenon that will outlive the current turbulence.