Can a Crypto Lawyer Really Help You? in New York City

A crypto lawyer may (or may not) be able to help you if you lost your money in cryptocurrency and feel you have been misled to invest in it. But just like with any investment decisions, your options may be limited.

The trillion-dollar crypto collapse many have witnessed in the past few months have sparked increased legislation to regulate cryptocurrency. Currently, the SEC does not regulate cryptocurrency or cryptocurrency exchanges, but government may plan to change this soon. More legislators have proposed to regulate the cryptocurrency market.

With the crypto collapse, Bitcoin lost more than 50% of its value, while Ethereum, the crypto currency where most NFTs are exchanged, lost 65%. Many crypto investors lost money in the cryptocurrency market and have initiated private lawsuits and class actions against persons they feel are to blame.

With the government’s plan to increase legislation regulating the cryptocurrency market, many forecast that this increased legislation will result to more litigation.

Litigation in the cryptocurrency market

Currently, class action lawsuits have been filed against numerous celebrities and influencers for alleged false statements advertising the minor cryptocurrency EthereumMax. A former employee of NFT marketplace OpenSea was charged by the justice department for wire fraud and money laundering in relation to NFT trades. There are also other lawsuits filed against exchanges, such as Binance, especially in connection with cryptocurrency Terra’s dive in value to almost nothing. This class lawsuit claims that that Binance was trading and selling Terra, when Terra was not even registered as a security, and Binance was not even registered as an exchange or broker-dealer, perpetrating fraud among investors. Right now, companies who created cryptocurrencies that have collapsed, exchanges that traded that sale, and celebrities and influencers who promoted such cryptocurrency are all being sued. Even digital tokens, such as NFTs, are being alleged as unregistered securities. As of May 2022, more than 200 class actions and private lawsuits have been filed regarding cryptocurrency.

Types of Crypto Losses That Can Lead to a Case

Not every crypto loss is actionable. A market decline that hits everyone, with no fraud or misconduct, generally has no legal remedy — that is simply the risk of investing. But many crypto losses arise from conduct that may be legally actionable. Common scenarios include:

• Rug pulls. Project promoters launch a token, drive up the price through hype, and then sell all their holdings and walk away, leaving investors with worthless tokens.
• Pump-and-dump schemes. Coordinated promotion of a token to inflate the price, followed by insider sales at the top.
• Misrepresentation by exchanges. Trading platforms that misled customers about the security of their funds, the safety of yields, the registration status of products, or their financial condition.
• Custody failures. Exchanges, wallet providers, or custodians that lost customer assets through poor security or commingling of funds.
• Influencer-driven fraud. Celebrities or social media influencers who promoted tokens without disclosing payment, in violation of FTC rules and federal securities laws.
• Phishing and account takeover. Hacks that result from inadequate authentication or platform vulnerabilities.
• Investment manager fraud. Funds that purported to manage crypto holdings but instead engaged in Ponzi-like schemes.
• Pig-butchering and romance-investment scams. Schemes in which scammers build a fake personal relationship with the victim before steering them into a fraudulent crypto platform.

Are Crypto Tokens Securities?

Whether a particular cryptocurrency or digital token is a "security" under U.S. law is the threshold question in many crypto cases. The SEC, applying the Howey test, has taken the position that most tokens — particularly tokens sold in initial coin offerings — are investment contracts and therefore securities. Courts have agreed in some cases and disagreed in others. The Ripple case made important distinctions between sales to institutional investors (held to be securities sales) and programmatic sales on exchanges (held in that decision not to be securities sales). The Coinbase case is testing different facets of the same question. The state of the law is evolving rapidly, and an experienced lawyer is essential to advising on the practical implications.

Federal Securities Law Claims

When a token is a security, sales of that token may give rise to claims under federal securities laws. The most commonly invoked statutes include:

• Section 12(a)(1) of the Securities Act. Imposes strict liability on sellers of unregistered securities.
• Section 12(a)(2) of the Securities Act. Creates liability for sales by means of a prospectus or oral communication that contains material misstatements or omissions.
• Rule 10b-5 under the Securities Exchange Act. Prohibits fraud in connection with the purchase or sale of any security.
• Section 17(a) of the Securities Act. Prohibits fraud in the offer or sale of securities (typically invoked by the SEC in enforcement actions).

State-Law Claims

State law claims often run alongside the federal claims. New York's Martin Act gives the Attorney General broad authority to investigate and bring securities fraud cases, and private plaintiffs can bring claims for common-law fraud, breach of contract, breach of fiduciary duty, conversion, and unjust enrichment. New York General Business Law Sections 349 and 350 prohibit deceptive trade practices and false advertising and offer some of the most plaintiff-friendly remedies in the country.

Class Actions and Private Litigation

Most large-scale crypto cases proceed as class actions, because individual investor losses, while painful, are often too small to justify individual lawsuits but become very large in the aggregate. Class actions allow lead plaintiffs to litigate on behalf of all similarly situated investors. We can refer clients to class action firms when appropriate, and we can also pursue individual cases where the loss is large enough to justify going it alone or where the facts do not fit a pending class action.

Tracing Crypto Assets

One of the unique features of crypto cases is that the blockchain provides a public, immutable record of transactions. Forensic blockchain analysts can trace stolen or fraudulently obtained crypto through wallets, exchanges, and mixers. While tracing alone does not always lead to recovery, the information it produces can support law enforcement referrals, identify exchanges willing to freeze and return funds, and provide evidence for civil litigation. We work with blockchain forensic experts when the facts call for it.

Law Enforcement Referrals

For serious crypto frauds, particularly those involving significant losses, an FBI or local law enforcement referral may be appropriate alongside or instead of civil litigation. The Department of Justice, the FBI, the IRS Criminal Investigation division, and the Secret Service all have active crypto fraud units. Recovery through law enforcement is slow and unpredictable, but it is sometimes the only practical route, particularly when the perpetrators are overseas.

What to Bring to the Initial Consultation

• Records of every transaction with the exchange or counterparty, including dates, amounts, and wallet addresses.
• Account statements, screenshots, and email confirmations.
• All correspondence with the exchange, the promoter, or the counterparty, including chat logs, emails, and social media messages.
• The marketing materials that induced you to invest.
• Records of how funds were transferred in and out, including bank wire records and credit card statements.

Realistic Expectations

Crypto cases are unpredictable. Wins can be large; losses can be total. Many cases settle for less than the full loss. Some result in no recovery at all because the perpetrator is judgment-proof or unidentified. A good lawyer will give you an honest assessment of the realistic outcomes before you spend money on litigation, and will be candid when the prospect of recovery does not justify the effort.

Tax Treatment of Lost Crypto

Even if a recovery is not realistic, the loss may have tax implications. The IRS treats crypto as property for tax purposes. A loss on a sale or exchange of crypto can produce a capital loss for the year. A loss from theft of crypto used as an investment may also be deductible, though the rules tightened after the 2017 tax reform. Worthless crypto can sometimes be claimed as a loss if the worthlessness is established. We coordinate with tax counsel and accountants when significant losses are at stake and there is a tax planning opportunity.

Exchange Insolvencies and Bankruptcy

The collapses of FTX, Celsius, BlockFi, Voyager, and other exchanges have left many investors trying to recover funds in bankruptcy court. Bankruptcy proceedings have their own deadlines and procedures, and customers with funds on a failed exchange must file proofs of claim within strict windows. Whether customers are treated as secured creditors, unsecured creditors, or property owners varies by case and has major implications for recovery. We help clients understand their rights and file the necessary paperwork to preserve them.

Time Limits

Securities and fraud claims have statutes of limitations and statutes of repose that vary by claim and by jurisdiction. Some federal securities claims must be brought within one year of discovery and within three years of the violation. Common law fraud in New York has a six-year statute, or two years from discovery, whichever is later. Class action filings can toll the limitations period for absent class members, but only as to the claims actually alleged. Acting quickly preserves options.

Call Our Office

A cryptocurrency lawyer may be able to help you if you have lost your money in the cryptocurrency market. Should you need help in evaluating your case, we, at the Law Offices of Albert Goodwin, are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].