Blockchain regulations are still up to the individual to navigate. But there have been new legal precedents in the last year that may signal changes are close at hand. Litigation against blockchain and crypto participants is growing less than in previous years but at a rate consistent with a promising industry. A new report published on January 22nd, by the law firm Murphy & McGonigle, the Blockchain Litigation Year in Review, provides insight to five key legal trends, which imply that 2020 should have more regulatory clarity than previous years.
The reports’ methodology collects all blockchain sector legal rulings in the U.S. and quantifies the incidence of litigation for the U.S. marketplace. The cases involve cryptocurrencies, blockchain-based companies, mining companies, crypto-investment platforms, exchanges, and initial coin offerings (ICOs) issuers and consultants. The information for this article was based on the report, Murphy & McGonigle’s recent press release, and my conversation with Daniel Payne, a member of the Firm’s Financial Technology and Blockchain Practice.
Perhaps the most crucial trend shows that 2019 was a year where the U.S. authorities delivered new rulings creating industry precedent. Mr. Payne said, “This is the first year we had more than a few judicial decisions impacting the industry.” In the report, a key trend shows, while American courts issued industry rulings, these standards may not be sufficient to defend against security litigation. More changes and clarity are needed to help industry participants adequately disclose and describe token properties concerning security law.
Mr. Payne is the architect of the firm’s Blockchain Litigation Database, something he describes as an unique data source for the industry. He said, “There is no shortage of speculation on the potential of blockchain, and this report identifies potential pitfalls and red flags for those investing or sponsoring blockchain initiatives.”
The following are the five top headlines from the Blockchain Litigation Year in Review Report:
The Southern District of New York (SDNY): More Blockchain Litigation Than Any Other Venue
The data form the report shows that New York State and the New York Metro areas have the largest percentage share of litigation in this space. This suggests that the area is becoming a center for blockchain innovation. “It is not entirely unexpected that a new industry that is both global and decentralized would see litigation emerging in New York,” said Payne. “Given cryptocurrency’s growing role in capital raising, the incidence of litigation in New York reflects the city’s status as the hub of financial services.”
The SEC Remained Active, with High Profile Enforcement Activity
The SEC continues to enforce and be active in this space. From the report, “While the states took a step back, the SEC filed 43% more blockchain enforcement actions in 2019 compared to 2018.” Specifically, the three high profile enforcement actions were for Kik, Block.one, and Telegram. Generally speaking, the enforcement actions were all in response to how ICO and token offerings violated U.S. security law requiring each case to resolve settlement and investment violations.
Regulatory Enforcement Actions Drop Off
The ICO enforcement wave in the U.S. is over. New litigation in the industry is still growing but at a lower rate.
American Courts Issued Rulings that will Impact the Blockchain Industry
This is, perhaps, the most important of the trends. As Mr. Payne explained at the start of this article, the meaning for the crypto industry is that “courts are scrutinizing fraud claims for allegations that meet heightened pleading standards.” The courts may take a broader jurisdiction view for firms’ operating outside the U.S. but could impact American security law. While new rules give participants much better guidance than in previous years, this is still a fluid space and more changes are expected. As the blockchain industry matures, legal opinions, rules and standards will become better defined.
The SEC’s “Path to Compliance” is a Road Less Traveled
In November 2018, the SEC issued its “Statement on Digital Asset Securities Issuance and Trading.” This gave unregistered ICO token issuers, who were not in compliance with the SEC, a way to become registered. However, many industry participants found the steps difficult or not be feasible. This is still a complex issue and will need more clarity from the SEC in the future.
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