Author: Michael Jacobs
Given ongoing volatility in cryptoasset markets, security incidents, thefts, exchanges collapsing and ever-increasing regulation, there is an emerging wave of class actions in the cryptoasset space, particularly in the US and other jurisdictions such as Singapore and Australia. This post considers the extent to which similar collective proceedings might be brought in England.
Bases of claims
There appear to be four prevailing bases for such claims:
- False or misleading marketing of cryptoassets. That is, making misleading statements in the marketing of a cryptoasset in respect of its nature or risk profile. For example, in the Terra class action against Binance, the class alleges that Binance and its CEO misled investors about Terra, marketing it as “safe”, “stable” and “fiat backed”, when in fact it was none of those things.
- Offering and selling unregistered securities. Under US law, securities, securities exchanges and brokers are required to be registered. If cryptoassets are securities (which remains an undecided issue), their unregistered offer and sale through exchanges and initial coin offerings are in violation of securities law.
- Misappropriation of funds. That is, the improper use or safeguarding of customer funds deposited with a cryptocurrency exchange. This issue may crystallise where there are liquidity issues and insolvency.
- Failing to secure user accounts from hacking and theft. That is, failure to have appropriate security in place to prevent hacking and theft of cryptoassets.
Although few crypto exchanges or promoters of cryptoasset schemes may be in England, there are potentially several affected investors in the jurisdiction (both consumers and institutional investors). HMRC recently estimated that between 8.5% and 10.7% of all UK adults had ever held a cryptoasset. Various jurisdictional gateways may allow claims to be brought in the jurisdiction by individuals based in England (such as s.15B Civil Judgments and Jurisdiction Act 1982 for claims relating to consumer contracts, or Practice Direction 6B para 3.1(9) of the Civil Procedure Rules (“CPR”), relating to torts). The more challenging issue is ensuring that the procedural mechanism for any group action is procedurally viable. The appropriate mechanism will vary depending on what type of claim is being brought and its underlying facts.
There are three main avenues for group claims in England:
- First, via a ‘Group Litigation Order’ (“GLO”) under CPR 19.11.
- Secondly, a representative action under CPR 19.6, brought by a person with the “same interest” as the class, in a procedure akin to US opt-out class actions.
- Third, collective proceedings in the Competition Appeal Tribunal (“CAT”) to recover damages for breaches of competition law.
The scope for class actions to be brought in the UK
Notwithstanding the existence of several procedural mechanisms for redress in England, each comes with various difficulties for prospective claimants:
- A GLO is an “opt-in” procedure which necessitates building a book of claimants and obtaining relevant information from each. Thus, it is not usually economically viable for large groups of smaller claims, such as the losses generally suffered by retail crypto investors. But it may be a useful procedure for smaller groups of HNW or institutional investors.
- CPR 19.6 claims avoid the difficulties of GLOs because they only require one claimant. However, any loss claimed must be common to each member of the class or suffered by the class as a whole such that it can be calculated without reference to the individual losses suffered by each class member. In 2021, the Supreme Court limited the application of CPR 19.6 in a ruling which highlighted the difficulty of establishing the “same interest” when there are differing degrees of reliance together with a range of extents of damages suffered by class members. However, the High Court recently offered a glimmer of the possibility of CPR 19.6, where a claim for undisclosed or secret commissions was allowed to proceed, notwithstanding each member’s claim was in respect of different contracts, entered into at different times, and for different amounts. This was because the information about the loss was in the possession of the defendants, and, as such, did not require individual assessment of the loss of each member.
- A claim in the CAT can be either opt-in or opt-out. Whilst the application of competition law to cryptocurrency is relatively novel and untested, there is a pending claim before the CAT alleging an anticompetitive agreement between exchanges relating to the delisting of cryptocurrency BSV in 2019. The outcome (if any) is likely several years away.
Which procedures work for which claims?
CPR 19.6 claims may be viable for claims in categories 3 and 4 above (i.e. misappropriated funds or failure to secure user accounts). Even if investors’ losses differ in quantum, the type of type of loss will be common across the class and derive from the same wrongdoing.
Conversely, claims involving false or category 1 (misleading marketing of cryptoassets, which are essentially tortious claims for deceit or negligent misstatement) will not be suited to CPR 19.6 due to the highly individualised elements of reliance and loss – GLOs may be more suitable for such claims.
An alternative approach which may be worth considering in the future is the use of a decentralised autonomous organisation (“DAO”) as a vehicle for bringing claims. Subject to English rules on funding, maintenance and champerty (not to mention navigating jurisdictional hurdles), prospective claimants could assign their claims to the DAO or permit the DAO to act as a representative. Although not suitable for all claims (particularly those involving retail investors accustomed to dealing with crypto via centralised entities, such as exchanges), it could present an effective method for group litigation brought by or on behalf of crypto natives.
In sum, the continued risk of losses in the cryptoasset space, together with the development of collective actions in England and Wales, mean that this promises to be an interesting area in the coming years.
Michael Jacobs is a partner at Boies Schiller Flexner in London. He specializes in complex and high-stakes banking and finance litigation. His practice has a particular focus on intercreditor disputes, contentious restructuring and insolvency, regulatory issues, privacy and technology, including De-Fi and cryptoassets. Clients value his broad experience and technical expertise, with Michael having acted in several of the most high-profile banking and corporate insolvencies in recent years. Michael regularly represents investment banks, hedge funds, and private investors on matters arising out of a range of investments, including equity structures, corporate and sovereign bonds, credit agreements, securitizations, and derivatives. Michael often acts in multi-party disputes, ranging from ad hoc groups and lender syndicates to group litigation and class actions, on both claimant and defendant sides. Additionally, Michael advises clients on a variety of other contentious issues, including privacy/GDPR, technology, crypto-assets, media and entertainment, oil and gas, and general commercial litigation.
The opinions expressed in the article are those of the authors and do not necessarily reflect the views of Boies Schiller Flexner or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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