Crypto Lawsuits of 2023: A Yearly Round-Up & Review

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In 2023, the cryptocurrency world faced significant challenges from regulatory agencies, notably the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC initiated legal actions against leading cryptocurrency exchanges such as Binance and Coinbase. These actions focus on claims of not registering trading platforms, offering unregistered securities, and not correctly informing investors about potential risks.

The cryptocurrency industry is known for its volatility, and 2023 was no exception. The year was marked by numerous legal developments that impacted key players in the crypto market. This report provides an in-depth analysis of these legal outcomes and their potential implications for the future of cryptocurrency regulation and market dynamics.

Ongoing Legal Proceedings

1. Nexo and Cayman Islands Financial Regulator

• Date: January 17, 2023
• Current Status: Lawsuit filed against the regulator.

Nexo challenged the Cayman Islands Regulator’s decision after its VASP registration was declined. Interestingly, just days before this legal move, Bulgarian authorities raided Nexo’s offices and charged four individuals with money laundering. Nexo aims to reverse the regulator’s decision, asserting its ability to offer crypto services to residents of the Cayman Islands.

2. SEC Takes on Avraham Eisenberg

• Date: January 20, 2023
• Current Status: Legal proceedings continue.

On January 20, 2023, The SEC accused Avraham Eisenberg of orchestrating an attack on Mango Markets using the MNGO token, allegedly sold as a security. Eisenberg is believed to have orchestrated a scheme in October 2022, misappropriating about $116 million in crypto assets from Mango Markets.

3. SEC’s Allegations Against Paxos

• Date: February 12, 2023
• Current Status: Paxos disputes SEC’s assessment.

On February 12, 2023, The SEC charged Paxos Trust Co., alleging violations of investor protection laws and asserting that Binance USD is an unregistered security. At that time, Paxos was the third-largest stablecoin, boasting a market cap of $16 billion. In response, Binance founder Changpeng Zhao indicated that Paxos had been instructed to halt the creation of new BUSD tokens.

4. SEC vs. Terraform and CEO Do Kwon

• Date: February 16, 2023
• Current Status: Legal action ongoing.

On February 16, 2023, The Securities and Exchange Commission charged Singapore-based Terraform Labs PTE Ltd. and Do Hyeong Kwon with producing a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.

According to the SEC’s accusations from April 2018 until the scheme’s collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions.

Multiple charges against DO Kwon are still going on, and the founder is still facing scrutiny by regulators.

5. CoinEx Faces NYAG’s Wrath

• Date: February 23, 2023
• Current Status: Legal action in progress.

New York Attorney General Letitia James filed a lawsuit against CoinEx, alleging that the exchange operated without registering as a securities and commodities broker-dealer in the state. James’ petition, filed on February 22, 2023, accuses CoinEx of persistent fraudulent activities and violations of New York’s stringent Martin Act, known for its strict anti-fraud and securities regulations.

6. SEC Sues Justin Sun

• Date: March 22, 2023
• Current Status: Ongoing legal case.

On March 22, 2023, The S.E.C. filed a complaint in federal court in the Southern District of New York, charging Justin Sun with securities law violations linked to his management of three crypto companies.

The agency charged eight celebrities, including Ms. Lohan and media influencer Jake Paul, for illegally promoting Mr. Sun’s cryptocurrencies.

Ms. Lohan, Mr. Paul, and four other celebrities agreed to pay $400,000 to settle the charges.

7. SEC vs. Beaxy

• Date: March 29, 2023
• Current Status: Active legal proceedings.

March 29, 2023, The Securities and Exchange Commission charged the crypto asset trading platform beaxy.com (the Beaxy Platform) and its executives for failing to register as a national securities exchange, broker, and clearing agency. The SEC also charged the founder of the platform, Artak Hamazaspyan, and a company he controlled, Beaxy Digital, Ltd., with raising $8 million in an unregistered offering of the Beaxy token (BXY) and alleged that Hamazaspyan misappropriated at least $900,000 for personal use, including gambling. Finally, the SEC charged market makers operating on the Beaxy Platform as unregistered dealers.

8. Gemini vs. Digital Currency Group

• Date: July 7, 2023
• Current Status: Lawsuit in progress.

On January 12, 2023, The Securities and Exchange Commission sued Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. 

SEC claimed that through these unregistered offerings, Genesis and Gemini raised billions of dollars worth of crypto assets from hundreds of thousands of investors.

 On April 25, 2023, DCG said new creditor demands disrupted Genesis settlement, but on October 12, 2023, the court showed the green light and approved a $175 million settlement. 

Genesis Global Capital filed for Chapter 11 bankruptcy protection in New York after being hit by two of 2022’s most significant industry collapses—Genesis Global Holdco, LLC and its subsidiaries Genesis Asia Pacific Pte.

9. Celsius Lawsuit Against StakeHound

• Date: July 12, 2023
• Current Status: Lawsuit underway.

On July 12, 2023, Bankrupt crypto lender Celsius Network filed a lawsuit against liquid staking platform StakeHound after the company allegedly failed to return $150 million worth of tokens owned by Celsius. 

10. SEC Sues Hex Founder Richard Heart

• Date: July 31, 2023
• Current Status: Legal proceedings are ongoing.

July 31, 2023, The Securities and Exchange Commission sued Richard Heart (aka Richard Schueler) and three unincorporated entities that he controls, Hex, PulseChain, and PulseX, for conducting unregistered offerings of crypto asset securities that raised more than $1 billion in crypto assets from investors. 

The SEC also charged Heart and PulseChain with fraud for misappropriating at least $12 million of offering proceeds to purchase luxury goods including sports cars, watches, and a 555-carat black diamond known as ‘The’Enigma’—reportedly the largest black diamond in the world.

After  HEX Plummets Over 40% After SEC Files Lawsuit Against Creator Richard Heart. 

11. VC Lawsuit Over FTX Fraud

• Date: August 9, 2023
• Current Status: Litigation continues.

On August 9, 2023, The lawsuit asserts that these VC firms actively participated in and conspired with FTX Group to commit multi-billion-dollar frauds for their own financial and professional gain. 

The lawsuit accuses 18 prominent VC firms, including Temasek, Sequoia Capital, Sino Global, and Softbank, of aiding and abetting the FTX fraud.

The suit alleges that these investment firms helped FTX’s founders, Sam Bankman-Fried and Gary Wang, launch and scale the now-bankrupt crypto exchange through their influence and financial resources.

12. Atomic Wallet Class Action

• Date: August 23, 2023
• Current Status: Class action lawsuit in process.

On August 23, 2023, A group of disgruntled cryptocurrency investors, including high-net-worth individuals from Russia and the Commonwealth of Independent States, launched a class action against Atomic Wallet following a major breach in June that resulted in $100 million in losses.

German lawyer Max Gutbrod and Boris Feldman, a co-founder of Moscow legal tech firm Destra Legal are coordinating the lawsuit. Gutbrod claims to be representing around 50 clients who lost $12 million due to the breach.

The lawyers are accusing Atomic Wallet of failing to implement adequate security measures to protect user funds, resulting in losing their clients’ investments. The exact amount being claimed in the class action has not been disclosed.

13. SEC vs. Impact Theory

• Date: August 28, 2023
• Current Status: Active legal action.

On August 28, 2023, The SEC accused Impact Theory, a media and entertainment company based in Los Angeles, of running an unregistered offering of crypto asset securities in the form of NFTs, raising around $30 million from over 250 investors across the US.

Accusations are made that Impact Theory failed to register the offering with the commission, potentially exposing investors to financial risks and violating securities laws.

14. SEC Charges Stoner Cats Web Series

• Date: September 13, 2023
• Current Status: Ongoing legal battle.

Sept. 13, 2023 The Securities and Exchange Commission took legal action against Stoner Cats 2 LLC (SC2) for conducting an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs) that raised approximately $8 million from investors to finance an animated web series called Stoner Cats.

The SEC claimed that the NFTs sold by the company were advertised as having the potential for future sales at a higher price. The SEC also noted that the company charged a 2.5% fee on all secondary sales. The SEC pointed out that the company sold over 10,000 NFTs for $800 each, using the money to fund the series. The SEC also mentioned that there were at least 10,000 secondary sales worth over $20 million.

15. Binance Class Action Lawsuit

• Date: October 2, 2023
• Current Status: Class action lawsuit in progress.

On October 2, 2023, the class-action suit accuses Binance.US and its CEO, Changpeng Zhao, of violating federal and California antitrust laws by attempting to monopolize the cryptocurrency market through unfair competition against FTX.

The suit focuses on tweets made by Zhao on Twitter (now X) in November 2022, just before FTX’s collapse. These tweets were coordinated with Binance’s decision to liquidate its holdings in FTX’s utility token, FTT, on November 6. The plaintiffs estimate that Binance owned up to 5% of all FTT tokens.

The plaintiffs argue that Binance’s actions harmed FTX and other competitors in the cryptocurrency market, potentially causing them financial losses and damaging their reputations. The suit seeks damages for these alleged violations of antitrust laws.

CZ tweets counted as responsible for FTX fallout.

16. CFTC Charges Former CEO of Voyager Digital

• Date: October 12, 2023
• Current Status: Active legal proceedings.

On October 12, 2023, CFTC charged Stephen Ehrlich, ex-CEO of Voyager Digital, with fraud and registration violations related to the digital asset platform.

Ehrlich and Voyager misled customers by promoting the platform as a safe haven for high-yield returns while taking reckless risks with assets.

CFTC seeks restitution, disgorgement, penalties, bans, and an injunction against further violations of the Commodity Exchange Act and CFTC regulations.

17. Gemini vs. Genesis over GBTC

• Date: October 27, 2023
• Current Status: Legal proceedings continue.

On October 27, 2023, Gemini accused bankrupt crypto lender Genesis of harming Earn users and hindering their recovery of digital assets. Gemini claims that Genesis owes it $1.6 billion, or 62 million shares of Grayscale Bitcoin Trust (GBTC), as collateral under a security agreement. If delivered, this collateral would completely secure and satisfy the claims of all Earn users.

DCG, the parent company of Genesis, declined to comment on Gemini’s complaint. In September, DCG submitted a plan claiming an expected recovery rate of 95% to 100% for Earn users, which Gemini disputed, accusing DCG of “gaslighting” creditors. DCG, Gemini, and Genesis are involved in various legal actions, including a suit by the New York Attorney General against all three companies and DCG CEO Barry Silbert.

Genesis filed for bankruptcy earlier this year after pausing customer withdrawals in November 2021. DCG and Genesis worked out a tentative Chapter 11 deal in August, with DCG seeing around 70% to 90% recovery for creditors in the Genesis bankruptcy, according to a shareholder letter released earlier this month.

18. SEC Charges SafeMoon

• Date: November 1, 2023
• Current Status: Ongoing legal case.

November 1, 2023, The Securities and Exchange Commission sued SafeMoon LLC, its creator Kyle Nagy, SafeMoon US LLC, and the company’s Chief Executive Officer, John Karony, and Chief Technology Officer, Thomas Smith, for perpetrating a massive fraudulent scheme through the unregistered sale of the crypto asset security, SafeMoon. 

According to the SEC’s complaint, the defendants promised to take the token’s price “safely to the moon.” Still, instead of delivering profits, they wiped out billions in market capitalization, withdrew crypto assets worth more than $200 million from the project, and misappropriated investor funds for personal use.

19. SEC Additional Charges Against Kraken

• Date: November 20, 2023
• Current Status: Lawsuit in progress.

Nov. 20, 2023, The Securities and Exchange Commission charged Payward Inc. and Payward Ventures Inc., together known as Kraken, with operating Kraken’s crypto trading platform. The SEC accused Kraken of facilitating the buying and selling of crypto asset securities since September 2018 without registering its functions with the SEC, depriving investors of necessary protections. Kraken allegedly provides an exchange, acts as a broker, deals in securities, and serves as a clearing agency. 

Kraken responded to this as they disagreed with the SEC’s stance, and they said the SEC had already tried this theory, and a court rejected it outright. The SEC argued in that case that digital assets bought and sold on trading platforms were securities transactions. 

Kraken shares were up 20% despite the lawsuit.

20. DOJ Sues Binance and CEO Chang Peng Zhao

• Date: November 19, 2023
• Current Status: Legal case ongoing.

On November 19, 2023, the Department of Justice sued Binance and CZ CEO for money laundering, unlicensed money transmission, and criminal sanctions violations.

Binance has admitted to breaching anti-money laundering (AML), unlicensed money transmitting (UMT), and sanctions violations in a landmark settlement with the US Department of Justice.

The settlement, which includes criminal charges for a Binance executive, marks the largest corporate resolution in history involving such offenses. Binance Holdings Limited, which operates Binance.com, then agreed to pay over $4 billion to resolve the investigation into BSA, IEEPA, and UMT violations.

Wrapping Up 

Year after year, the cryptocurrency landscape witnesses a rising tide of lawsuits, many of which arise due to ambiguities in regulations and legal frameworks surrounding cryptocurrency use and trading.

The imperative for robust regulatory oversight becomes evident as the cryptocurrency sector expands and evolves. Such oversight is vital to safeguard investors, curb fraud manipulation, and ensure adherence to crucial financial crime prevention measures, including anti-money laundering protocols.