DOCSLIB.ORG

Cryptocurrency Class Action Lawsuit Alleges Securities Violations and Demands “Rescue Fork” As Remedy

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Cryptocurrency Class Action Lawsuit Alleges Securities Violations and Demands “Rescue Fork” As Remedy April 24, 2018 Another fork in the road? Cryptocurrency class action lawsuit alleges securities violations and demands “rescue fork” as remedy By Megha Shah, Marx P. Calderon and Caitlin Duncan As the number of cryptocurrencies available over the internet continues to grow, their treatment in courts and with regulators remains to be seen. Cryptocurrency companies and users are waiting to see how the legal and regulatory industries react to them and the underlying Blockchain technology. On April 6, 2018, plaintiff, Alex Brola (“Brola”) brought a class action lawsuit against NANO, a cryptocurrency company, and key members of NANO’s core team for violations of Section 12(a)(1) and Section 15(a) of the Securities Act, negligent misrepresentation, unjust enrichment and civil conspiracy in connection with the loss of $170 million worth of XRB from BitGrail, an Italian cryptocurrency exchange. See Alex Brola v. NANO et al., 1:18-cv-02049 (E.D.N.Y. filed April 6, 2018). As this case moves forward, we’ll start seeing more answers. WHAT HAPPENED: Brola alleges that he opened an account at BritGrail for the primary purpose of investing in and exchanging a cryptocurrency called XRB, upon investment solicitations and specific instructions and representations of safety and security made by NANO representatives. Id. at *2. Brola further alleges that NANO publicly promoted BitGrail as a safe and reliable place for XRB holders to stake and exchange their XRB, and XRB holders relied on that endorsement by NANO in choosing BitGrail as their exchange. Id. However, in early February 2018, BitGrail announced that it lost $170 million worth of XRB from its exchange due to unauthorized transactions. According to the class complaint, the loss accounts for approximately eighty percent (80%) of the XRB that BitGrail customers held in their accounts and fifteen percent (15%) of all XRB that exists. Id. at *9. Since this loss, BitGrail users attempted to move their XRB off the BitGrail exchange into private cryptocurrency wallets but BitGrail suspended all account activity. Id. at *10. This newsletter is intended as an information source for the clients and friends of Nixon Peabody LLP. The content should not be construed as legal advice, and readers should not act upon information in the publication without professional counsel. This material may be considered advertising under certain rules of professional conduct. Copyright © 2018 Nixon Peabody LLP. All rights reserved. Brola filed this suit under a theory that XRB is a security subject to U.S. securities laws. As such, Brola brings this private right of action under Section 12(a)(1) and Section 15(a) alleging that NANO misled investors into using the BitGrail exchange to invest in XRB. According to the class complaint, NANO has failed to implement any solution to the loss of XRB for its holders. See id. at *10. Brola asserts that NANO can create a “rescue fork” where NANO would rewrite the XRB code and restore ownership to Brola and the purported class. Id. Brola further alleges that NANO has refused to implement such a remedy because NANO still owns and controls millions of XRB and does not want to sacrifice any financial advantage they currently have over XRB investors that lost their coins on BitGrail. Id. at *4. IMPLICATIONS: This lawsuit requires that the court’s decisions be analyzed at every step for a number of reasons. The lawsuit brings up a host of questions that businesses and courts alike will face as Blockchain technology continues to develop and cryptocurrencies gain traction. First, Brola asks the court to order NANO to create a “rescue fork” in a manner that results in rescission of all XRB held in accounts at BitGrail. A hard fork describes a major change to the code and Blockchain protocol, which can make previously valid blocks or transactions invalid. A hard fork usually results in two different coins with different ledgers and sets of code. Here, Brola asks the court to require a company to create a new coin, ledger and code to turn back the clock to before February 2018 when BitGrail announced the $170 million loss of XRB. This is a tall demand from a court, and Blockchain companies should pay attention to whether or not the court can require the company to essentially create a new product. Similarly, cryptocurrency users may be interested to see if they can recoup any of their losses by convincing a court to require a cryptocurrency company to execute a “rescue fork” to turn back time to compensate users who lost money. Next, it will behoove cryptocurrency companies to pay attention to whether securities laws violations can be brought for a company’s alleged misrepresentation of an exchange as opposed to the cryptocurrency itself, either by private individuals or the SEC. Brola alleges that NANO’s core employees promoted BitGrail and caused it to be the “predominant and nearly exclusive home for XRB.” If this case proceeds, the court may have to address whether a cryptocurrency is a security subject to the Securities Act, as discussed further below. In a regulatory environment where the SEC, CFTC and other regulatory agencies have indicated a desire to exercise rulemaking authority, a ruling on whether or not cryptocurrencies are securities alone is likely to further open the regulatory can of worms that cryptocurrencies are striving to avoid or minimize as regulators contemplate implementing rules for investor protection. Finally, as lawsuits increase, companies will face challenges in explaining the Blockchain technology behind cryptocurrencies to judges and juries alike. As with any type of litigation, expect to see issues arise in the discovery process to secure documents or information from a third party foreign exchange, like BitGrail; arguments about trade secrets; and the relationship between a cryptocurrency company and an exchange on which the currency is traded. Overall, this lawsuit will be interesting and important to track as one of the first of its kind, where the law and regulations relating to this new technology are still developing. IS XRB A SECURITY? The SEC has not formally taken a position as to whether Bitcoin, the first and current largest cryptocurrency, is a security. However, the SEC to date has brought enforcement actions in this arena. Bitcoin does not neatly fall into any definition of a “security” under the Securities Act, but it does have attributes of instruments that do fall into that category. In SEC v. Howey Co, the court explained that an instrument is treated as a security if the “common scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” Whether or not XRB or any new coin, will be viewed as a security, as always, depends on the facts. A good starting point is to look at the “investment” portion of the Howey definition. If Bitcoin is treated as any other currency, then purchasing “coins” is unlikely to trigger regulations. However, if the SEC finds that the primary purpose of purchasing these coins is the inherent speculation of cryptocurrency, there may be grounds for regulation that could lead to enforcement. Press releases by the SEC indicate that quoted prices and other services often offered in connection with a security could tip the scales. It is prudent, then, that any player in this growing field remain mindful of what the SEC views as a security. As the industry grows, expect a higher degree of scrutiny on the unique characteristics of each coin and the associated offering. This lawsuit could provide some of the much needed clarity and guidance needed in this space. Nixon Peabody will continue to monitor this litigation and updates in the cryptocurrency and Blockchain technology space. For questions related to cryptocurrencies, Blockchain or this litigation, please reach out to the authors or anyone in Nixon Peabody’s experienced Blockchain and Cryptocurrency group. — Megha Shah at [email protected] or 312-977-9205 — Marx P. Calderon at [email protected] or 617-345-1205 — Caitlin Duncan at [email protected] or 617-345-6180 .
Load more

Recommended publications
  • User Manual Ledger Nano S
    User Manual Ledger Nano S Version control 4 Check if device is genuine 6 Buy from an official Ledger reseller 6 Check the box contents 6 Check the Recovery sheet came blank 7 Check the device is not preconfigured 8 Check authenticity with Ledger applications 9 Summary 9 Learn more 9 Initialize your device 10 Before you start 10 Start initialization 10 Choose a PIN code 10 Save your recovery phrase 11 Next steps 11 Update the Ledger Nano S firmware 12 Before you start 12 Step by step instructions 12 Restore a configuration 18 Before you start 19 Start restoration 19 Choose a PIN code 19 Enter recovery phrase 20 If your recovery phrase is not valid 20 Next steps 21 Optimize your account security 21 Secure your PIN code 21 Secure your 24-word recovery phrase 21 Learn more 22 Discover our security layers 22 Send and receive crypto assets 24 List of supported applications 26 Applications on your Nano S 26 Ledger Applications on your computer 27 Third-Party applications on your computer 27 If a transaction has two outputs 29 Receive mining proceeds 29 Receiving a large amount of small transactions is troublesome 29 In case you received a large amount of small payments 30 Prevent problems by batching small transactions 30 Set up and use Electrum 30 Set up your device with EtherDelta 34 Connect with Radar Relay 36 Check the firmware version 37 A new Ledger Nano S 37 A Ledger Nano S in use 38 Update the firmware 38 Change the PIN code 39 Hide accounts with a passphrase 40 Advanced Passphrase options 42 How to best use the passphrase feature 43
    [Show full text]
  • Performance-Based Analysis of Blockchain Scalability Metric
    ISSN 1846-6168 (Print), ISSN 1848-5588 (Online) Subject review https://doi.org/10.31803/tg-20210205103310 Performance-Based Analysis of Blockchain Scalability Metric Jyoti Yadav*, Ranjana Shevkar Abstract: Cryptocurrencies like Bitcoin and Ethereum, are widely known applications of blockchain technology, have drawn much attention and are largely recognized in recent years. Initially Bitcoin and Ethereum processed 7 and 15 Transactions Per Second (TPS) respectively, whereas VISA and Paypal process 1700 and 193 TPS respectively. The biggest challenge to blockchain adoption is scalability, defined as the capacity to change the block size to handle the growing amount of load. This paper attempts to present the existing scalability solutions which are broadly classified into three layers: Layer 0 solutions focus on optimization of propagation protocol for transactions and blocks, Layer 1 solutions are based on the consensus algorithms and data structure, and Layer 2 solutions aims to decrease the load of the primary chain by implementing solutions outside the chain. We present a classification and comparison of existing blockchain scalability solutions based on performance along with their pros and cons. Keywords: consensus; decentralization; latency; scalability; security; throughput 1 INTRODUCTION sectors such as health care, media, logistics, supply chain management, power and utilities, Government, property, E- Blockchain is a decentralized, distributed, immutable voting etc. Apart from attractive features and interesting ledger with a sequence of blocks interlinked and secured applications, the most challenging task of blockchain is its using cryptography. Block is a basic unit of blockchain that scalability. bundles a set of transactions initiated by participating nodes This paper attempts to classify and compare existing in the blockchain network.
    [Show full text]
  • Impossibility of Full Decentralization in Permissionless Blockchains
    Impossibility of Full Decentralization in Permissionless Blockchains Yujin Kwon*, Jian Liuy, Minjeong Kim*, Dawn Songy, Yongdae Kim* *KAIST {dbwls8724,mjkim9394,yongdaek}@kaist.ac.kr yUC Berkeley [email protected],[email protected] ABSTRACT between achieving good decentralization in the consensus protocol Bitcoin uses the proof-of-work (PoW) mechanism where nodes earn and not relying on a TTP exists. rewards in return for the use of their computing resources. Although this incentive system has attracted many participants, power has, CCS CONCEPTS at the same time, been significantly biased towards a few nodes, • Security and privacy → Economics of security and privacy; called mining pools. In addition, poor decentralization appears not Distributed systems security; only in PoW-based coins but also in coins that adopt proof-of-stake (PoS) and delegated proof-of-stake (DPoS) mechanisms. KEYWORDS In this paper, we address the issue of centralization in the consen- Blockchain; Consensus Protocol; Decentralization sus protocol. To this end, we first define ¹m; ε; δº-decentralization as a state satisfying that 1) there are at least m participants running 1 INTRODUCTION a node, and 2) the ratio between the total resource power of nodes Traditional currencies have a centralized structure, and thus there run by the richest and the δ-th percentile participants is less than exist several problems such as a single point of failure and corrup- or equal to 1 + ε. Therefore, when m is sufficiently large, and ε and tion. For example, the global financial crisis in 2008 was aggravated δ are 0, ¹m; ε; δº-decentralization represents full decentralization, by the flawed policies of banks that eventually led to many bank which is an ideal state.
    [Show full text]
  • Blockchain Security
    CO 445H BLOCKCHAIN SECURITY Dr. Benjamin Livshits Apps Stealing Your Data 2 What are they doing with this data? We don’t know what is happening with this data once it is collected. It’s conceivable that this information could be analysed alongside other collections of data to provide insights into a person’s identity, online activity, or even political beliefs. Cambridge Analytica and other dodgy behavioural modification companies taught us this. The fact is we don’t know what is happening to the data that is being exfiltrated in this way. And in most cases we are not even aware this is taking place. The only reason we know about this collection of data-stealing apps is because security researcher, Patrick Wardle told us. Sudo Security Group’s GuardianApp claims another set of dodgy privacy eroding iOS apps, while Malwarebytes has yet another list of bad actors. http://www.applemust.com/how-to-stop-mac-and-ios-apps-stealing-your-data/ From Malwarebytes 3 https://objective-see.com/blog/blog_0x37.html Did You Just Steal My Browser History!? 4 Adware Doctor Stealing Browsing History 5 https://vimeo.com/288626963 Blockchain without the Hype 6 Distributed ledgers and blockchain specifically are about establishing distributed trust How can a community of individuals agree on the state of the world – or just the state of a database – without the risk of outside control or censorship Doing this with open-source code and cryptography turns out to be a difficult problem Distributed Trust 7 A blockchain is a decentralized, distributed and public
    [Show full text]
  • How to Sell Ethereum Classic on Robinhood
    1 How to Sell Ethereum Classic on Robinhood Update [06-07-2021] This widget shows the number of times this symbol reached a new low price for specific periods, from the past 5-Days to the past 20-Years. Included are the Open, High, Low, Last,Change, Change and Volume figures. When looking at the Periods in the Price Performance table, the 5-Day through 2-Year periods are based on daily data, the 3-Year and 5-Year periods are based on weekly data, and the 10-Year and 20-Year periods are based on monthly data. I need to give payment ETH address to my customers for deposit ETH their accounts. You can t export the xpub directly from a ledger nano s with the default bitcoin or ethereum apps. I want to use a HD ETH wallet for this and I am using Ledger Nano S now. If Ledger support HD, How can I export XPub. But you can construct an xpub using the data you can extract from the ledger. Positively Correlated Currencies. 50-day, 100-day and 200-day moving averages are among the most commonly used indicators to identify important resistance and support levels. Some charts will use hollow and filled candlestick bodies instead of colors to represent the same thing. The Maker Protocol MakerDAO s Multi-Collateral Dai MCD System. At a technical level, smart contracts manage each type of vote. Additionally, because exchanges and blockchain projects can integrate the DSR into their own platforms, it presents new opportunities for cryptocurrency traders, entrepreneurs, and established businesses to increase their Dai savings and Dai operating capital.
    [Show full text]
  • Uncontrolled Randomness in Blockchains: Covert Bulletin Board for Illicit Activity
    Uncontrolled Randomness in Blockchains: Covert Bulletin Board for Illicit Activity Nasser Alsalami Bingsheng Zhang* Lancaster University, UK Zhejiang University, China [email protected] [email protected] Abstract—Public blockchains can be abused to covertly store platforms that use randomized cryptographic primitives, such and disseminate potentially harmful digital content which poses as digital signatures and non-interactive zero-knowledge a serious regulatory issue. In this work, we show the severity of proofs. The main observation is that all randomized algo- the problem by demonstrating that blockchains can be exploited to surreptitiously distribute arbitrary content. More specifically, rithms need to consume random coins somewhere along all major blockchain systems use randomized cryptographic the execution, and these random coins are not audited or primitives, such as digital signatures and non-interactive zero- certified publicly. By intentionally manipulating the random knowledge proofs; we illustrate how the uncontrolled random- coin supplied to a randomized algorithm, an attacker is ness in such primitives can be maliciously manipulated to enable able to embed arbitrary information into the output of the covert communication and hidden persistent storage. To clarify the potential risk, we design, implement and evaluate our algorithm, where the output that contains steganographic data technique against the widely-used ECDSA signature scheme, is computationally indistinguishable from normal output. the CryptoNote’s ring signature scheme, and Monero’s ring Our attack can be used for covert channels, persistent stor- confidential transactions. Importantly, the significance of the demonstrated attacks stems from their undetectability, their age, and many other scenarios. For instance, the attacker(s) adverse effect on the future of decentralized blockchains, may try to subvert, or mis-implement cryptocurrency wallets and their serious repercussions on users’ privacy and crypto and re-distribute them to unsuspecting users.
    [Show full text]
  • A Survey of Distributed Consensus Protocols for Blockchain Networks
    1 A Survey of Distributed Consensus Protocols for Blockchain Networks Yang Xiao∗, Ning Zhang†, Wenjing Lou∗, Y. Thomas Hou∗ ∗Virginia Polytechnic Institute and State University, VA, USA †Washington University in St. Louis, MO, USA Abstract—Since the inception of Bitcoin, cryptocurrencies participants. On the other hand, blockchain is also known for and the underlying blockchain technology have attracted an providing trustworthy immutable record keeping service. The increasing interest from both academia and industry. Among block data structure adopted in a blockchain embeds the hash various core components, consensus protocol is the defining technology behind the security and performance of blockchain. of the previous block in the next block generated. The use of From incremental modifications of Nakamoto consensus protocol hash chain ensures that data written on the blockchain can not to innovative alternative consensus mechanisms, many consensus be modified. In addition, a public blockchain system supports protocols have been proposed to improve the performance of third-party auditing and some blockchain systems support a the blockchain network itself or to accommodate other specific high level of anonymity, that is, a user can transact online application needs. In this survey, we present a comprehensive review and anal- using a pseudonym without revealing his/her true identity. ysis on the state-of-the-art blockchain consensus protocols. To The security properties promised by blockchain is unprece- facilitate the discussion of our analysis, we first introduce the dented and truly inspiring. Pioneering blockchain systems such key definitions and relevant results in the classic theory of fault as Bitcoin have greatly impacted the digital payment world.
    [Show full text]
  • Research and Applied Perspective to Blockchain Technology: a Comprehensive Survey
    applied sciences Review Research and Applied Perspective to Blockchain Technology: A Comprehensive Survey Sumaira Johar 1,* , Naveed Ahmad 1, Warda Asher 1, Haitham Cruickshank 2 and Amad Durrani 1 1 Department of Computer Science, University of Peshawar, Peshawar 25000, Pakistan; [email protected] (N.A.); [email protected] (W.A.); [email protected] (A.D.) 2 Institute of Communication Systems, University of Surrey, Guildford GU2 7JP, UK; [email protected] * Correspondence: [email protected] Abstract: Blockchain being a leading technology in the 21st century is revolutionizing each sector of life. Services are being provided and upgraded using its salient features and fruitful characteristics. Businesses are being enhanced by using this technology. Countries are shifting towards digital cur- rencies i.e., an initial application of blockchain application. It omits the need of central authority by its distributed ledger functionality. This distributed ledger is achieved by using a consensus mechanism in blockchain. A consensus algorithm plays a core role in the implementation of blockchain. Any application implementing blockchain uses consensus algorithms to achieve its desired task. In this paper, we focus on provisioning of a comparative analysis of blockchain’s consensus algorithms with respect to the type of application. Furthermore, we discuss the development platforms as well as technologies of blockchain. The aim of the paper is to provide knowledge from basic to extensive from blockchain architecture to consensus methods, from applications to development platform, from challenges and issues to blockchain research gaps in various areas. Citation: Johar, S.; Ahmad, N.; Keywords: blockchain; applications; consensus mechanisms Asher, W.; Cruickshank, H.; Durrani, A.
    [Show full text]
  • The Ultimate Guide to Gpu/Crypto Mining Contents
    THE ULTIMATE GUIDE TO GPU/CRYPTO MINING CONTENTS Introduction Page 1 Mining pools - solo mining vs Page 13 pool mining Buy your own rig or rent it out? Page 2 How to mine Bitcoin Page 15 How to build a rig Page 4 How to mine ETH Page 16 GPU – which one is best for Page 7 what How to mine Monero Page 17 ASIC vs GUI vs Cloud vs CLI Page 9 Top tips for miners Page 19 Mining difficulty and hashrates Page 11 Cudo Miner Page 20 Mine Better, Mine Stronger, Mine Faster! INTRO The chances are, you’ve not got here by accident. You have an interest in one of a) cryptocurrency, b) mining it, c) making money and – quite likely – d) all of the above. At its most basic, cryptocurrency mining is the harnessing of computer processing way, to verify and add entries to the blockchain that underpins a currency. Naturally enough, the computations involved are long, complex and require a huge amount of power to crack an individual block. There are lots of miners all trying to crack the same computations, but the one who does it is rewarded by mining a new coin. It’s very hit and miss, and thus the more power at your fingertips, the better your odds. The rewards are increasingly worth it, too, and that’s why more and more people are either investing in crypto-mining hardware, leasing the power of others, or using their spare processing power to mine currency. This guide, then, is aimed at those looking to do just that.
    [Show full text]
  • Blockchain Development Trends 2021 >Blockchain Development Trends 2021
    >Blockchain Development Trends 2021_ >Blockchain Development Trends 2021_ This report analyzes key development trends in core blockchain, DeFi and NFT projects over the course of the past 12 months The full methodology, data sources and code used for the analysis are open source and available on the Outlier Ventures GitHub repository. The codebase is managed by Mudit Marda, and the report is compiled by him with tremendous support of Aron van Ammers. 2 >The last 12 months Executive summary_ * Ethereum is still the most actively developed Blockchain protocol, followed by Cardano and Bitcoin. * Multi-chain protocols like Polkadot, Cosmos and Avalanche are seeing a consistent rise in core development and developer contribution. * In the year of its public launch, decentralized file storage projectFilecoin jumped straight into the top 5 of most actively developed projects. * Ethereum killers Tron, EOS, Komodo, and Qtum are seeing a decrease in core de- velopment metrics. * DeFi protocols took the space by storm with Ethereum being the choice of the underlying blockchain and smart contracts platform. They saw an increase in core development and developer contribution activity over the year which was all open sourced. The most active projects are Maker, Gnosis and Synthetix, with Aave and Bancor showing the most growth. SushiSwap and Yearn Finance, both launched in 2020, quickly grew toward and beyond the development activity and size of most other DeFi protocols. * NFT and Metaverse projects like collectibles, gaming, crypto art and virtual worlds saw a market-wide increase in interest, but mostly follow a closed source devel- opment approach. A notable exception is Decentraland, which has development activity on the levels of some major blockchain technologies like Stellar and Al- gorand, and ahead of some of the most popular DeFi protocols like Uniswap and Compound.
    [Show full text]
  • Download Whitepaper
    WHITEPAPER WWW.IAGON.COM v4.5 1 TABLE OF CONTENTS OVERVIEW .............................................................................................................................3 INTRODUCTION .....................................................................................................................5 MARKET OUTLOOK OF CLOUD STORAGE SERVICES .............................................................6 MARKET OUTLOOK OF CLOUD COMPUTING SERVICES ..........................................................7 IAGON’S AI-BASED COMPUTATIONAL PROCESSES ...............................................................8 IAGON’S MULTIPLE BLOCKCHAIN SUPPORT .........................................................................9 IAGON’S SECURE LAKE TECHNOLOGY ..................................................................................9 IAGON’S SMART COMPUTING GRID PLATFORM AND AI-TRACKER TECHNOLOGY .................11 CASE STUDY ........................................................................................................................12 REGULATIONS .....................................................................................................................13 REINFORCEMENT LEARNING ...............................................................................................13 DATA MINING ........................................................................................................................14 BLOCKCHAIN .......................................................................................................................15
    [Show full text]
  • Major Cryptocurrency Provider Compromised in a Supply Chain Attack
    Memo 26/11/2019 - TLP:WHITE Major cryptocurrency provider compromised in a supply chain attack Reference: Memo [191126-1] – Version: 1.0 Keywords: cryptocurrency, finance, Monero, supply chain attack Sources: Publicly available information Key Points The official command line interface Monero wallet was compromised and used in a supply chain attack. At least one person has reported financial loss due to the compromise. Cryptocurrency platforms and software are a high-value target for cyber-thieves. Summary On November 19, the Monero cryptocurrency team announced1 that for 35 minutes, the wallet tools available from the official download site getmonero[.]org, had been compromised and harboured additional code that was designed to steal cryptocurrency. According to reports, at least one user lost about $7000 from their cryptocurrency wallet as a result of using the modified binary. As of writing, it is not clear how the compromise was achieved. The breach came to light when some users noticed that the command-line Monero cryptocurrency wallet components downloaded from the official site had hashes that differed from the officially published checksums. This indicates that either the files have been modified or an incorrect hash value has been published. Monero team confirmed the breach and recommends that everyone who downloaded the tool recently should replace it with a known good one. Also, Monero recommends that if a cryptocurrency wallet was accessed with the compromised tool, all funds should be transferred to a different wallet immediately to avoid theft of virtual money. Comments Cryptocurrency management platforms and software are a preferred target for cyber criminals, simply “because that’s where the money is.” The Monero platform compromise is an ideal supply chain attack.
    [Show full text]