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Litigating Cryptocurrency: Is Bitcoin’s Future Doomed?

The following article can also be found in the Legal Intelligencer and VISTA.Today.

By John Rafferty — After the price of Bitcoin hit $10,000 on November 28th and Bitcoin futures launched on December 10th, you might have asked yourself why this digital currency is getting so much attention in the closing days of 2017. You may have also wondered what the broader-adoption of cryptocurrency means for future plaintiffs who hold their money in digital wallets on a blockchain, only to later find themselves the target of hackers and their money, gone.

When a client stores money with a bank in the U.S., that money is both insured by the FDIC and is “held” by a central institution that could be a named defendant if those funds ever went missing. In fact, the bank, if required, could provide a full accounting of how and where your money was stored and moved. But what makes Bitcoin and other cryptocurrencies unique from other currencies is that they exist on a continuously growing list of records, that when linked together using cryptography, form a blockchain.

John RaffertyUnderstanding the Blockchain

The Harvard Business Review describes a blockchain as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” Although record-keeping is a central function of businesses, when exchanges are transacted across separate institutions with unique record-keeping ledgers, there is no master ledger to review, reconcile and verify those transactions. Settlement of a sale of stock, for example, can take as long as a week, because the buyer and seller don’t have access to one another’s ledgers and can’t automatically verify that the assets are owned by the seller and can be transferred to the buyer. If you’ve ever tried to transfer money into an account in another country, you understand the enormous headache this need for verification creates.

When currency is held and transferred on a blockchain, those verifications happen in just seconds and are recorded on the chain’s blocks, forever. How does that happen? If you had information that was terribly important but you wanted access to it quickly from anywhere, you might copy that data and put those copies in several places. (Think Jason Bourne stashing identical passports in safe-deposit boxes in multiple banks around the world.) By copying information, you are ensuring that if something happens to your original, you have a backup. By putting copies of that information in several places, you’re making it quickly accessible, no matter which bank is open for business.

A blockchain-based, or distributed ledger works on much the same principle: The ledger of transactions across the entire blockchain is replicated in thousands of identical databases, each hosted by someone who is willing to devote computing power to the verification of these transactions. By storing cryptographically-linked duplications of the same ledger information, the blockchain ensures that changes in one copy of the ledger are mirrored simultaneously in all other versions of that ledger. Records of every transaction are permanently stored in all ledgers on the chain. Unlike a sale of stock or international transfer of money, this system of decentralized, automated verifications does not require third-party intermediaries.

Growth of Crypto

Given its ability to facilitate rapid, verifiable movements of money around the world in seconds, blockchain-based currencies (cryptocurrencies) have grown enormously in adoption and use since the introduction of Bitcoin in 2008. From uses in supply-chain management, intellectual property, fraud detection, regulatory compliance, audits, data storage and even contract creation, cryptocurrency represents more than just a symbol of money owned, but actually enables its holders to be more nimble and informed than once thought possible.

Perhaps that is why banks like Citi Bank, UBS, Barclays, Goldman Sachs and Santander are opening labs to research blockchains, developing their own coins, and planning trials with Bitcoin. Amid extreme volatility and wide swings in value, the price of Bitcoin has surged in 2017 from $600 to more than $19,000 for one coin.

It came as no surprise, then, when the Chicago-based exchange group CBOE Global Markets launched Bitcoin futures on December 10, 2017, enabling crypto-wary investors to dip their toes into the wild swings of Bitcoin, without the risk of holding the cryptocurrency themselves. Three days after Bitcoin futures launched on Dec 13, 2017, Bitcoin’s market cap of $287B exceeded that of Wells Fargo ($279B), Alibaba ($269B) or Samsung Electronics ($259B).

All That Glitters Is Not Gold

Although it has the largest market cap, Bitcoin is just one of more than a thousand cryptocurrencies available to hold, buy and sell. Sites like list the coins and “tokens” that have emerged in the past few years and online exchanges like provide a hub for the buying and selling some of the largest coins by market share: Bitcoin, Bitcoin Cash, Ethereum and Litecoin. On December 9, 2017, Coinbase became the #1 downloaded app from the Apple iOS Store.

In just 24 hours after Bitcoin futures went live on December 10, Coinbase added 100,000 new users to its exchange, bringing their total number of users to 11.9 million across 32 countries, putting it ahead of traditional brokerages like Charles Schwab.

With such an incredible influx of new users opening accounts, moving money and trading cryptocurrencies, it is hardly a surprise that exchanges struggle to keep pace with the demand. As the cryptocurrency market cap approached $500B on Dec 12, 2017, some of the biggest exchanges had to temporarily halt trading of Litecoin and Ether, to ensure that transactions were being processed in the order in which they were received.

Outages like this one, although typically brief, are not uncommon among crypto exchanges and could result in a holder of a particular coin not being able to sell or buy during what might be critical inflection points in the coin’s valuation.

Technical challenges of buying and selling are not the only problems confronting cryptocurrency investors. Although blockchain ledgers are designed to ensure verifications at a confidence level and speed that humans cannot achieve, assets held digitally will nearly always be vulnerable to hacking and swindlers.

Using invasive software known as malware, Theodore Price of Pennsylvania admitted to stealing $40 million USD worth of Bitcoin in July 2017, by causing investors’ computers to reassign their Bitcoin to accounts he controlled. Because owners of cryptocurrency can more easily store their holdings under fictitious names, thieves are easily able to mask their identities and are seldom found. Had Price not reportedly tried to charter a plane to flee the country using the name Jeremy Renner as a ruse, he might have gotten away.

Litigating Crypto

Besides the obvious difficulties of having to educate your judge, your jury (if there is one) and potentially, opposing counsel about the intricacies of the blockchain, a significant challenge to litigating cases involving cryptocurrencies is the hurdle of recovery. Since individuals, corporations and banks tend to be insured, judgments in large dollar values for lost assets tend to be recoverable.

But blockchain assets lost to hackers or swindlers are neither covered under most insurance policies nor are they easily attributable to one person. When an exchange is hacked and thousands of investors have their cryptocurrency stolen, is the CEO the one at fault?

A federal judge in Florida thought so. When a smaller exchange, called Cryptsy, was hacked in July of 2014, the hacker made off with 13,000 Bitcoin and 300,000 Litecoin. CEO Paul Vernon then filed for bankruptcy, but was sued in a class-action lawsuit by the investors who had kept and lost their money in the Cryptsy exchange. Because he failed to respond to the allegations, a default judgment for $8.2M was entered, but execution on that judgment will depend on many factors, including whether or not Vernon is ever found. Plaintiffs’ $8.2M judgment, which is likely to remain uncollected, demonstrates the unusually high risk investors face when they store their coins in exchanges.

In April 2016, Anthony Murgio and several of his associates were indicted by a federal grand jury for operating the website as an unlicensed money transmitting business. The Government alleged that Murgio and his co-conspirators’ attempted to shield the true nature of his Bitcoin exchange business by operating through several front companies, to convince financial institutions that was just a members-only association of individuals interested in collectable items, like stamps and sports memorabilia.

When the defendants challenged the sufficiency of the indictment, they argued that Bitcoins do not qualify as “funds” under 18 U.S.C. § 1960, which makes it a crime to “knowingly conduct, control, manage, supervise, direct, or own all or part of an unlicensed money transmitting business.” 18 U.S.C. § 1960(a). Since § 1960 does not specify what counts as “money,” the District Court for the Southern District of New York had to determine whether Bitcoins are “funds” under the statute.

The Court noted that the ordinary definition of funds as “available pecuniary resources” implied resources that are “generally accepted as a medium of exchange.” United States v. Murgio, 209 F.Supp.3d 698, 707 (S.D.N.Y. 2016). Acknowledging that Bitcoins can be accepted “as a payment for goods and services” or bought directly from an exchange with a bank account, the Court concluded that “Bitcoins clearly qualify as money or funds under § 1960.”

The Court’s judgment notwithstanding, the question as to whether cryptocurrency should be classified as money, a commodity or a security is still the subject of much debate and seems to depend on the structure and purpose of the particular coin at issue. Whether the Commodities Futures Trading Commission or the Securities and Exchange Commission has authority over these digital assets is an important question with multi-million dollar implications.

Looking Ahead

Is Bitcoin’s future doomed? Based on its rising adoption rate and unprecedented growth in value, it’s likely that even if Bitcoin does not gain the widespread adoption that James Altucher has predicted, it is not going away quietly or quickly. Instead, it may limp along on the sidelines, reminding bullish investors of the time they bet on a social experiment and lost. But even on the sidelines, Bitcoin, like all cryptocurrency, is a 21st century phenomenon that lawyers must understand and be prepared to litigate.

The decentralized nature of blockchains makes anonymity easy and therefore naming and unmasking defendants very difficult. The distributed version of a ledger may mean that hackers and swindlers have the advantage of perpetrating rather small thefts millions of times an hour on blocks and accounts distributed around the world. In a world where insurance companies are not yet writing policies that cover blockchain-based assets or exchanges, investors must proceed with caution. Suits involving lost crypto may be difficult to get into court. When they do make it in the door, litigators should expect that different courts will have divergent opinions on whether cryptocurrency is money, a commodity or a security. And if they’re fortunate enough to get a judgment in their favor, litigators should be ready for all manner of difficulty collecting on that judgment.

On December 27, 2017, the Chicago Mercantile Exchange (CME) tweeted that it launched a market simulation tool, which allows newcomers to practice trading Bitcoin futures without risking real money. Just a week prior, CME became the second of only two US-based companies to facilitate the trading in Bitcoin futures. Whatever else the future may hold for cryptocurrency, we can expect that as this experiment unfolds, more and more institutions will find ways to extract profits from this emerging technology.

So although Bitcoin’s future is probably not doomed, we, as legal practitioners will be in the best position to serve our clients by remaining attuned to developments that are transforming how business is transacted around the world.

For a simple, easy-to-understand pictorial guide of what a blockchain is and how it’s useful to business, visit this link:

John Rafferty is a former Naval Officer, a Fulbright Scholar and works as a Litigation Associate at Gawthrop Greenwood, PC. He can be reached at or 610-696-8225.



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