Class action lawsuits against profiteers of the 2017 ICO hype

Class action lawsuits against profiteers of the 2017 ICO hype

A law firm files eleven class action lawsuits in a New York court against the issuers of tokens as well as exchanges that offered them for trading. This marks the beginning of the process of dealing with the token excess of 2017 and 2018, in which investors lost billions of dollars with investing in shitcoins. For those who profited through tokens, this could be the beginning of a dark, painful time.

Class action lawsuits2017 was the year the world danced around the golden calf of tokens. Prices flew to absurd heights, anyone who was able to set up an ERC token, a whitepaper with technically cloistered promises, and a website could bag millions from unsuspecting investors. Today, two and a half years later, it has become apparent that almost everything was built on hot air. Most promises have been broken, share prices have often lost more than 90 percent from their peak, and unsuspecting investors, fearful of missing out on the next big thing, have made huge losses.

Now a full-scale legal reappraisal of this excess is beginning. On April 3, 2020, a law firm filed not one but 11 class action lawsuits against token exchanges and issuers in New York Southern District Court. These lawsuits target a wide range of those responsible for the token hype. Among them are …


  • Binance
  • Kucoin
  • BitMEX
  • BitBox
  • KayDex

As well as issuers of tokens:

  • TRON Foundation
  • (EOS)
  • Civic (Civic wallet and token)
  • Status (status token)
  • BProtocoll (Bancor)
  • Quantstamp (QSP Token)

This is a massive roundup. OffShore Alert, which first reported on the wave of class action lawsuits, calls it a “red wedding” for the crypto economy, alluding to the horrific scene on Game of Thrones where the Starks are dastardly slaughtered at a wedding. Behind the class action lawsuits is an old acquaintance who, not for the first time, has spooked the crypto scene with lawsuits: Kyle Roche, attorney for Freedman and Roche, who has already celebrated success in the lawsuit against the alleged Satoshi Craig Wright and is also pushing a lawsuit against Bitfinex and Tether. An article on TheBlock links to the lawsuits. I took a look at a few as examples.

Against Binance

Binance is one of the largest crypto exchanges currently. The company exploded in 2017, adding new coins at an astoundingly rapid rate. Currently, 400 cryptocurrencies are traded on Binance, according to Coinmarketcap.

In South New York District Court, Eric Lee and Chase Williams, representing suspected tens of thousands of other victims, are now suing the exchange. They purchased twelve digital tokens on Binance:

EOS, Bancor (BNT), Status (SNT), Quantstamp (QSP), Kyber Network (KNC), Tron (TRX), FunFair (FUN), ICON (IXC), OmiseGo (OMG), Aave (LEND),aelf (ELF), and Civic (CVC).

Some of these tokens, he said, are security tokens, which, unlike utility tokens, must be registered with the U.S. Securities and Exchange Commission. Since the issuers failed to do so and Binance offered them for trading anyway, this broke U.S. law – while the exchange and issuers made billions of dollars worth of profits.

The lawsuit describes the 2017 token market with relentless harshness, saying the issuers “took advantage of the enthusiasm for cryptocurrencies like Bitcoin and announced a revolutionary digital token. This token is typically said to be ‘better,’ ‘faster,’ ‘cheaper,’ ‘better connected,’ ‘more trustworthy,’ and ‘more secure'” than established cryptocurrencies. In an ICO, the issuers then sold the tokens to a small group of investors. Soon after, Binance listed the tokens, after which the small group of investors were able to profitably sell them to a much larger group of investors. The issuers would have made “millions, if not billions, of dollars” as a result, and Binance made good money from it as well, with the exchange charging trading fees and collecting a “listing fee” from token issuers to allow the tokens to be traded. This listing fee, which by all accounts can be as high as six or seven figures, appears to have been one of the core business models for Binance.

In the process, token issuers have often misled investors. First, they tried to disguise the legal nature of the tokens by stating that they were utility tokens instead of security tokens, which misled investors about the rights they were entitled to. Instead of the securities prospectus that was actually required, there was only a white paper that described the token in incomprehensible technical terms and in no way met the requirements of the Securities and Exchange Commission. As a result, investors were unable to “reliably assess whether the disclosures were true and what the risks of an investment were.”

Second, they made empty promises about the benefits of the tokens. “In reality, they had no benefit at all. The promises of the products and markets were not fulfilled and the networks were never fully developed, while investors held the empty bags as token prices plummeted.” The result was serious losses. Most tokens have lost at least 90 percent of their value since peak prices in late 2017 and early 2018. Tron about 95 percent, BNT 98.4, and QSP as much as 99 percent.

The Binance exchange has willingly participated in this dirty game. It had “assisted in the illegal promotion and sale of securities for which there was no registration or exemption from registration.” The exchange, which made an extraordinary profit in one year, did so by building a platform for buying and selling unregistered securities of historically unparalleled reach, they say. The statements of claim against the other exchanges, such as KuCoin and BitMEX, are in a very similar vein.

Against Quantstamp and Tron

What is particularly interesting about the class action is that it targets both exchanges and token issuers. Thus, it seeks to bring a wide range of collaborators in the token hype to court. One example of the issuers is Quantstamp, which developed the token of the same name (QSP), which was mentioned above and attracted attention for its extraordinary price drops, even for tokens.

The QSP token was promoted and offered in an ICO starting in November 2017. Even before that, Quantstamp had incentivized people to promote the token on the blog with a “Proof of Caring” campaign. Supposedly, QSP solves “very important security problems of Ethereum smart contracts.” Readers of the blog were encouraged to spread this happy news and spread the word about the project. Quantstamp then published a whitepaper for investors that described in “highly technical terms” what benefits the QSP tokens would have. In doing so, it disregarded the rules that the SEC places on issuing securities, such as that the information about the security must be in plain language and must also describe risks.

One finds at Quantstamp more or less the same misleading that has already been described above. For example, the company left investors in the dark about the legal form of the tokens and even explicitly stated in the whitepaper that it was not a security token – while, according to the statement of claim, it was obviously a security token.

There are also misleading promises in the content. For example, the company advertised that QSP was similar to Bitcoin and Ethereum. Quantstamp is said to form “a permission-free and decentralized network like Ethereum and Bitcoin.” This naturally raised hopes among investors to invest in the next Bitcoin or Ethereum, a ploy we’ve seen from many questionable projects, and “take advantage of the market’s lack of understanding of how cryptocurrencies work.” Most investors were unaware that QSP had fundamentally different characteristics than a real cryptocurrency. As a result, Quantstamp’s class action lawsuit demands a full refund of the funds invested.

The lawsuits against the other token issuers argue similarly. For example, the Tron tokens (TRX) were created in a centralized process, unlike Bitcoin and Ethereum, but investors were unaware of this. Only after intensive research and later announcements by the TRON Foundation had this slowly become clear. Again, investors had been misled when they bought a security but thought it was not one. And so on.

The Red Wedding?

Whether class action lawsuits will actually become the “Red Wedding” of cryptocurrencies remains to be seen. In many cases, it will likely be details that lawyers can argue about for a long time, and often token issuers will likely be able to defend themselves with unclear jurisdictions and laws that are not fully drafted until after the ICO. Nevertheless, the wave of lawsuits has the potential to set several precedents that will in turn become the catalyst for new lawsuits.

For example, the lawsuits frequently cite the conviction of for issuing a security with EOS without authorization. That ruling earned a relatively small fine, but set a precedent for a token issuer to violate U.S. securities laws. With the class actions, Kyle Roche is both building on that – by suing the various token issuers – but also trying to set new precedents by also suing the exchanges that offer these tokens for trading.

A favorable outcome for the plaintiffs in the lawsuits could have far-reaching consequences for many players in the crypto scene. Anyone who has issued tokens or trades them must ask themselves whether they could also become the target of further class actions.