What is a Cryptocurrency Expert and How Can One Help Your Cryptocurrency Litigation Case

In Re Tether and Bitfinex Crypto Asset Antitrust Litigation

A currently active cryptocurrency antitrust case involves a class action filed by investors alleging Defendants conspired to artificially inflate the price of bitcoin by flooding the market with Tether tokens, a stablecoin pegged to a fiat currency such as the U.S. dollar.³

A cryptocurrency stablecoin, like US dollar backed Tether (“USDT”) is presumed to be backed by sufficient US dollars such that USDT holders could confidently redeem their stablecoins in return for the same amount of US dollars.  Instead, debased USDT (not fully backed by US dollars) was secretly created or “minted” and injected into the market by Defendants through the Bitfinex cryptocurrency exchange (also allegedly controlled by Defendants).⁴  This gave the impression that bitcoin was worth far more than what it was.

Defendants were then able to exploit price arbitrage opportunities as bitcoin traded at a premium on Bitfinex relative to other cryptocurrency exchanges.  The case highlights not only the importance of market structure issues (USDT accounts for a large share of stablecoin cryptocurrencies), but the ability to achieve price impact leverage through deception.

Using a supposedly debased stablecoin, USDT, to manipulate the prices of cryptocurrency assets in the spot market has parallels to the LIBOR manipulation.⁵  The LIBOR quoted rates submitted by large banks were not backed by actual short-term interbank loan transactions, giving contributing banks leverage over market participants who were unaware of (and unable to verify in real time) that LIBOR was not tethered to true interbank loan costs and was being manipulated.

The misconduct described in the Tether-Bitfinex investor class action points to specific supply and demand mechanisms that were collusively manipulated by Defendants in violation of Sherman antitrust laws and that caused artificial market prices in violation of the Commodity Exchange Act.⁶

These types of allegations in other antitrust and commodity price manipulation cases have been examined by Econ One finance and economics experts using time-series financial econometric techniques to detect whether market prices were collusively set and/or made artificial.

Securities Market Experts Assisting with Cryptocurrency Cases

A second major area of cryptocurrency law and regulation where Econ One finance and economics experts are playing an active role is the issue of whether or not cryptocurrencies are securities, and if so, how might and how much investors could have been harmed.

If a cryptocurrency is a security (like stocks or bonds issued by U.S. corporations), then the cryptocurrency must be registered with the U.S. Securities and Exchange Commission (“SEC”) in order to be legally issued and traded in public markets, like an exchange.

Moreover, an exchange that lists a cryptocurrency for trading must itself be a registered exchange with the SEC if the cryptocurrency in question is a security.  As discussed in our previous blog on cryptocurrency investor class actions, investors trading an unregistered cryptocurrency could file potentially large loss claims, up to the full amount of the cryptocurrency’s market price.⁷

Two examples of currently active securities cases with ways experts can assist clients are reviewed.⁸

In re Ripple Labs Inc. Litigation

Ripple Labs operates a blockchain used for payment and settlements supported by the native coin “XRP”.⁹  The coin’s price surged in late 2017,¹⁰ prompted in part by what a class of investors have alleged was a fraudulent scheme to inflate the market price.¹¹  In early 2018, the market price of XRP quickly fell back from its peak value.  Ripple Labs and XRP are also the subject of an SEC enforcement action claiming it is an unregistered security, a claim which the investor class asserts in their class action as well.

The cases have curiously diverged on the securities definition question with consequential implications for how investor damages might be calculated.  In the enforcement action by the SEC, the judge ruled that XRP was indeed a security (unregistered) but only when purchased by institutional investors.  However, in the same case the judge ruled XRP was an (unregistered) security for other investors who purchased XRP on an open trading venue such as a digital exchange.¹²

In the investor class action, by contrast, the judge ruled in favor of plaintiffs by dismissing Defendant’s motion that XRP was not a security under the Howey Test.¹³ The Howey Test is the current standard for deciding whether or not a financial instrument or asset is a security as discussed in our previous blog post about how cryptocurrency investor loss claims could quickly stack up.¹⁴

In the SEC case, the judge interpreted the absence of a sufficient connection between non-institutional investors and Ripple, the issuer of XRP, as indicating they had no investment contract with Ripple and thus for them, XRP was not a security.  The measurement of investor damages would therefore need to separate cryptocurrency transactions by investor types.

As discussed in a previous cryptocurrency blog, methods to estimate damages to investors by type of investor include multi-trader securities models that can be reliably and scientifically applied to cryptocurrency cases.¹⁵  These models can be empirically anchored to individual investor transactions tracked by exchanges through their emphasis on “know your customer.”  More specifically, registering to trade on an exchange requires end-user specific information such as email addresses, wallet information and other identification proof that can be used for analyzing individual investor gains or losses from trading.

Aceves et al. v. Coinbase Global

The Coinbase cryptocurrency exchange is currently the target of an SEC enforcement action and an investor class action alleging it operates as an unregistered securities exchange.¹⁶

According to its website, Coinbase is an exchange for trading cryptocurrencies.¹⁷  Coinbase provides digital assets and cryptocurrency traders with a Centralized Limit Order Book or “CLOB” platform on which traders can post bid and offer limit orders.¹⁸  A CLOB is one of the most common types of exchanges in the world, on which securities like stocks and derivatives like futures are typically traded.  Coinbase is the second largest cryptocurrency exchange after Binance.¹⁹

Coinbase, itself a publicly traded company whose shares are listed on the NASDAQ stock exchange, earns revenue primarily from transaction fees charged to members for executing trades on its platform.  As a publicly traded entity, Coinbase publishes quarterly and annual financial reports with the SEC known as 10-Q and 10-K reports.²⁰  This type of financial reporting information can be extremely valuable in litigation and should not be overlooked as a source of data and information about a company.

Data discovery in the Coinbase litigation will no doubt produce large amounts of granular exchange trading data.  Experience on other financial exchange litigations suggests that a useful way to help manage large complex datasets is by establishing known, quantifiable reference points to ensure data is properly understood and ready for analysis.

For example, Coinbase SEC 10-Q and 10-K filings contain line items for the exchange revenues it generates as well as the customer segments from which these trading revenues are generated.  To the extent investors could claim as losses the trading fees incurred from trading on an unregistered exchange, their aggregate losses could be compared to Coinbase’s reported trading revenues over time, by segment and under different cryptocurrency market conditions to provide an upper bound on overcharges to investors.

Selecting the Right Expert for Cryptocurrency Cases

Who is a cryptocurrency expert and what guidelines are there to follow for choosing the right expert?  This blog has highlighted the need for finance and economics experts in digital currency and those who understand cryptocurrency concepts amid the changing contours of cryptocurrency judicial outcomes and performing complex damages calculations using alternative tools and data.

Econ One’s multidisciplinary approach draws on experience in financial and securities markets and the latest economics, statistics and finance research on cryptocurrency.  Econ One’s finance and economics experts have the knowledge of behavioral relationships in financial markets and what types of behaviors could constitute violations of securities and/or antitrust laws.

Econ One’s well-recognized antitrust expertise is deep and crosses the disciplines of finance and economics.  Of importance to the cryptocurrency industry, Econ One experts have achieved successful results for clients in markets including spot, derivatives, exchange and non-exchange traded instruments and markets from which benchmark prices are derived.

The Econ One team has economic, financial, computer science, and data analytics expertise that can be applied to complex cryptocurrency transactions including bitcoin transactions along with more generalized market data.  Econ One has provided assistance in evaluating large-scale datasets drawn from blockchain technology, cryptocurrency exchanges, and working with vendors who specialize in gathering these data and making it available in an accessible, user-friendly form.