From Musk-backed meme coins to the now fallen set of stablecoins, cryptocurrency is a fintech feat that has taken the market by storm. And when it comes to the widespread adoption of new, nuanced technologies (like these digital tokens), legal fallout is inevitable. We are now seeing this firsthand as crypto lawsuits are fast becoming the market’s most lucrative type of litigation. But what is driving this increase, and how will the market players mitigate the crash?

What’s Sparking the Spats

According to Morrison Cohen, crypto conflicts have increased by 50% since 2020, generating more than 200 class action and private suits in May alone (and yes, we mean this May). Crypto coin values began to tank early this spring. With the Federal Reserve announcing its plans to enact massive interest rate hikes, Bitcoin—one of the largest and most well-known of this virtual currency—lowered in price for six straight weeks for the first time since August 2014. This decrease in token value has prompted an increase in potential litigation opportunities ranging from intellectual property disputes to complex commercial cases.

This isn’t the only reason we are seeing a boom in cases. The U.S. government is moving fast to formulate regulations for this relatively unregulated industry. Unfortunately, these upcoming crypto rules will only create more conflict as coin creators have to standardize their operations to ensure they’re up to code. We already saw this begin with President Biden’s latest cryptocurrency executive order. Now lawmakers are pushing harder for legislation from Congress, both over Decentralized Finance (DeFi) as a whole and stablecoins in particular. As Bloomberg reported, US Securities and Exchange Commission Chair Gary Gensler feels that most digital assets are subject to his rules and that he is ready to increase enforcement.

Stablecoins were used to protect investors from the volatility seen with other crypto tokens. There are two types of these tokens: those backed by actual financial assets such as US Treasury bonds, bank deposit accounts, and money market funds, and those that are *not* backed by financial assets. The latter are called *algorithmic* stablecoins. Terra’s coin is of the latter sort and *was not backed by financial assets*, it was just an algorithmic stablecoin whose peg was supposed to be maintained by demand and supply algorithms. By contrast, Tether’s stablecoin is backed by financial assets.  

However, with the latest crash primarily driven by stablecoin price instability, regulators are now looking to control this currency more than ever. As told by the Federal Reserve, stablecoins are “backed by assets that may lose value or become illiquid during stress” and are “vulnerable to runs.”

Looking Ahead at Litigation

As we watch the market attempt to stabilize, it is important to note that forthcoming cryptocurrency regulations will likely be the largest catalyst contributing to companies seeking counsel in the fintech market. According to WIT fintech expert Marc Holtz, these regulations will cover consumer protection, financial market stability, and prudential requirements for issuers of stablecoins. He stated, “Gary Gensler knows more about cryptocurrencies than almost all investors in the space and more than most crypto talking head enthusiasts. He won’t shy away. However, investments into and experiments with these new technologies will continue.”

Holtz explained that the demise of Terra’s stablecoin’s algorithmic structure was offset in part by the fact that Tether’s asset-backed stablecoin maintained its 1:1 peg to the dollar after a brief fall. He said that it works in theory and practice like money markets, and some version will serve a purpose in twenty-first-century banking. First, however, we know that it must be regulated. Inevitably, regulated digital cash embedded in the financial and banking infrastructure will eventually dominate coins and bills, either as an ecosystem of regulated private money or in the form of central bank digital money. This mix and trend make it clear that there will be plenty of work for lawyers of various specialties who focus on the broader crypto space.

At WIT, we believe it is important to engage with experts early in the litigation process. With the legal need in the crypto market expanding fast, our team is working hard to continue identifying areas that will be ripe for potential disputes.

If your company needs help preparing for these challenges, reach out to WIT for the best experts who can advise you on your strategy. Our expert teams were created to address what we expect to be the key areas of IP litigation in emerging financial technologies, digital currency, and crypto law. For more insights on what is to come in the future of cryptocurrency and the fintech industry, contact us to schedule a partner briefing.

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