The Latest in Crypto-Asset Disputes

Just two weeks after the publication of our last piece, cryptocurrency exchange FTX and trading firm Alameda Research dramatically fell into bankruptcy, amid allegations about misuse of customer funds.

At time of writing, Sam Bankman-Fried, founder of both firms and CEO of FTX until its collapse, is out on USD250 million bail, having pled not guilty to criminal charges including two counts of wire fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering. Fellow executives Gary Wang and Caroline Ellison have already pled guilty to fraud-related charges and are reported to be co-operating with investigators. 

John J. Ray III, the veteran bankruptcy administrator put in charge of FTX, reported that “never in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever.” 

Ray has turned to Sullivan & Cromwell to represent the FTX entities in Chapter 11 proceedings. 

In January 2023, Jenner & Block partner Shoba Pillay released her final examiner’s report into Celsius Network, a cryptocurrency lending business which has been in Chapter 11 proceedings since July 2022.

Pillay’s lengthy and damning report found that “the business model Celsius advertised and sold to its customers was not the business that Celsius actually operated... Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”

This included a lack of transparency around demand for the company’s native CEL token, efforts to prop up the price of the token to mitigate the effects of significant selling by company insiders, and use of customer deposits to fund its purchases of CEL, a practice one Celsius employee is reported to have described as “very Ponzi-like” in an internal communication. 

Earlier in January, Judge Glenn of the US Bankruptcy Court for the Southern District of New York had ruled that customer funds deposited in Celsius’ Earn accounts were the legal property of the bankruptcy estate, following litigation in which attorneys from Kirkland & Ellis, White & Case, Milbank and Jones Day appeared, among others. 

In the England and Wales courts, the Tulip Trading v. Bitcoin Association for BSV litigation continues after the Claimant company successfully appealed against summary judgment handed down by Falk J in March last year.  

Giving judgment in the Court of Appeal, Birss LJ ruled that Tulip Trading, a company associated with Dr Craig Wright, had established at least an arguable case that the Defendant developers owed it a fiduciary duty to make changes to the core protocol of the Bitcoin blockchain and of several forked chains, which would allow the recovery of cryptocurrency Tulip claims to own but to which it claims to have lost access in a hack. Birss LJ said:

“If the decentralised governance of bitcoin really is a myth, then in my judgment there is much to be said for the submission that bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property.” 

Chambers-ranked law firms including Bird & Bird, and barristers from Wilberforce Chambers, appeared in the Tulip Trading case, which will now proceed to a full trial on the merits. 

Back in the New York courts, luxury retail brand Hermès won its trademark infringement case against the creator of the MetaBirkins NFT project, Mason Rothschild. Rothschild had claimed that his NFTs, which conferred digital ownership of images based on the brand’s iconic Birkin handbags, were digital art and should be considered protected speech under the First Amendment. Attorneys from Baker & Hostetler successfully argued that the digital assets did not represent protected speech and infringed Hermès’ trademark rights over the bag design. 

Finally, in February 2023 partners at Band 1-ranked firm Skadden won a significant victory for publicly-listed crypto exchange Coinbase in a putative class action case in which it was accused of listing unregulated securities on its platform. 

UK and US law firms handling cryptocurrency commercial litigation, bankruptcy matters, regulatory investigations and white-collar criminal defence are invited to send submissions for our Crypto-Asset Disputes categories in the upcoming Chambers FinTech research cycle. Firms elsewhere are requested to include this work in their submissions for the FinTech Legal category. 

The deadline for submissions is Thursday, 25^th May and the Chambers FinTech 2024 guide will be released in December. Find out more about how to make your submission to the Chambers FinTech guide here.