Cryptocurrency disclosures in the face of recent attacks

“Bitcoin is evil.” “Bitcoin is a pyramid scheme.” “Bitcoin is worthless.” These are just some of the comments that have been levied against cryptocurrency generally and Bitcoin specifically. Most recently, one of the most prominent bankers in the US characterized Bitcoin as a “fraud” and compared it to tulip mania. Earlier this summer, a prominent investor denounced digital currencies as a “pyramid scheme.”  At the same time, however, many well-respected individuals and companies are investing in cryptocurrency, are creating their own tokens, or are attracting investors via initial coin offerings (ICOs). For this group of people, Bitcoin is seen as an attractive investment. Indeed, at the time of this alert, Bitcoin was trading at just under USD $4,000 per coin.

Whatever views one might hold about whether these criticisms of cryptocurrencies are well-taken or not, these harsh statements by prominent and respected members of the financial community cannot simply be ignored. Now that such strong statements have been made, is it enough for those involved in cryptocurrency merely to disagree with the statements themselves, or is there something more that those involved in the industry should be doing about them?

The risks that these negative statements present to the cryptocurrency industry are real. In the US, price volatility—whether in securities, commodities, or other investments—can lead to lawsuits brought by consumers and others who may claim that they did not understand the risks of the investment, or that risks of the investment had not been fully and properly disclosed or investigated. Such plaintiffs may claim that these publicized remarks constituted “red flags” that showed the existence of underlying problems or at least the need for greater investigation. Moreover, even if the ultimate cause of an investment’s price decline was in fact unrelated to these issues, a court may not always be able to make that determination before years of discovery and a trial. Before then, however, a plaintiff may be able to keep the case alive by pointing to these supposed “red flags” and arguing that they are sufficient to create a factual issue as to what was the true reason behind what happened with the investment. And if there ever were a pyramid scheme or a Ponzi scheme that happened to involve the use of cryptocurrency, plaintiffs would likely point to such general statements to argue that everyone involved with the particular investment was on notice all along that it might well be a fraud.

Even for those who disagree strongly with these kinds of statements, the risks caused by these types of statements should be examined, and, to the extent possible, minimized. This risk mitigation strategy may include taking a number of steps to help protect you and your company in this new environment. For example, consider:

• Whether any disclaimers highlighting any of these concerns should be included, so that plaintiffs cannot claim to have been any less on notice of them and what they might portend for the investment than those with whom the plaintiffs dealt;
• Remind investors that cryptocurrency can be volatile, and returns are not guaranteed nor any investment insured;
• Explain that some cryptocurrencies are very popular and can be changed into fiat currency fairly easily, but others less so;
• If you are subject to regulation, you can include/link to the relevant regulator’s consumer-facing statements, which we have discussed on our Financial services blog. For example, the US Securities and Exchange Commission recently issued a report on ICOs; and the UK Financial Control Authority also recently issued guidance.

In short, ignoring strong negative statements made by leading players in the financial industry or disregarding them because you do not believe in them is not an effective solution or the best way to lessen risk. These statements have been made, and now it is important that the various players in the space properly manage how they conduct their businesses in an environment that has been changed by them.

You can access the Norton Rose Fulbright Knowledge webpage on “FinTech law and regulation: blockchains, distributed ledgers, smart contracts and cryptocurrencies.” Readers may wish to attend the upcoming 40-minute briefing on “FinTech developments – initial coin offerings” to be held at our New York office on October 5, 2017 at noon. Register for the in-person seminar, or for the live webinar version.