Stoltmann Law Offices, P.C. represents investors who have lost cryptocurrency as a result of hacks and theft from their accounts. In December 2021, a security breach at crypto-exchange BitMart resulted in customers losing more than $200 million in cryptocurrency. What is newsworthy, is that since May 2022, the Federal Trade Commission has been investigating BitMart in connection with this hacking incident. According to court filings, the FTC is evaluating 1) whether BitMart engaged in deceptive, unfair, or otherwise unlawful acts or practices regarding the marketing and representations made by BitMart to its clients about account security, in violation of Section 5 of the FTC Act, 15 U.S.C. Section 45; and 2) violations of Gramm Leach Bliley Act, 15 U.S.C. Sections 6801-27, which is a federal law that, amongst other things, requires financial institutions to protect the private information of its customers.
This investigation is significant because it is reportedly the first time the FTC has investigated the crypto-exchange market. Surely, the ten-fold increase in crypto-related hacks and identity thefts from 2020-2021, has drawn the attention of the FTC, which investigates scams and identity thefts on behalf of consumers. Also significant is the possible application of the Gramm-Leach-Bliley Act to crypto-currency exchanges. Since their inception, exchanges like Coinbase, Voyager, and Gemini, to name a few, have heavily lobbied Washington to stay out of their business. These exchanges are profit centers for their owners and shareholders and they do not need layers of consumer protection regulations to crimp their style. Recently, as hacking, identity theft incidents, and bankruptcies rock the crypto-exchange world, whispers of CFTC and SEC regulations are becoming calls for action.
Crypto-Exchanges argue consistently that cryptocurrencies like Bitcoin are not securities – because if they are, then the purchase, sale, and exchange of Bitcoin will have to be handled like any securities transaction offered through a brokerage firm. What’s the big deal? Securities Exchange registration would require companies like Coinbase to spend exponentially more money on compliance, surveillance, and supervision of accounts to ensure record keeping, and security, as opposed to taking all that money they generate in transaction fees, and allowing their founder to buy the most expensive real estate in Los Angeles County. Notwithstanding all of the representations about account security and how crypto-exchanges prioritize account security, their resistance to registering as securities brokers/dealers should tell consumers all they need to know about how they prioritize consumer protections over profit.
The slow pace of federal regulators and the implementation of regulations specific to crypto-currency exchanges, does not mean these companies have no liability when a client’s account is hacked and their assets are stolen. First, every state has its own consumer fraud act which provides remedies to consumers in the event they have been victimized by unfair or deceptive representations. Namely, crypto-exchanges almost always make representations on their websites, their privacy policies, their codes of business conduct, and in their user agreements, about account security and its importance. These representations can be used by plaintiffs to pursue state-based consumer fraud claims against crypto-exchanges. Further, regardless of what they say to you when you complain that your account has been hacked and your crypto was stolen, crypto-exchanges still owe their customers duties under the common law. This standard of care means that in the face of known threats, they must act and take reasonable steps to secure your account. This negligence-based theory is another way consumers can pursue claims against crypto exchanges.
If you are the victim of a crypto-exchange hack, do not try to pursue your claim on your own. These companies hire good lawyers and defend every case vigorously. You should instead contact Stoltmann Law Offices at 312-332-4200 to go over your options with a consumer protection and investor-rights advocate.