Flash Crash of Cryptocurrency Exchange Yields Lawsuits – How Experts Might be Used

Dani Alexis Ryskamp, J.D.

Written by
— Updated on February 18, 2021

Flash Crash of Cryptocurrency Exchange Yields Lawsuits – How Experts Might be Used

Cryptocurrency lawsuit

“Cryptocurrencies” like Bitcoin, Litecoin, and Ethereum, which store value digitally and are used to purchase real-life goods and services, have gained attention in recent years. Often controversial due to their digital nature and lack of centralized controlling authorities, cryptocurrency now faces another challenge: market crashes and resulting lawsuits.

On May 7, the cryptocurrency exchange Kraken found itself the target of both a distributed denial of service (DDoS) attack and a flash crash. The value of Ether, a cryptocurrency traded on the exchange, plummeted.

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On July 5, 2017, five plaintiffs filed a class action complaint against Payward, Inc., the company doing business as Kraken. The lawsuit claims that the site is liable for the losses they suffered during the DDoS attack and the crash. The lawsuit states that the plaintiffs lost a total of 3,414.08669 Ether, which at the time of the loss was worth $328,844.83. Ether has since risen in value: by July 2017, the same amount of Ether was valued at nearly $900,000.

How Was Kraken Responsible?

According to the plaintiffs, Kraken’s behavior in the face of the DDoS attack was negligent in a number of ways. Their complaint includes claims of negligence, unjust enrichment, and breach of contract, alleging that:

  1. Kraken’s failure to suspend trading during the DDoS attack and the crash caused traders’ losses, which worked to Kraken’s benefit when the system automatically liquidated accounts holding Ether on margin,
  2. Kraken breached its contractual duties to traders by “failing to maintain adequate measures, rules, policies and procedures for margin, liquidation, data, and security of Plaintiffs’ and the Class’s accounts,”
  3. Kraken “improperly” froze and liquidated Ether holdings.

The plaintiffs argue that Kraken should have halted trading during the DDoS attack, since the attack left many users unable to access their accounts. Kraken argues that if it had stopped market trading during the attack, the “consequences for traders would have been even worse,” according to a news article at Bitcoin. Kraken claims that “the DDoS did neither cause nor exacerbate liquidations.”

The lawsuit seeks both actual and punitive damages against Kraken, as well as injunctive relief and prejudgment interest. The complaint requests certification of the class and a jury trial.

Calling In the Experts: Who Is Likely to Testify?

Cryptocurrency remains a relatively unknown territory. To many, its digital-only nature gives it the air of a game, rather than a form of value storage or exchange. The Kraken case is likely to cover complex questions of digital encryption, privacy, and security, as well as issues related to currency exchanges and the rights and protections available for those who trade on them.

As the case unfolds, both sides may need to turn to experts in several different fields to address complex issues in the case. Online security will be at the top of the list, as will financial security and obligations to clients on digital trading systems.

One less obvious area an expert witness may be asked to cover is social media. Although the DDoS attack and flash crash occurred on Kraken’s servers, much of the evidence of the event, of traders’ reactions to it, and of the dropping value of Ether on that day comes from social media reports, according to an article at CoinDesk. Social media reports tracked Ether’s value plunge to a low of $26—an amount sufficient to trigger a wave of liquidations of “on margin” accounts, the event on which the plaintiffs’ unjust enrichment claim hinges.

The claim against Kraken isn’t the first lawsuit filed against cryptocurrency exchanges or related businesses. The now-defunct exchange Cryptsy and digital currency startup Coinbase have also faced similar lawsuits in recent years for failing to adequately protect customers.

For attorney David C. Silver, who represents the plaintiffs in the Kraken case, the “bottom line” is simple: “The fact is when users lose money that they don’t believe should be lost, they are like any other customer in any other case,” he said in an interview with ETHNews. The challenge for the Kraken plaintiffs is to demonstrate this fact to the court.

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