Courts losing patience with crypto’s ‘it’s Chinatown’ defense

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Judges are increasingly rejecting the long-held belief that victims of ‘crypto’ criminality have no recourse against the perpetrators of said crimes—or those who help facilitate those criminals’ actions.

On February 17, U.S. District Judge Kenneth Marra found ‘The Ren Project’ in civil contempt after it failed to reply to a ‘show good cause’ court order in a class action suit brought by customers of the defunct Cryptsy digital asset exchange.

Cryptsy collapsed in early 2016, shortly after its customers realized that then-CEO Paul Vernon had stolen over 11,000 of their BTC tokens and relocated to China from Cryptsy’s Florida headquarters. After safely ensconcing himself abroad, Vernon destroyed Cryptsy’s customer database in a failed bid to hide evidence of his theft. Vernon was officially designated a fugitive in 2019, and federal criminal charges were filed against him in January 2022.

In January 2016, Cryptsy customers teamed up to file a class action against Vernon, seeking the return of their stolen assets. In July 2017, Judge Marra entered a default judgment against Vernon. In June 2021, Marra issued a permanent injunction barring Vernon from transferring the stolen BTC.

Meanwhile, Vernon had already transferred 685 of the stolen BTC—currently worth around $17 million—to Ren, a Singapore-based “open and community-driven protocol” launched by developers Taiyang Zhang and Loong Wang in 2017. Originally dubbed the Republic Protocol, Ren allows users to store different types of digital assets and transact in its native token REN.

The plaintiffs subsequently teamed up with North Field Technology Ltd, a subsidiary of Themis Recovery AG, to assist in recovering their stolen assets. In March 2022, North Field emailed the permanent injunction against Vernon to Ren, alerting them to the fact that Vernon had transferred some of the stolen BTC to their platform. Ren failed to take any action, and later that same month, Vernon began moving some of the stolen BTC off Ren into a private digital wallet.

In April and August 2022, North Field sent Ren more messages regarding the injunction against Vernon, but Ren still failed to take any action. Last December, North Field asked Marra to impose sanctions against Ren for ignoring the injunction. Ren was unable to respond to Marra’s ‘show good cause’ order or make an appearance at last Friday’s hearing.

After that hearing, Marra found Ren in civil contempt and ordered it to immediately transfer the BTC in question to a North Field-controlled wallet or pay North Field the equivalent amount in USD. Marra also imposed a $500 fine for each day that Ren failed to comply with this order.

In early 2021, Ren was acquired by—surprise!—Alameda Research, the defunct market-maker of the equally defunct FTX exchange. Both FTX and Alameda were owned by Sam Bankman-Fried, who is currently facing multiple criminal charges for stealing billions of dollars worth of customer deposits. Following FTX/Alameda’s bankruptcy filings last November, Ren announced it was shutting down “version 1.0” of its network before launching “a new community-run Ren 2.0.”

Enough is enough

Sometimes it can seem as if half the ‘crypto’ space is scamming, stealing, or shrugging off this behavior. Predictably, these same crypto bros express frustration and more than a little annoyance that—for some weird reason—the general public has yet to welcome the toxic digital asset sector with open arms.

This deplorable situation persists largely because criminals keep getting away with their crimes. It’s only in the past year or so that regulators and law enforcement agencies have shown the will to rein in crypto excesses by making examples of some of the worst offenders.

Fortunately, the desire to hold criminals accountable and provide relief to their victims is gathering steam. This movement also seeks to establish the principle that those who oversee the technologies by which these criminals commit their crimes and cash out their ill-gotten gains also bear some legal responsibility.

In 2021, a legal action was brought by Tulip Trading Limited (TTL) following the 2020 hack of private keys to wallet addresses containing over 111,000 unsplit Bitcoins belonging to Dr. Craig Wright. The gist of TTL’s suit is that software developers exert significant control over their respective blockchains, making them fiduciaries with legal obligations to blockchain users.

Earlier this month, the U.K. Court of Appeal agreed with TTL, unanimously overturning a High Court decision and paving the way for a full trial. The Court of Appeal believes the developers “realistically” have “a duty to act to introduce code so that an owner’s Bitcoin can be transferred to safety in the circumstances alleged by [TTL].”

Token Recovery: an idea whose time has come

Assisting Cryptsy’s former customers in pursuing the return of their assets is Themis Recovery AG, which does business as Token Recovery, a proprietary tracing and recovery mechanism for misappropriated digital assets. Token Recovery is ably represented in the Cryptsy class action suit by the Cozen O’Connor law firm.

Johnny Jaswal, managing director/general counsel at the Toronto-based Jaswal Institute, assists Token Recovery’s efforts. Jaswal told CoinGeek that “the most misunderstood concept in the market is that the recovery process does anything other than take existing legal frameworks and apply them to blockchain technology. ‘Not your keys, not your coins’ is contrary to the law and impedes the efficient operation of the market, and the work we are doing at Token Recovery is making that clear.”

Jaswal continued: “At Token Recovery, we have worked on, developed and own proprietary technology to enable digital assets to be frozen and/or recovered if they are lost, stolen or require transfer of ownership. We want billions of people using these technologies and bringing the law to digital assets enables a functioning and thriving financial system.”

The process by which victims of fraud, theft, or their own fat-fingered mistakes could be reunited with their digital assets is both simple and effective. It’s a matter of (a) freezing assets on the blockchain after securing a court order or equivalent documentation, (b) removing those assets from the blockchain, and (c) reissuing those assets at the tip of the chain to their rightful owners, with a full audit trail so everyone can verify their origin.

As little as possible

For too long, crypto’s loudest voices have taken the stance espoused by the cop at the end of the movie Chinatown, who bluntly instructs Jack Nicholson’s private detective character to ignore the fact that a woman has just been killed and the villain is walking away scot-free. “Forget it, Jake… It’s Chinatown.” A realm where life is cheap, crooks prosper, and the rules don’t apply.

For too long, crypto bros dismissed the notion that the principal figures behind this protocol or that exchange had any obligation to lift a finger to aid victims of fraud and theft. Code was law, and if you didn’t foresee becoming a victim, it was probably your own fault for having failed to Do Your Own Research™.

Barry Boss, one of the leading white-collar criminal defense attorneys in the United States, co-chair of Cozen O’Connor’s Commercial Litigation Department and co-chair of the White Collar Defense & Investigations Practice Group of Cozen O’Connor, representing Token Recovery, commented: “We are tremendously proud of the work we have done on behalf of the many unsuspecting Cryptsy customers who have fallen victim to Defendant Vernon’s brazen theft. Sadly, as this type of criminal activity is all too common in the digital currency world, Token Recovery is determined to relentlessly pursue those bad actors in an effort to provide some justice for the many innocent people who have become victims of fraud and had their digital assets stolen. The Cozen O’Connor team is honored to support Token Recovery in its efforts.”

Until such time as Digital Asset Recovery is enshrined in law, the sector will remain a financial blind alley where fools rush in, angels fear to tread, and criminals run free. When the scammers are doing their own research on how to survive in prison, maybe the rest of the public will finally feel secure enough to hop on board the digital asset train.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.