Crypto Consumer Protection
Gerstein Harrow has created the nation’s leading private practice seeking to hold the crypto industry accountable when bad actors lose or steal customer money, operate outside the law, or make false representations about the nature of their business. Led by Charlie Gerstein, Gerstein Harrow has filed cases against the biggest cryptocurrency protocols, investors, and founders.
Why have a crypto practice?
Although we think there is some promise in the technologies underlying crypto assets and so-called decentralized finance—regrettably abbreviated “DeFi”—it’s become increasingly clear that the crypto world is awash in fraud and illegality. FTX is a recent and prominent example, but the fact that crypto purports to be unregulated has made it a natural breeding ground for scams.
Advocates for the industry tend to minimize the scams and scandals and say that we can ignore them as growing pains for important new technology. But of course scams will inevitably proliferate in a totally unregulated market. There is an inevitable tension between the kind of largely anonymized transactions that happen on blockchains and honest dealings.
At Gerstein Harrow, we seek to use the legal system to go after illegal businesses operating on the blockchain, even while we do recognize that there can be some valuable uses for the technology in the long run. In the end, we hope to encourage those valuable uses by driving out the bad ones.
How can anyone recover lost or devalued crypto when everything is decentralized and anonymous?
DeFi supposedly allows users to transact with each other without the aid of any intermediaries, with all transactions publicly verified on a blockchain and executed using smart contracts that facilitate borrowing, lending, and other simple financial interactions. Some think that this means there can be no accountability and no recovery for fraudulent transactions. After all, if your bank loses your money, you can sue the bank, which has an established headquarters, CEO, and board of directors. But if a decentralized protocol loses your money, whom can you sue?
That’s where Gerstein Harrow adds value. Our law firm’s central insight is that there frequently are people responsible for crypto losses. That’s because DeFi today typically isn’t decentralized at all. Usually, there are a handful of major investors and founders that functionally control a DeFi business. Gerstein Harrow pairs its ability to dig deeply into online records with its novel legal theories of accountability, combining these to bring multiple lawsuits against groups of supposedly decentralized entities seeking to hold their individual partners accountable for losses and legal violations.
How can you hold individuals or investors responsible for the losses caused by a crypto protocol?
Most modern companies benefit from limited liability. That means that, when a company has committed wrongdoing, it can be sued in its own name, and its liability is limited to the assets of the company itself. If Microsoft as a company must pay a court judgment, then it pays the proceeds from its company treasury. But Bill Gates cannot typically be required to pay the judgment himself.
Crypto businesses are different because they willingly fail to take advantage of limited-liability corporate structures. Instead, they operate as so-called DAOs, which stands for Decentralized Autonomous Organizations. We have argued in several court filings that these DAOs must be treated as unincorporated associations of partners, and, if we are correct, then all partners in the DAO can be held responsible.
Courts have agreed with us. In Ometak v. bZx, a judge in our case became the first judge to let a case proceed against founder and investor defendants on the grounds that victims had alleged these defendants were part of a legal partnership and could be held accountable for the partnership’s losses. We expect more decisions along these same lines to follow.
Who created your crypto practice?
Our crypto practice was created by Gerstein Harrow's partner Charlie Gerstein. Charlie has a deep knowledge of both consumer protection law and crypto technology. He has appeared in many prominent media outlets, including NPR, CNBC, and the Wall Street Journal. Gerstein Harrow partner Jason Harrow and associate Emily Gerrick also have substantial experience litigating cases in this space, and Gerstein Harrow draws on other legal partners and experts where needed.
If you have lost money in a crypto scam, or believe you have seen crypto entities operating illegally, shoot us an email at hi@gerstein-harrow.com to discuss.