Courts are losing patience with crypto’s “it’s Chinatown” defense

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

On February 17, US District Judge Kenneth Marra found The Ren Project in civil contempt after it failed to respond to a court order to “show good cause” in a class action lawsuit brought by customers of the defunct digital asset exchange Cryptsy.

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

In January 2016, Cryptsy customers banded together to file a class action lawsuit against Vernon to recover the stolen assets. In July 2017, Judge Marra entered a default judgment against Vernon. In June 2021, Marra issued a permanent injunction preventing Vernon from transferring the stolen BTC.

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

The plaintiffs then teamed up with North Field Technology Ltd, a subsidiary of Themis Recovery AG, to help recover their stolen assets. In March 2022, North Field sent the permanent injunction against Vernon to Ren, notifying them of the fact that Vernon had transferred some of the stolen BTC to their platform. Ren failed to do anything, and later that month Vernon began moving some of Ren’s stolen BTC into a private digital wallet.

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

Following 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 an equivalent amount in USD. Marra also imposed a fine of $500 for each day that Ren did not 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 that it was turns off “version 1.0” of the network before launching “a new community-driven Ren 2.0.”

Enough is enough

Sometimes it can seem like half the ‘crypto’ space is scamming, stealing or shrugging off this behavior. Predictably, those same crypto bros are expressing frustration and more than a little annoyance that the general public – for some strange reason – has yet to embrace the toxic digital asset sector with open arms.

This deplorable situation persists mainly because criminals keep getting away with their crimes. It is only in the past year or so that regulators and law enforcement agencies have shown a willingness to rein in crypto transgressions by making examples of some of the worst offenders.

Fortunately, the desire to hold criminals accountable and help their victims is growing. This movement also seeks to establish the principle that those who oversee the technologies with which these criminals commit their crimes and disburse their ill-gotten gains also bear some legal responsibility.

In 2021, a lawsuit was filed by Tulip Trading Limited (TTL) following the 2020 hack of private keys to wallet addresses containing over 111,000 unshared Bitcoins belonging to Dr. Craig Wright. The main issue in TTL’s case is that software developers exercise significant control over their respective blockchains, making them fiduciaries with legal obligations to blockchain users.

Earlier this month, the UK 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 securely transferred under the circumstances alleged by [TTL].”

Token Recovery: an idea whose time has come

Themis Recovery AG is assisting former clients of Cryptsys in pursuing the return of their assets, which operates as Token Recovery, a proprietary tracking and recovery mechanism for misused digital assets. Token Recovery is ably represented in the Cryptsy class action lawsuit by the Cozen O’Connor law firm.

Johnny Jaswal, executive director/general counsel at the Toronto-based Jaswal Institute, is assisting 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 against the law and prevents an effective operation of the market, and the work we do at Token Recovery makes that clear.”

Jaswal continued: “At Token Recovery, we have worked on, developed and own proprietary technology to enable the freezing and/or recovery of digital assets if they are lost, stolen or require transfer of ownership. We want billions of people who 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 can be reunited with their digital assets is both simple and effective. It is a question of (a) freezing assets on the blockchain after securing a court order or equivalent documentation, (b) removing those assets from the blockchain, and (c) issuing those assets on 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 the police suggested at the end of the movie Chinatown, which simply instructs Jack Nicholson’s private detective character to ignore the fact that a woman has just been killed and the villain is walking free. “Forget it, Jake…it’s Chinatown.” A kingdom where life is cheap, villains thrive, and the rules don’t apply.

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For too long, crypto bros rejected the notion that the protagonists behind this protocol or the exchange had any obligation to lift a finger to help victims of fraud and theft. Code was law, and if you didn’t anticipate becoming a victim, it was probably your own fault for failing to do your own research™.

Barry Boss, one of the leading 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. Unfortunately, as this type of criminal activity is all too common in the digital currency world, Token Recovery is determined to relentlessly pursue the bad actors in an effort to bring justice to the many innocent people who have fallen victim to fraud and received their digital property stolen. The Cozen O’Connor team is honored to support Token Recovery in their efforts.”

Until Digital Asset Recovery is enshrined in law, the sector will remain a financial cul-de-sac where idiots rush in, angels fear to tread, and criminals run free. As the fraudsters do their own research on how to survive in prison, perhaps the rest of the public will finally feel confident enough to jump aboard the digital asset train.

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

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