Crypto’s Rules-Free Ride Has a Price, and Investors Are Paying It

For more than a decade, the crypto industry has told a simple story: crypto is new, the old rules don’t fit, so the old rules don’t apply.

It’s a convenient story. A company that sells stock has to register with regulators, disclose its risks, and tell investors the truth about who’s behind the curtain. A brokerage that sells that stock has to be licensed and follow strict rules about how it treats its customers. Much of the crypto industry has spent years insisting that none of that applies to it. Tokens aren’t securities, they say. Exchanges aren’t brokers. Trading firms that quietly prop up a token’s price aren’t anybody’s business.

People with the most information have the fewest obligations, and the people with the least information carry all the risk

The result is a market where the people with the most information have the fewest obligations, and the people with the least information carry all the risk.

We’ve seen what happens next. When the stablecoin TerraUSD collapsed in May 2022, roughly $40 billion in investor value vanished in a matter of days. Investors were told UST was pegged to the dollar. What they weren’t told was that its stability depended in part on secret deals with a trading firm that could walk away when things got ugly. That firm’s affiliate later settled charges with the SEC for misleading investors about the token’s stability. Meanwhile, the exchanges that sold UST to everyday investors said nothing about the red flags they knew about.

When investors try to hold anyone accountable, crypto companies keep them from ever getting to court.

Then comes the second half of the strategy: when investors try to hold anyone accountable, crypto companies keep them from ever getting to court.

Here’s something most people don’t know. If you buy stock through a regular brokerage, your account agreement almost certainly has an arbitration clause. But brokers regulated by FINRA, the industry’s self-regulatory body, are not allowed to use that clause to stop you from joining a class action. Their agreements must say so in black and white. (FINRA Rule 2268(f).) The reason is simple. When thousands of investors are harmed by the same conduct, each one’s losses may be too small to justify a lawsuit on their own. A class action is often the only realistic way to hold a company accountable.

Crypto platforms that refuse to register as brokers don’t follow that rule. Instead, they bury forced arbitration clauses and class action waivers in user agreements that run dozens of pages, and they make agreeing to them a condition of opening an account. The effect is that each investor must fight alone, in private, before an arbitrator chosen under rules the company wrote. Some companies go even further, trying to force investors into arbitration based on contracts the investors never signed and never saw.

We have to push back. In one of our cases, Pearl v. Coinbase, an arbitrator found that a major crypto exchange’s user agreement had “a high degree of procedural unconscionability” and that its arbitration provision was unenforceable. And courts routinely recognize a basic principle: you can’t be forced to arbitrate under a contract you never agreed to.

Calling something a “token” doesn’t change what it is.

The law has other tools, too. Calling something a “token” doesn’t change what it is. If people hand over money expecting profits from someone else’s work, it’s an investment, and the securities laws apply. California law goes further, holding liable not just the seller of an illegal, unregistered security but also those who materially help make the sale happen. And investors’ rights under California’s securities laws can’t be signed away in fine print.

Crypto doesn’t need a special set of rules. It needs to follow the ones that already protect every other investor.

If you lost money in a crypto investment and think you were misled, talk to us. It’s our job to help you.