Australia: The new battleground for crypto class actions

Macroeconomic conditions, a surge in crypto-related class actions in the US, the growth of litigation funding and recent regulatory changes are creating an environment in Australia conducive to litigation and, particularly, crypto-related class actions. This article sets out a high-level analysis of the regulatory landscape that blockchain-based and  web3 businesses need to re-assess their risk exposure.

Effects of the Pandemic

The current conditions for litigation and class actions result from the COVID-19 pandemic. The pandemic precipitated significant and unprecedented government fiscal stimulus and exacerbated monetary policy measures. This environment drove the adoption of crypto assets by institutional investors and retail consumers and the usage of crypto service providers (such as crypto exchanges). In turn, these conditions (and lockdown-induced increases in social media usage) created and fueled the 2021 crypto bull run. Subsequently, this further drove mainstream adoption by the retail consumer.

Litigation Funding

Global economies are experiencing economic stress and distress as they recover from the  COVID-19 pandemic. Additionally, challenging macroeconomic and geopolitical conditions which have caused the present "crypto winter". One industry which may benefit from these conditions is litigation funding.

Historically, periods of economic stress and distress typically precede increased disputes as businesses have been or come under pressure and scrutiny. Government fiscal stimulus would have concealed business weaknesses and flaws. As fiscal stimulus has been withdrawn (with an inflationary environment and other factors), industries are negatively impacted. For example, the Australian construction industry has struggled with the collapse of notable construction companies in 2022.

These conditions come when litigation funding of class actions has been growing as an industry in the past decade. Notably, 17 class action claims were filed in Australian courts in 2012. In 2020 this figure increased to 62 claims, and in 2021 53 claims. Presumably, this increase is a result of the pandemic.

The election of the Labor government is another political factor which will likely be conducive to a proliferation of class actions. The Albanese government will likely implement changes from the Australian Law Reform Commission's 2019 report, which will include contingency fees for law firms and increased powers for the judicial system.

US Class Action Landscape

The US is the forum of choice for plaintiffs worldwide pursuing crypto-related litigation and securities class action claims. Crypto-related litigation continues to increase in the US and over 200 crypto-related class action claims against various issuers and exchanges from regulators and privately funded. This has increased by more than 50% since the beginning of 2020.

Allegedly, Coinbase failed to properly secure customer accounts, causing financial harm to users by locking them out permanently or for extended periods. Additionally, it violated US federal laws by listing securities on its trading platform. This class action claim follows another class action claim filed in New Jersey against Coinbase in April 2022.

Given the recent comments of SEC Chairman Gary Gensler, further crypto-related class actions in the US are likely imminent. The Chairman has discussed the notion of proof-of-stake cryptocurrencies potentially qualifying as securities under the Howey test.

Victoria as a Class Action Forum

The 2020 Victorian class action reforms have made Victoria the jurisdiction in Australia for securities claims – allowing lawyers to charge contingency fees and pursue larger payouts through group costs orders. In 2021-22 in Victoria, eight securities class action claims were filed. This represents an increase from 12% to 24% of all claims. More claimants filed securities claims in the Victorian registry of the Federal Court than in the NSW registry. Furthermore, the Victorian Supreme Court received 62% of all new securities claims. The utilisation of the new group costs orders regime is apparent, with 75% of these claims being unfunded.

Key Takeaways

With increasing crypto-related class action lawsuits, businesses must ensure they take preventative action. A majority of the current class actions have their roots in the COVID-19 pandemic. It is still unknown whether or not the Victorian reforms will be federally adopted to prevent forum shopping. However, one thing is clear, crypto-related class actions will come to Australia.