Litigation Opportunities follow Cryptocurrency Market Vulnerabilities

The Coinrail cryptocurrency exchange based in South Korea fell victim to a “cyber intrusion” causing a 10 percent decrease in bitcoin price, and similar losses across other digital currencies around the globe. Approximately 30 percent of the coins traded on that exchange were “lost” following the attack, valued at approximately $40 million, of which two-thirds were promptly “withdrawn or frozen in partnership with related exchanges and coin companies.” As for the other third, the exchange is reportedly analyzing the server access history, which was also secured, in an effort to recover the coins. As stated on Coinrail’s website, the company was able to save and move 70 percent of total coin/token reserves to a cold wallet, not connected to the internet, to allow the Korean National Police Agency to investigate the situation. The saved coin reserves will remain unavailable indefinitely, with the company stated only that “transactions and withdrawals will resume after stabilizing the service.”

Class-action litigation followed similar preventative measures by Tokyo-based Coincheck earlier this year, which fell victim to a $530 million digital heist and also responded by freezing all withdrawals of both hard and digital currencies. Within days of the preventative measure, investors sued seeking 5 percent annualized interest while the funds remained unavailable. Additional lawsuits were commenced shortly thereafter, which are still pending. Little information is available about Coinrail, including its ownership status, other than its launch date of October 2017 and the identity of its CEO Kyungsic Nam.

Attacks on exchanges, banks and other markets are certainly not new, with hackers successfully penetrating the NASDAQLondon Stock Exchange, and even the Federal Reserve Bank of St. Louis. Moreover, in contrast to theft of hard currencies, digital currencies provide unique tools to isolate and return stolen coins — such as the “hard fork” used by Ethereum to “magically” isolate and automatically relocated $60 million of stolen currency into an isolated account used to reimburse victims of the theft, a move which led to a 13 percent increase in market value. Even so, the failure to regulate cryptocurrencies and digital exchanges has led significant price instability, and the possibility of price manipulation. Currently, U.S. regulators are investigating price manipulation at four major cryptocurrency exchanges.

As separately reported by our firm, the G7 Summit addressed “impacts of the digitalization of the economy,” and vowed to work “to enforce existing international rules and develop new rules where needed…such as forced technology transfer or cyber enabled theft.” We will continue to monitor any developments in litigation, or regulation, to address these issues.

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