Samuel Bankman-Fried arrives at Manhattan federal court on Jan. 3, 2023, in New York. The FTX founder faces charges of cheating investors and looting customer deposits on his cryptocurrency trading platform. (AP Photo/Seth Wenig)
As entreaties from government agencies go, these were emphatic.
“The Whistleblower Office of the Commodity Futures Trading Commission is issuing this alert to inform members of the public about how they may make themselves eligible for both financial awards and certain protections while helping stop fraud and manipulation relating to virtual currencies,” reads one online post dated May 2019.
The CFTC went on to explain that virtual currencies like Bitcoin are considered commodities under the Commodity Exchange Act, which triggers the CFTC’s enforcement of the act when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.
Meanwhile, the Securities and Exchange Commission lists “initial coin offerings and cryptocurrencies” as one of the areas ready and willing to accept the help of whistleblowers to probe for possible violations of the federal securities laws.
The number of whistleblowers who responded to the calls for crypto-related tips has spiked in recent years, according to data compiled by attorneys at Mintz Levin in Boston.
In 2020, the SEC received a total of 6,911 tips, only 345 of which — or 5 percent — were related to cryptocurrency or initial coin offerings. In 2021, the SEC took in 12,210, and 762 (6.2 percent) dealt with cryptocurrency or initial coin offerings.
In 2022, the SEC received a similar number of tips (12,322), but 1,719, or 14 percent, related to cryptocurrency or initial coin offerings.
A similar trend was observed with the CFTC, which saw a 50-percent increase in its overall number of tips between 2021 and 2022.
“The majority of tips received during the Period involved fraudulent misappropriation and fraudulent solicitation involving crypto/digital assets (e.g., pump-and-dumps, fraudulent representations of
opportunities, or refusals to honor withdrawal requests),” the CFTC noted in an annual report on its whistleblower and community education initiatives.
In other words, the “age of the crypto whistleblower” is upon us, as both the SEC and CFTC have risen to the challenge of bringing some law and order to what has been a largely unregulated digital asset industry. As documented in news reports, the industry has fallen prey to various types of fraud, including manipulation of prices, exploitation of participants in the market, the theft of assets, and tax evasion.
To get a sense of how this emerging area of the law may continue to develop, Lawyers Weekly spoke to attorneys who could soon end up on either side of cases involving crypto whistleblowers.
Outside looking in
Whistleblowers in other contexts are typically employees or other company insiders whose positions give them unique access to information helpful to a government investigation.
But many crypto companies are using blockchains — the immutable digital ledger of financial transactions — that are publicly accessible, which potentially expands the universe of whistleblowers significantly.
“Now anyone with the time, skill, and inclination can audit every transaction on a public blockchain, and the concept of the ‘traditional’ whistleblower has greatly expanded in this relatively unregulated space,” Mintz colleagues Cory S. Flashner, Adam L. Sisitsky and Edmund P. Daley write in an analysis of the trend posted to the firm’s website.
A recent example of such an investigatory effort involved Voyager Digital, Daley told Lawyers Weekly.
The centralized finance platform, which had filed for Chapter 11 bankruptcy last July, seemed to be selling assets through the Coinbase crypto exchange, cyber sleuths determined.
Those sleuths took the information not to the SEC or CFTC but to the public via Twitter. But it is still a good example of the type of detective work that can be done with the proper expertise, Daley said.
A slight counterbalance to the rise in crypto whistleblowing activity is the “libertarian” attitude and mistrust of institutions like banks or the government that has become enmeshed in the ethos of segments of the cryptocurrency industry, attorneys acknowledged.
But the increasing number of whistleblowers coming forward suggests that other impulses are carrying the day.
“If you’ve been victimized by fraud, that tends to be a pretty strong motivator that somebody needs to do something about this,” said Robert M. Thomas Jr. of the Whistleblower Collaborative in Boston.
Whistleblowers can also be awarded between 10 and 30 percent of the sanctions collected by the SEC or CFTC, if those sanctions exceed $1 million.
“The economic inducement is precisely designed to move the needle for people who are hesitant for whatever reason,” Thomas said.
As with other whistleblower awards, to qualify, a whistleblower must be able to demonstrate that the information he has provided to the government is not exclusively derived from public sources such as judicial hearings, government reports or the media.
At first glance, that might appear to pose a challenge for a whistleblower analyzing a public blockchain, but attorneys agreed that it would not be a major impediment to collecting compensation, in large part due to the expertise needed to parse the transactions and derive insights helpful to the government.
Particularly in this context, having a whistleblower’s help will be considerably more efficient than using subpoenas or search warrants, Thomas said.
“It is an enormous investigatory advantage to have someone essentially provide you a roadmap and tell you, if you are looking for a needle in a haystack, you can skip this whole part of the barn,” he said.
The paper by Flashner, Sisitsky and Daley notes that it is an “unsettled question” whether the SEC or the CFTC will emerge as the “lead digital asset regulator.”
The SEC has more resources, and at this point, its enforcement efforts seem to be making daily appearances in the Wall Street Journal, Daley said. But the CFTC is buttressing those efforts in a “meaningful” way, he added.
Thomas noted that, given their overlapping jurisdictions, the two agencies allow potential whistleblowers in some cases to file with both and leave it to them to sort out the investigatory work.
None of the attorneys who were interviewed expect the agencies to be miserly when it comes to rewarding whistleblowers. Indeed, at least one suspects it will be the opposite.
“I think there is going to be a strange race to the top among regulatory agencies,” said Boston white-collar defense attorney David G. Lazarus, who noted the high degree of discretion the agencies have to decide what to award whistleblowers. “None of the potential regulatory agencies is going to want to be seen as stingy.”
That, in turn, may lead to some degree of agency shopping by sophisticated whistleblower attorneys seeking to maximize the potential recovery for their clients, he theorized.
“The agencies are going to want to tout these statistics,” Lazarus said.
Challenges ahead
As compared to cases arising under the False Claims Act, the SEC and CFTC whistleblower programs embody a more informal process that does not require the filing a lawsuit subject to Rule 11’s good faith requirement, said Boston whistleblower attorney Royston H. Delaney.
Indeed, the agencies themselves refer to what is submitted to them as a “tip,” which need not come from attorneys, Delaney said.
However, Delaney explained that certain crypto whistleblowers may find it advantageous to retain an attorney for one specific reason: maintaining their anonymity.
If an award is made to a whistleblower, the agency will need to know “where to send the check,” which in the absence of an attorney’s help will mean that the relator’s name will be publicly disclosed.
In the False Claims Act realm, whistleblower attorneys tend to be able to develop relationships within the Department of Justice to get regular updates on the status of a case and can manage their clients accordingly, Delaney said.
By contrast, SEC investigations are typically more of a “black box.”
“It can be quite a long process and can be difficult to monitor,” Delaney said.
But the opacity of the situation may also help whistleblower attorneys establish their worth, Lazarus suggested.
“It will make whatever information can get out that much more valuable,” he said.
While not unique to the crypto context — the same phenomenon exists with cutting-edge technology in the health care industry — Thomas anticipated that there likely will be a learning curve for lawyers when that first crypto whistleblower case walks in the door.
“The biggest challenge for us for doing intake is we have got to slow the caller down a bit,” he said. “They cannot assume we’re crypto geeks.”
Flurry of activity foreseen
The explosion of whistleblower tips will inevitably lead to a spike in enforcement actions, with no real end in sight, attorneys said.
A lot of traditional companies were eager to “ride the wave” of non-fungible tokens — or NFTs — and may have opened themselves up to unforeseen legal difficulties, Daley said.
For example, a judge recently declined to dismiss a proposed class action brought by purchasers of NBA Top Shot Moments, which are digital video clips of professional basketball highlights. The suit is based on the premise that those NFTs are unregistered securities from which its creator allegedly reaped millions of dollars of profit by preventing purchasers from “cashing out.”
In terms of potential whistleblower activity, “the sky is almost the limit,” Thomas agreed.
Cliches like “the Wild West” and “brave new world” have become associated with the crypto space, but the fact that there are two agencies rising to the challenge of regulating the industry “tells you there are a lot of developments to come,” Delaney said.
Delaney predicted that as crypto whistleblowers begin to reap financial awards, a “cottage industry” of nonlawyer players may begin to grow around it.
Despite the “very methodical” way the SEC and CFTC operate, that may incentivize attorneys to specialize in such cases.
“Once they get a reputation, they should get a lot of work,” Delaney said.