Thread
This $240 million class action suit against crypto company PoolTogether was originally filed in Oct and is now showing up in a few pubs this week (if it was covered back in Oct I missed it).
www.wsj.com/articles/crypto-savings-lawsuit-puts-principles-of-defi-to-the-test-11642069806 🧵 1/36
www.wsj.com/articles/crypto-savings-lawsuit-puts-principles-of-defi-to-the-test-11642069806 🧵 1/36
It raises interesting enforcement and compliance issues for crypto projects and is an example of how opponents of a new tech try and find laws that *might* apply even if the law isn't a perfect fit (squeezing new wine into old bottles). 2/36
Here for example, the plaintiff is using NY Lotto Law.
As @dgtokar notes in the article, the plaintiff has ties to Senator Warren and this may "be a deliberate effort to put some of the DeFi community’s core doctrines to the test" 3/36
As @dgtokar notes in the article, the plaintiff has ties to Senator Warren and this may "be a deliberate effort to put some of the DeFi community’s core doctrines to the test" 3/36
For the 🧵 I grabbed some excerpts from the complaint (I couldn't find a filing from Df. yet), and I added a comment here and there below (disclaimer, this is my first time looking at a Lotto law class action 😜). 4/36
Plaintiff:
"Each of PoolTogether’s lottery tickets is purchased with crypto, but otherwise this lottery is materially identical to an old-fashioned numbers racket:... 5/36
"Each of PoolTogether’s lottery tickets is purchased with crypto, but otherwise this lottery is materially identical to an old-fashioned numbers racket:... 5/36
...gamblers give PoolTogether money in exchange for chances to win money as determined by a random-number drawing." 6/36
Note how the plaintiff frames it as a lottery ticket.
This is because New York law provides individuals with a private right of action against those who sell them illegal lottery tickets and provides double the amount spent back in damages.
codes.findlaw.com/ny/general-obligations-law/gob-sect-5-423.html 7/36
This is because New York law provides individuals with a private right of action against those who sell them illegal lottery tickets and provides double the amount spent back in damages.
codes.findlaw.com/ny/general-obligations-law/gob-sect-5-423.html 7/36
The plaintiff raises the disconnect between what the PoolTogether founder said:
"PoolTogether 'offers people access to outsize returns WITHOUT needing to risk their capital.'" 8/36
"PoolTogether 'offers people access to outsize returns WITHOUT needing to risk their capital.'" 8/36
and what the PoolTogether website says:
“there are risks associated with using [PoolTogether]and users assume the full responsibility for these risks. You should not deposit any money you are not comfortable losing.” 9/36
“there are risks associated with using [PoolTogether]and users assume the full responsibility for these risks. You should not deposit any money you are not comfortable losing.” 9/36
This issue of misrepresentation is merely raised as a fact in this case; it's not central to the plaintiff's lotto claim.
I'm highlighting it because I think it points to something bigger... 10/36
I'm highlighting it because I think it points to something bigger... 10/36
Misrepresentation might not make or break the lotto claim.
Still, misrepresentation is a big issue new crypto and NFT projects should be aware of as regulators are very much in the business of policing material misrepresentations. 11/36
Still, misrepresentation is a big issue new crypto and NFT projects should be aware of as regulators are very much in the business of policing material misrepresentations. 11/36
What projects say has to match what they do, or they may find plaintiffs or regulators (or both) coming for them. 12/36
Also, note that the plaintiffs didn't just sue PoolTogether. Compound Labs was also sued. Why? 13/36
The plaintiffs say:
"Compound designed the tools that PoolTogether uses to operate some of its lotteries, directly handled the proceeds delivered to PoolTogether as part of the illegal lotteries, and profited from doing so." 14/36
"Compound designed the tools that PoolTogether uses to operate some of its lotteries, directly handled the proceeds delivered to PoolTogether as part of the illegal lotteries, and profited from doing so." 14/36
Investors (individuals and funds) were also sued. Why?
They allegedly "took the concrete action of giving PoolTogether money for the purpose of aiding its operation of an illegal lottery in the State of New York." 15/36
They allegedly "took the concrete action of giving PoolTogether money for the purpose of aiding its operation of an illegal lottery in the State of New York." 15/36
It will be interesting to see how far the claims against investors go. 16/36
This may give new crypto funds and other investors reason to pause before investing in certain projects (or at least greater incentives to ask more questions in diligence as they analyze business risk and legal risk). 17/36
A tangentially interesting issue for legal geeks is how the plaintiffs raise the public ledger nature of the blockchain to claim the case will be an easy one to manage with readily ascertainable facts (blockchain makes discovery easy!) 18/36
...and achievable notice to class members.
They wrote (in part):
"PoolTogether keeps a publicly accessible record of every transaction any gambler has ever executed with it, and each gambler’s account is assigned a unique identification code.... 19/36
They wrote (in part):
"PoolTogether keeps a publicly accessible record of every transaction any gambler has ever executed with it, and each gambler’s account is assigned a unique identification code.... 19/36
...Thus, although PoolTogether does not know the legal identities of its gamblers, it can communicate with (and therefore ensure the provision of notice to) all its gamblers;... 20/36
...it can determine the amount of money it owes them without any complex individual calculations; and it can pay the money it owes them easily by crediting the accounts associated with each identification number." 21/36
I think the claim is wallet + email = capable of notice. Which tangentially might mean that in other cases involving privacy policies or TOS changes, one can't argue that anonymous users are not capable of receiving notice and updates. 22/36
I can't predict (too lazy, it's Saturday) if the plaintiffs will win, but just defending the suit is imposing substantial (monetary and non-monetary) costs on PoolTogether, their investors, and other associated parties named in the complaint. 23/36
Perhaps this type of suit was unavoidable, but the defendants made some unforced errors in the form of public comments, which aren't helping them and... 24/36
as noted above, the bigger problem may be that the suit is drawing attention to potential misrepresentations, which can bring the scrutiny of other regulators.
IOW the present suit may get resolved, only to be followed by more legal and regulatory action. 25/36
IOW the present suit may get resolved, only to be followed by more legal and regulatory action. 25/36
Ending where this started. As innovators, we oftentimes argue our technology is an entirely new category of tech, not subject to existing regulations (As a founder, I have personally made these arguments). 26/36
This notion of technology being "born free" until specifically regulated is what allows for rapid technological developments. 27/36
As innovators experiment without the constraints of existing laws and regulations, new products can be quickly developed, iterated on, and improved upon. 28/36
What we frequently find though, is that regulators, plaintiffs and others try to find a way to apply existing law and regulation to new technologies, thus making any new tech "born captive" to the government's precautionary impulses. 29/36
Out of the gate, innovators are sometimes lucky to have free rein and room to experiment (at least for a while), but invariably regulators catch up. 30/36
Usually starting with expressions of concern, then with white papers and guidance, calls for comments and dialogue, and eventually with law and regulation. 31/36
and
www.mercatus.org/publications/technology-and-innovation/permissionless-innovation-continuing-case-com...
and
www.mercatus.org/system/files/broughel-technological-innovation-mercatus-research-v1.pdf 33/36
www.mercatus.org/publications/technology-and-innovation/permissionless-innovation-continuing-case-com...
and
www.mercatus.org/system/files/broughel-technological-innovation-mercatus-research-v1.pdf 33/36
Another tangent, but an interesting point nevertheless, is the importance of project classification (according to regulators, and eventually courts). That can determine what body of law(s) provide plaintiffs and regulators with a sword. 34/36
Are we dealing with a security, property, a contract, are state gaming laws implicated, etc?
For a quick overview of some of the classification issues, see this blog post by a Fordham law student @fordhamcorpcntr
news.law.fordham.edu/jcfl/2021/02/26/how-classification-issues-affect-cryptocurrency-class-action-law... 35/36
For a quick overview of some of the classification issues, see this blog post by a Fordham law student @fordhamcorpcntr
news.law.fordham.edu/jcfl/2021/02/26/how-classification-issues-affect-cryptocurrency-class-action-law... 35/36
Okay, so this went longer than I thought it would and I never know how to end these, so: 36/36 
