(Reuters) — A lawsuit by FTX account holders in the United States is likely to be the first of many to be brought over billions of dollars in cryptocurrency exchange losses, although the cases will face hurdles including proving that U.S. securities laws apply to FTX’s products, said experts.
The suit, filed in Miami federal court on Tuesday, alleges that FTX founder Sam Bankman-Fried and celebrities including NFL quarterback Tom Brady and basketball Hall of Famer Shaquille O’Neal engaged in fraudulent business practices by promoting unregistered securities.
While some courts have ruled that some cryptocurrencies fit the legal definition of securities, the issue remains unresolved.
Cases against FTX, which is based in the Bahamas, will be made more complex by the fact that US securities laws generally only apply to domestic transactions, said Yuliya Guseva, a professor who directs the fintech and blockchain research program at Rutgers Law School.
“It̵7;s more complicated than your standard vanilla encryption story,” she said.
Representatives of Mr. Bankman-Fried, Mr. O’Neal and Mr. Brady did not respond to requests for comment on the lawsuit.
FTX filed for bankruptcy on November 11 and is facing review by US authorities. Sources told Reuters that $10 billion in client assets were moved from FTX to Mr. Bankman-Fried’s trading company Alameda Research, and that more than $1 billion in client funds are missing.
Tuesday’s lawsuit, a proposed class action brought on behalf of FTX yield-bearing account holders in the United States, alleges that the accounts were unregistered securities because they used investors’ pooled funds to engage in activities that generated the returns the account holders received.
It is an open question whether US securities laws apply to interest-bearing crypto accounts such as those offered by FTX.
The US Securities and Exchange Commission has recently argued that other yield-bearing accounts constituted unregistered securities. Investors have made similar allegations in court against Voyager Digital Ltd. and Celsius Network over their crypto accounts, but judges have yet to rule on those claims.
The lawsuit filed Tuesday did not name FTX as a defendant, instead targeting individuals.
Other investors are likely to file more lawsuits as details of FTX’s collapse emerge.
Guseva said a “wave” of litigation is the “expected result of a major debacle like this.”
FTX’s new CEO, John J. Ray III, said in the bankruptcy filing Thursday that the company’s situation was “unprecedented” and involved a “complete failure of corporate controls.”
Cases against FTX and related companies will be paused during the bankruptcy proceedings, but cases against individuals who have not filed for bankruptcy may be allowed to proceed, Guseva said.
Several law firms have said they are considering filing claims on behalf of investors in FTX Token, or FTT, an exchange-linked cryptocurrency whose value has plummeted from about $25 per token to less than $2 in the wake of the FTX liquidity crisis.
New lawsuits may also target celebrity promoters of FTX crypto products.
Tuesday’s complaint alleges that such promoters violated Florida’s consumer protection law by failing to disclose what they were paid to support the company.
Investors have made similar claims against reality TV star Kim Kardashian for her promotion of EthereumMax tokens. A judge has not yet ruled on whether the case can proceed.
Kardashian has argued that the lawsuit should be dismissed because compensation details would not have mattered to investors in the token.
She settled similar claims earlier this year by the SEC for $1.26 million without admitting wrongdoing.