Patel on Fraud on the Crypto Market

Menesh S. Patel (University of California, Davis – School of Law) has posted “Fraud on the Crypto Market” (Harvard Journal of Law & Technology, Forthcoming (2023)) on SSRN. Here is the abstract:

Crypto asset trading markets are booming. Traders in the United States presently can buy and sell hundreds of crypto assets on dozens of crypto exchanges, and this trading is expected to further intensify in the coming years. While investors now increasingly turn to crypto asset trading for portfolio appreciation and diversification, the popularization of secondary crypto asset trading risks significant investor harm through increased incidents of fraud. False or misleading statements by crypto asset sponsors or third parties have the prospect of financially impairing traders in crypto asset trading markets, including everyday traders who are ill-equipped to sustain significant investment losses.

As traders seek judicial redress for their fraud-related injuries, courts will be asked to make doctrinal determinations that will be pivotal to injured traders’ ability to recover. A primary issue that courts will need to confront is whether crypto asset traders can avail themselves of fraud on the market in connection with fraud claims asserted under SEC Rule 10b-5 or CFTC Rule 180.1. This Article addresses that question and has as its intended audience not just academics, but also courts, practitioners, and market participants.

The Article shows that as a doctrinal matter fraud on the market is available in securities or commodities fraud cases involving crypto assets that trade on crypto exchanges, especially in light of the Supreme Court’s decision in Halliburton II, which resolved that fraud on the market is predicated on just a generalized notion of market efficiency, rather than a strict financial economic notion of efficiency. Drawing on how courts apply the doctrine to fraud cases involving stock transactions, the Article articulates a framework for how fraud on the market should be applied to the crypto asset context and explores methodological issues relevant to the framework’s application in a given crypto asset case.