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With a new sheriff in the lawless world of crypto trading, blockchain lawyers and participants in the $1.7 trillion digital asset market are hopeful that increased consumer protections will lead to greater adoption of the nascent industry.
FOX Business reported that Chicago-based blockchain company Jurat will unveil technology on Tuesday that would allow law enforcement actions to be filed directly on the blockchain, an immutable distributed ledger that records data such as transactions between cryptocurrency wallets.
Jurat's native coin, JTC, which is set to list on the Bitmart exchange on Tuesday, will connect to state and federal court systems using technology that can recover stolen coins, freeze accounts linked to illegal activity and enforce legal action against so-called “smart contracts” – digital agreements that are stored on the blockchain and executed automatically without an intermediary.
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Many in the cryptocurrency industry blame fear of investing in an inherently volatile and easily manipulated asset class, as well as the numerous scams and fraudulent activities reported in the media, for the slow adoption of cryptocurrencies and blockchain technology since Bitcoin's creation in 2009.
A New York federal jury found former crypto mogul Sam Bankman Freed guilty in November of using the now-bankrupt crypto exchange FTX to defraud customers. Bankman Freed was found guilty of stealing as much as $8 billion in client funds and using them to hedge against risk at his crypto trading firm Alameda Research. The collapse of stablecoin issuer Terraform Labs and crypto lending firm Celsius in 2022 also contributed to tens of billions of dollars in customer losses.
FTX co-founder Sam Bankman Freed arrives at a New York courthouse on January 3, 2023. (Photographer: Stephanie Keith/Bloomberg via Getty Images/Getty Images)
A 2023 Pew Research Center survey found that 75% of Americans who have heard of cryptocurrency are not confident in its safety and reliability, and only 17% of American adults say they have invested in, traded or used cryptocurrency.
“The lack of effective enforcement of consumer legal rights has prevented cryptocurrencies from seeing mainstream adoption,” said Jurat CEO Mike Kanovitz. “Stronger on-chain policing would not only curb the lawlessness that scares off would-be adopters and angers government officials, it could also be incredibly useful for commerce.”
On-chain enforcement actions could be a faster, more efficient way for victims of cryptocurrency fraud to obtain legal relief. Until now, courts have faced challenges with limited resources to effectively enforce smart contracts between parties transacting on the blockchain, or to freeze or seize digital assets without the help of intermediaries such as centralized exchanges or asset managers.
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Meanwhile, traditional enforcement agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission also lack the resources and infrastructure to police blockchain activity, and as a result, almost all enforcement actions are brought only after a suspected violation has occurred.
SEC Chairman Gary Gensler has described himself as the “field cop” for digital assets, and has filed more than 20 crypto-related enforcement actions in 2023. Gensler has called the crypto industry a sector rife with scammers, charlatans and fraudsters who refuse to follow the SEC’s rules.
SEC Chairman Gary Gensler testified at an SEC Oversight Hearing of the Senate Committee on Banking, Housing and Urban Affairs on September 14, 2021 in Washington, DC. (Evelyn Hochstein Pool/Getty Images/Getty Images)
Kanovitz and his team of lawyers believe their technology can help government agencies like the SEC prevent crimes in real time, as well as help retail customers recover lost or stolen funds.
The need for comprehensive regulation surrounding digital assets is likely to be highlighted more than ever in 2024, when the SEC is set to soon approve a “spot” bitcoin exchange-traded fund, giving retail investors greater exposure to the world's largest cryptocurrency.
Jurat has already seen some success in testing its decentralized enforcement technology: in August, a U.S. district court blocked several Russian and North Korean hackers from accessing cryptocurrency wallets using Jurat's on-chain enforcement model.
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“There's trillions of dollars of potential in this technology, because that's the total amount of litigation right now over contracts and partnerships,” said Jeremy Hogan, attorney and founder of law firm Hogan & Hogan. “Once the world is ready to embrace Web3, Jurate will be one of the ways to enforce contracts.”
Jurat's strategy is not without its critics, however. So-called crypto “purists,” strong proponents of decentralization, argue that on-chain monitoring and enforcement runs counter to the vision Bitcoin inventor Satoshi Nakamoto had when the first blockchain database was created. Nakamoto preached a financial system that would be controlled by the people as a whole, rather than controlled by a government or overseen by any particular organization.
“Cryptocurrencies must evolve in order to achieve widespread adoption. On-chain law enforcement is an evolution and a healthy one for the industry as a whole,” Kanovitz added.
