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How Are Directors of Crypto Companies Liable?

Sona Sulakian


  • While a company’s board of directors is generally not involved in day-to-day management, directors have certain duties to appropriately oversee management.
  • Directors may be held personally liable for damages if they fail to meet their fiduciary duties to the corporation and its shareholders.
  • This article reviews directors’ duties and potential liabilities in the cryptocurrency context.
How Are Directors of Crypto Companies Liable?
Jirapong Manustrong via Getty Images

Over the past year, investors and shareholders have scrutinized the management of cryptocurrency companies as alleged misconduct and bankruptcies flood the crypto news. For example, affiliates of Fir Tree Capital recently filed a complaint against Grayscale Investments, seeking records regarding potential mismanagement and conflicts of interest involving Grayscale’s $10.7 billion Bitcoin fund. Fir Tree cited concerns that Grayscale’s directors “consist entirely of insiders” and that the fund lacks transparency in management and formal procedures to resolve conflicts of interests. In another case, shareholders filed suit against Coinbase’s former executive officers and directors for alleged breaches of fiduciary duties, unjust enrichment, gross mismanagement, abuse of control, and “false and misleading statements” ahead of the company’s direct listing in violation of federal securities law.

While a company’s board of directors is generally not involved in day-to-day management, directors have certain duties to appropriately oversee management. Directors may be held personally liable for damages if they fail to meet their fiduciary duties to the corporation and its shareholders. This article reviews directors’ duties and potential liabilities in the cryptocurrency context.

Fiduciary Duties

Generally, the business judgment rule protects directors from liability for actions taken while conducting the business of the company. Under this rule, courts will defer to business decisions made by directors if made in the corporation’s best interest at the time. In short, if directors act with due care on an informed basis, in good faith, and in the company’s best interest, the directors will generally not be liable for their actions. But directors who breach any of these fiduciary duties may become personally liable. These fiduciary obligations are also known as the duties of due care, good faith, and loyalty.

Terms in the company’s governing documents generally protect directors by requiring exculpation from liability, indemnification, and advancement of expenses, as well as directors’ and officers’ (D&O) insurance. These protections allow directors to take healthy risks and make decisions for the company without undue fear of personal liability. However, many crypto companies have struggled to obtain D&O insurance due to the regulatory uncertainty and cybersecurity risk facing the industry.

The limited protections available to corporate directors, in the crypto context and beyond, mean that courts can impose personal liability in certain cases, especially for directors’ lack of oversight. One Delaware court found that a company’s directors had failed to implement any monitoring or reporting system to manage an important legal compliance risk. Another court denied a motion to dismiss claims against company directors for failing to appropriately monitor their company’s compliance systems. Yet another decision held directors liable for failing to make a good-faith effort to institute a monitoring system for the company’s financial reporting. These cases suggest that courts are stricter for companies operating in industries that present increased regulatory compliance risks. The heightened scrutiny of the cryptocurrency sector by both regulators and investors likely raises similar concerns.

Sources of Liability

Conflicts of interest

Courts expect directors to avoid conflicts of interest as part of their fiduciary duty of loyalty. A director has a conflict of interest if the director is a party or related to a party in the transaction at issue or if the director has a beneficial financial interest in the transaction. Many crypto company directors own the crypto assets that are issued, sold, or traded by the company and its users. This mixing of interests could potentially blur the actions taken to benefit the company with actions taken to benefit the directors. For example, a lawsuit (subscription required) against crypto lender Celsius alleges that the company artificially inflated the price of its own digital coin. Similarly, the Securities and Exchange Commission (SEC) has charged former executives associated with FTX with fraud for manipulating the price of the exchange’s FTT token.

A transaction tainted by a potential conflict of interest will not result in damages if approved by a majority of disinterested directors or disinterested shareholders, or if the transaction was fair to the corporation at the time. For example, directors of bankrupt crypto lender Voyager Digital tried to negotiate immunity for their approval, allegedly after little due diligence, of an almost $1 billion loan that purportedly led to Voyager’s bankruptcy. In that case, the company appointed two independent directors to investigate certain historical transactions, including a loan to the now bankrupt crypto hedge fund Three Arrows Capital. The investigation revealed no non-frivolous claims against the directors, but the company settled with the chief executive officer and chief commercial officer as to potential claims.

Securities laws

Securities laws hold directors liable for, among other issues, material misrepresentations or omissions in security offering documents, unregistered securities issuances, insider trading, and market manipulation. Whether securities laws apply to many cryptocurrencies is still an unresolved issue, and the SEC has been sued for its allegedly “deliberately confusing” enforcement in the digital assets space. SEC Chair Gary Gensler seems to be of the view, however, that cryptocurrencies generally constitute securities.

The SEC recently sued Genesis Global Capital and Gemini Trust Co. for violations of securities laws, holding that allowing clients to loan their assets on interest amounted to offering unregistered securities. Likewise, recent class actions filings (subscription required) challenging celebrities’ crypto endorsements allege that yield-bearing accounts constitute an offering of unregistered securities in violation of securities laws. In another case, a director who had invested in the crypto mining firm GAW Miners became embroiled in a class action against the company for allegedly aiding and abetting the company’s unregistered issuance of securities. The complaint cited the director’s close relationship with the chief executive officer and his involvement in the company’s business, which included making operational decisions and representing the company in negotiations. The director was initially found not liable in this case because a jury concluded that the digital assets at issue were not securities. The court, however, vacated the jury’s verdict as against the weight of the evidence and ordered a new trial.

Directors of blockchain companies must ensure that any digital assets that constitute securities are registered with the SEC or are issued pursuant to a registration exemption, must make truthful statements about any digital products, and should ensure that the company provides sufficient information disclosures in connection with any digital asset transactions.

Insolvency law

Upon insolvency, creditors have standing to assert derivative claims against directors for breaches of fiduciary duty. This indirect duty helps protect against directors taking extreme risks in the shareholders’ favor to the creditors’ detriment. In some cases, directors may take actions benefiting non-insider creditors over others of similar priority.

As seen with the bankrupt crypto lender Celsius, an insolvent company and its clients may wrestle over account custody, given that clients’ digital assets (which crypto companies often store) may be deemed company property subject to creditor claims. Misusing client assets or insufficiently explaining risks associated with insolvency may result in breach of trust liability. Duty of loyalty may also be at issue if certain insider accounts were given preferential treatment over other client accounts.

Antitrust law

Directors may be liable for violations of antitrust laws, such as the Sherman Act or the Federal Trade Commission Act, which could subject them to criminal prosecution, civil suits, or derivative acts by shareholders. For example, a lawsuit was filed under the Sherman and Clayton Acts for alleged manipulation of a network upgrade to assume control of a blockchain.


Cryptocurrency companies face unique challenges that expose their directors to potential personal liability. Directors must sufficiently oversee management and ensure that they conduct appropriate due diligence before making decisions. Unclear regulations, inconsistent enforcement by regulators, and the lack of D&O insurance coverage for crypto companies further compound these concerns.