Hash Asset Management Ltd. sued the founders of the ICHI crypto protocol in Delaware state court for orchestrating what the digital asset investment firm alleged was a pump-and-dump scheme that caused the collapse of a yield-earning cryptocurrency pool, wiping out more than $16 million in investor capital.
Daniel A. Griffith, co-chair of the litigation department at Whiteford, Taylor & Preston in Delaware, and George Benaur, of counsel at Belgravia Law in New York, represent the plaintiff, Hash, in its lawsuit against DMA Labs Inc., its officers Bryan Gross and Nick Poore, the ICHI Foundation, its associate Tyler Pinter, and its business manager Julian Brand. “This is a crypto case, but the bottom line is [that] this was a fraud case where the crypto platform was used to commit a fraud and cause losses of over $16 million,” Benaur alleged. “We’re also going to seek to establish that the individuals are liable, and that should be a lesson to folks that you can’t use the corporate forum to commit fraud because there are repercussions for that.”
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Cryptocurrencies are digital assets encrypted through blockchain technology; a blockchain is a string of code that forms a binding distributed ledger of all transactions involving a cryptocurrency. The Ethereum blockchain makes it easy to create new cryptocurrencies. Stablecoins are designed to maintain a value equal to a stable asset, such as the U.S. dollar, to avoid the price swings of typical cryptocurrencies.
Launched in early 2021, ICHI is an Ethereum-based token and protocol designed to create project-specific stablecoins—dubbed “oneTokens”—which were to be backed by deposits of stablecoins like USD Coin. Investors, including Hash, were promised the ability to mint and redeem oneTokens on a one-to-one basis and earn yield by contributing liquidity to Rari Pool 136. That pool was set up with dangerously high leverage, allowing borrowers to use the volatile ICHI token as collateral to borrow stablecoins, per the complaint. The defendants allegedly used this structure to artificially inflate the price of ICHI—borrowing against their own token to buy more of it, driving up its value, then pledging that higher-valued ICHI to extract more stablecoins.
In doing so, Gross and his co-defendants secretly drained millions from the so-called “community treasury” without any vote. The lawsuit details multiple instances where the treasury—supposedly safeguarded by smart contracts and user consensus—was tapped unilaterally to prop up the ICHI token or fund the pool, leaving investors exposed. When the value of ICHI surged from $79 to $139 in early April 2022, insiders began selling, the complaint says, triggering a collapse in the token's value and a cascade of liquidations that wiped out the pool. During that time, when investors tried to exit, the redemption mechanisms failed, ultimately leaving them with worthless assets as the defendants “reap[ed] massive illicit windfalls.”
Now, Hash has sued the defendants in the Court of Chancery of the state of Delaware for several claims, including fraud, selling unregistered securities, market manipulation, breach of contract, and conversion.
Eugene Uporov, the general counsel for Hash, noted that the complaint raised fresh questions about governance and investor protection in the “DeFi,” or decentralized finance, space. DeFi is a peer-to-peer financial system built on blockchain technology that aims to remove traditional financial intermediaries and provide accessible financial services, including through cryptocurrencies.
“This case highlights a critical issue for the entire digital asset industry because there was the misuse of investment pool structures, and the investment pool structure was presented to be decentralized,” Uporov said. “When in reality, it was not decentralized—it was managed by DMA Labs. It undermines the trust in the ecosystem and misleads participants who rely on advertised principles of decentralization.”
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From: The National Law Journal
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Michael A. Mora
Michael was born and raised in South Florida. He went to undergrad at Florida Atlantic University and earned his master's degree from the Columbia University Graduate School of Journalism. He is the crypto litigation reporter for Law.com, as well as an editor for ALM Global. You can email him at [email protected].
