Italian cryptocurrency exchange BitGrail is at the center of a controversy that has led to the filing of a class action lawsuit against the developers of the cryptocurrency project Nano, which could see the first hard fork ordered by a court proceeding.
On April 6, an American law firm by the name Silver Miller announced it had filed a lawsuit representing a group of people who invested in Nano tokens. In a press release, the law firm stated that it “has commenced a new class action lawsuit on behalf of investors in Nano, formerly known as RaiBlocks (XRB), alleging that Nano and key members of its core team violated federal securities laws.”
“Moreover, in their push to introduce XRB to a wide market of investors, recklessly directed investors to open accounts and place their assets with a little known, and severely troubled, Italian cryptocurrency exchange called BitGrail, where $170 million of the investors’ XRB allegedly ‘disappeared’ in February 2018.”
The Background Story
Nano is a project that was formerly known as RaiBlocks. RaiBlocks changed its name to Nano at the beginning of 2018. While its name was changed, the underlying plan remains the same. The cryptocurrency native to the project is still denoted by the same ticker, XRB. Moreover, the project’s website still bears the name RaiBlocks.
The developers of Nano embarked on the project in order to create a cryptocurrency that would function better than bitcoin. In order to mitigate some of bitcoin’s most pressing challenges such as scalability concerns, relatively high fees as well as low transaction speeds Nano employs the innovative Directed Acyclic Graph (DAG) algorithm as well as a structure it refers to as a block lattice.
The project claims to be able to provide transactions without a fee attached that settle in real-time. Moreover, Nano’s consensus mechanism does not consume large amounts of energy as is the case with bitcoin, as well as many other cryptocurrencies.
XRB token currently trades at $4.79 and has a market capitalization of over $600 million. The token is listed on a number of exchanges and consistently shows high daily trading volumes.
On February 9, an Italian exchange called BitGrail – through which much of Nano’s users traded their tokens – announced that it had come to the realization that a substantial amount of the tokens had been stolen. While no other tokens were affected, the exchange then went offline, albeit temporarily.
The news was received with a large amount of backlash and speculation within the Nano community. CEO and exchange operator Francesco ‘The Bomber’ Firano was at the receiving end of anger from the customers who had lost money. Moreover, some went so far as to speculate that Firano may have had something to do with the hack.
In an attempt to quell any suspicions, the exchange published a statement which explained that the hack happened as a result of a vulnerability in the software created by Nano:
“BitGrail S.r.l intends to stress having been subject to theft, a crime made possible by taking advantage of faults in the team Nano’s software (rai_node and the official block explorer) and therefore, for these reasons and in accordance with the law, it is not in any way responsible for the situation.”
Moreover, BitGrail explained that it had contacted the authorities in an effort to bring the perpetrators to justice. “We confirm that an investigation led by the legal authorities is underway The purpose of the investigation is to shed light on the theft, therefore we have already provided all the useful elements in order to reconstruct the facts, including the evidence concerning those involved in the fraudulent activity, who took advantage of the vulnerability of Nano’s software, thus not BitGrail’s.”
With Firano and BitGrail maintaining the narrative that the hack happened as a result of security lapses on Nano’s part, the saga deepened when Nano developers published a statement of their own effectively distancing themselves from the attack and laying the blame on BitGrail.
Nano’s developers stated, “From our own preliminary investigation, no double spending was detected on the ledger and we have no reason to believe the loss was due to an issue in the Nano protocol. The problems appear to be related to BitGrail’s software.”
Moreover, the developers added that they believed the loss of funds was related to the fact that the exchange was going bankrupt. “We now have sufficient reason to believe that Firano has been misleading the Nano Core Team and the community regarding the solvency of the BitGrail exchange for a significant period of time.”
Nano further explained that Firano had asked the developers to implement a hard fork, a claim which ‘The Bomber’ confirmed. However, Nano claimed that Firano had requested the fork in order to recover his losses while Firano claimed he was only trying to ensure customers were reimbursed.
The Nano team shared a log of correspondence between them and Firano which includes a substantial amount of information. It included the hard fork request as well as the fact the BitGrail had been aware of some irregular activity with regard to Nano tokens for a considerable amount of time. Firano expressed unhappiness with this move saying it was an effort to paint him and the BitGrail exchange in a bad light.
The Class Action Lawsuit
While it had initially seemed that the bulk of the blame would fall on the exchange’s shoulders, a substantial set of users of the token believe the responsibility lies with the developers of the project.
As one user said “The Nano / XRB core team had BitGrail listed for months on their Reddit sidebar and were very active supporters of it. For a while, anybody who visited the RaiBlocks page through BitGrail was the preferred exchange over any other since the devs were supporting it.”
The lawsuit is hinged on the fact that the developers led users to believe that the exchange was the best platform through which to trade XRB tokens. Thus the users are seeking the court to order the developers to implement a hard fork in order to recompense the affected users:
“The Lawsuit pleads that the Court rescind the plaintiff class’ investments in XRB and require Nano to “rescue fork” the allegedly missing XRB into a new cryptocurrency in a manner that would fairly compensate the class of victims.”
This lawsuit goes down in history as the first time where a project may be forced by a court to fork its ledger, but may not be the last according to lawyer Stephen D. Palley. On April 9, the Nano foundation released a statement announcing that a legal fund for victims of the BitGrail breach would be made available, summing to $600,000 at the time of writing.