SLAPP: Chainalysis Argues For Dismissal Of Defamation Suit

• A crypto project has sued blockchain analytics firm Chainalysis for defamation
• Chainalysis named the project as second largest crypto scam of 2022 without presenting evidence of wrongdoing
• On Wednesday, Chainalysis argued for dismissal of the case on grounds of New York anti-SLAPP laws

Defense lawyers for Chainalysis, the blockchain analytics company, argued in a hearing today for the pre-emptive dismissal of a defamation lawsuit against Chainalysis by YieldNodes, a cryptocurrency investment program which Chainalysis labelled a “scam” as early as 2022. Chainalysis argues that the defamation claim is a “SLAPP” suit intended to curtail free speech. Presiding Judge Lyle E. Frank will consider arguments and rule on the motion at a later date.

The case has potentially high stakes for the entire cryptocurrency industry. Exceptional Media, YieldNodes' parent firm filing the suit, argues that YieldNodes was defamed based on analysis conducted by Chainalysis’ analytics software, Chainalysis Reactor. For close to a year, controversy has simmered around Reactor, following a Chainalysis executives’ testimony in a separate trial that the firm had no scientific evidence supporting the accuracy of the software.

According to the complaint, Chainalysis flagged YieldNodes as a scam in its Reactor blockchain tracing software sometime in 2022. Around the same time, YieldNodes customers started reporting that their bitcoin withdrawals and deposits were being frozen by multiple cryptocurrency exchanges. In February 2023, Chainalysis allegedly falsely communicated Yieldnodes as the second largest crypto scam in the world in the year 2022 to a global audience in its annual Crypto Crime Report.

YieldNodes claims that Chainalysis’ designation of YieldNodes as a scam caused damages of more than $650M to its business, which solicited investment in “masternodes” on cryptocurrency networks. In 2022, YieldNodes halted customer deposits and withdrawals and has not reopened them.

The defamation suit describes extensive efforts by YieldNodes to communicate with Chainalysis about its conclusions. These efforts were, according to the suit, met with silence by the analytics firm. “They never tried to contact us before publishing their report, and when we tried to contact them to discuss their report, all they did was direct us to their sales representatives and try to sell us licenses for their software,” YieldNodes wrote in their newsletter.

YieldNodes claimed to put investor funds, paid largely in bitcoin and paid out exclusively in bitcoin, to work via dividend-generating “masternodes” – an element of security architecture used by a relatively small subset of cryptocurrencies, such as Dash. But YieldNodes serviced only lesser known tokens, which it considered to provide utility to build a decentralized economy.

Cryptocurrency enthusiasts may yet be poised to be skeptical of the validity of YieldNodes claims, given largely negative reviews of the project since it stopped paying out investors in 2022. “Until mid 2022, YieldNodes Trustpilot ratings were exceptional – even better than Binance,” a YieldNode representative tells The Rage. “Ever since the blacklisting, our ratings tanked.”

YieldNodes’ legal team, led by Tor Ekeland, reiterated yesterday that Chainalysis Reactor is closed-source software, so “we can’t get access to the actual defamatory statements” from 2022, which were only distributed to Chainalysis clients.

Arguing at the New York County Supreme Court in lower Manhattan yesterday, Chainalysis’ legal team claimed instead that Yieldnodes’ defamation suit amounts to a so-called “SLAPP,” or Strategic Lawsuit Against Public Participation, designed to silence communication involving the public interest. Chainalysis argued that the suit should be thrown out under New York’s anti-SLAPP laws. Chainalysis’ motion to dismiss also argues that YieldNodes’ suit should be dismissed on jurisdictional grounds, as it names individual Chainalysis employees who do not live in New York County, where the suit was filed.

But the Reactor software and jurisdictional questions were both secondary at yesterday’s hearing, which focused instead almost entirely on the question of whether YieldNodes’ defamation suit should be dismissed on anti-SLAPP grounds. Chainalysis’ legal team spelled out to Judge Frank that widespread fraud in the cryptocurrency sector made its work broadly relevant to the public interest, meriting anti-SLAPP measures.

Under section 3211G of New York’s statewide anti-SLAPP law, in any such matter of public interest, the party bringing a defamation claim (in this case, YieldNodes) must prove a “substantial basis” for a claim of defamation. That overriding basis, the defense team argued, could include proving malicious intent to deceive on the part of Chainalysis, or providing substantial evidence of their claims’ falsehood.

Chainalysis’ defense team, led by Ellyde Thompson, argued that the initial YieldNodes suit did not include a sufficient fact-based rebuttal of Chainalysis’ claims that YieldNodes was fraudulent to override anti-SLAPP concerns. Thompson described the complaint as “lacking in any detail [providing] a substantial basis in the law” for defamation, such as evidence of Chainalysis’ knowing or reckless disregard for fact.

Thompson pointed out that the YieldNodes suit did not contain any affidavits from YieldNodes employees refuting the idea that it was an investment scam. Ekeland argued that the suit itself was meant to establish that YieldNodes was not fraudulent, but Judge Frank seemed to agree that the suit lacked specificity on this and other counts. Importantly, YieldNodes won’t be allowed to update its initial suit in response to the anti-SLAPP dismissal effort, for instance to add affidavits more directly rebutting claims of fraud.

Thompson also argued that the suit was “extraordinarily conclusory,” and failed to specifically detail Chainalysis’ flagging of the service resulted in $650m in damages. Ekeland claimed that this vagueness was a result of Chainalysis’ closed structure: “We’re not privy to … who their clients were,” and YieldNodes only learned about its designation as a scam after exchanges began blacklisting the service in response.

"Chainalysis did not argue the affirmative defense of truth. They are not arguing that the defamatory statements are truthful," Mike Hassard of Tor Ekeland PLLC tells The Rage. "If they had proof that YieldNodes was a scam, they would have argued the affirmative defense of truth. Instead they are relying on recent amendments to the anti-SLAPP law. They are taking the ethos of the anti-SLAPP statutes, turning them on their head, and trying to apply them to a big corporation."

The laws Chainalysis is relying on increase the burden of evidence for the plaintiff, says Hassard. "This is one of the first times this new standard and increased burden will be fought out in Court."

Chainalysis did not respond to a request for comment.

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