There’s a number of different ways one can get in trouble offering, selling or promoting unregistered and non-exempt tokens or coins, says Barrington Dyer, tech attorney and shareholder at Polsinelly law firm. But the past litigations can teach us a lesson on the blockchain law in the U.S.
When it comes to the most active areas for blockchain litigation, securities fraud still dominates the space, but other areas are more active, such as: intellectual property, unfair competition, contracts, class actions, consumer privacy, consumer protection, commodities, etc.
Let's take a look at some of the individual cases Dyer presents in The National Law Review."Blockchain technology is no trade secret"
Case “Invisible Dot, Inc. v. DeDecker” saw a startup accuse a former executive of trade secret theft, fraud, conversion, and conspiracy. Invisible Dot was developing products for recording ownership interest in real-world assets on blockchain, but the defendant was consulting for another company that may have been connected to potential customers for Invisible Dot’s technology. The court found Invisible Dot’s alleged trade secret too broad to be meaningful, saying that linking real-world assets to the virtual worlds was general knowledge in blockchain."Hyping blockchain creates an expectation of “Profits”
“Balestra v. ATBCOIN LLC” was a securities class action lawsuit, in which purchasers of the ATB coin sued the coin issuer and its two co-founders for selling unregistered securities. ATB raised over USD 20 million in an ICO (initial coin offering) and didn't register it with the Securities and Exchange Commission (SEC). The company touted its blockchain as “the fastest blockchain-based cryptographic network in the Milky Way galaxy,” but the complaints allege that it could not deliver on its technological promises. The value of the ATB coin dropped soon and quickly to 15% of its originally purchased value. The court dismissed the company's arguments that the customers weren't buying securities, finding that ATB’s hyping of blockchain technology had led to expectations of profits, while the customers were not in control of the blockchain."Cryptocurrency guarantees semi-anonymity until discoverability"
In “ZG TOP Tech. Co. v. Doe case,” crypto exchange ZG TOP lost 330,000 tether (USDT) and 100 ether (ETH) in a hack, and the transaction trail led to a single account with Bittrex exchange. To identify the account holder, ZG TOP sued that person and asked the court for expedited discovery from Bittrex so the suspected hacker would be identified – the court granted it. Dyer emphasizes that the story would've been a lot more complicated had the funds been transferred to an exchange with no U.S. presence."Creditors can’t capriciously treat crypto like cash"
Credit card companies usually charge higher interest rates for cash advances than for purchases. In “Eckhardt v. State Farm Bank FSB,” Seth Eckhardt sued his credit card company for breach of the cardholder agreement – in which cryptocurrency wasn't addressed – and violations of the Truth in Lending Act (TILA), meant to protect consumers against inaccurate and unfair credit billing practices. Eckhardt's early 2018 crypto purchases had been treated as “purchases,” but then as cash advances with applied surcharges from February 2018. The court found Eckhard’s claims proven but left the question of whether cryptocurrency is cashlike open. The parties agreed to dismiss the case."Power company can discriminate miners from other customers"
Another case, “Blocktree Properties, LLC v. Pub. Util. Dist. No. 2 of Grant Cty. Washington,” describes Public Utility of Grant County (popular with miners due to some of the lowest electricity rates in the country) proposing heightened rates of 295%-400% over a three year period for miners, in order to lessen the increasing strain on its grid. Also, other customers would have a priority of service. Blocktree and other miners filed for a preliminary injunction, arguing that the rate change was discriminating and violated due process. It was denied. The court found that the rate hike wasn't arbitrary, capricious or unreasonable, but was needed to address the sudden influx of industry threatening the stability of the county’s power services."Distributed ledger can show membership in a class action
“Audet et al. v. Garaza et al.” started with two guys founding a business of importing mining hardware for sale in the U.S., then turning it into a complicated Ponzi scheme, even announcing their own bank and investment firms-backed “Paycoin” token. Defrauded customers brought a class action lawsuit against GAW Miners, its founders and another company they own. In deciding whether to certify the class, the court considered and ultimately answered affirmatively to two issues: the act of mining or converting qualified as a sale or purchase, and customers who purchased Paycoin with bitcoin could use the Bitcoin blockchain transaction trail to prove their membership."Blockchain operators may have a duty of care in managing tokens"
Finally, in “Fabian v. LeMahieu,” a class action was brought against Nano (NANO), BitGrail and others for securities fraud and various offenses connected to Nano Coin. The plaintiffs alleged that Nano and its developers have promoted, offered, traded and sold unregistered and unexempted Nano Coins to the public, while also commissioning the creation of and subsequently maintaining BitGrail exchange, via which customers were instructed to buy Nano and store it there. On February 8, 2018, 15 million Nano coins (c. 15% of coins in circulation) stored on the BitGrail Exchange (worth c. USD 170 million) were lost. The court said ‘no’ to the breach of implied contract claim, the breach of fiduciary duty, and unjust enrichment charges. But, on the state claims for negligence, fraud and negligent misrepresentation, the court found the allegations enough to deny dismissal of the case – this means, the court thought it plausible that Nano had a duty to exercise reasonable care in managing Nano Coins on the BitGrail exchange. Dyer writes that other states favoring strong consumer protection may find a duty of care where a coin issuer maintains customer coins or closely works with an exchange that does. “One way for companies to avoid this pitfall would be to simply transfer custody of coins to customers,” says Dyer.