Home Technology Block.one decision questions where crypto transactions take place (1)

Block.one decision questions where crypto transactions take place (1)

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Block.one decision questions where crypto transactions take place (1)

A federal judge’s recent refusal to approve blockchain tech developer Block.one’s $27.5 million settlement with cryptocurrency investors highlights plaintiffs’ challenges in class action lawsuits to get their money back from foreign crypto companies.

The scope of federal securities law is limited to “domestic transactions” in disputes involving securities not traded on a US exchange. Determining what a domestic or foreign transaction is is more difficult in cryptocurrency, which is developed, bought, and sold through a collection of decentralized computers around the world.

And like Williams et al vs. Block.one shows, this distinction matters when considering the appropriate representation of classes in crypto investor disputes. Crypto Assets Opportunity Fund – as a fund that did both foreign and domestic transactions of tokens sold by Block.one – had not shown that it could adequately represent other investors whose transactions primarily took place in the United States, said U.S. District Judge Lewis Kaplan of the South. The District of New York ruled on August 15. Kaplan declined to approve the proposed settlement and appoint Crypto Assets as class representative.

The problems with Kaplan’s decision will no doubt show up in other similar lawsuits as the fallout from the cryptocurrency’s volatility unfolds. Kaplan’s decision is one of the few early cases that directly advances the argument — and could serve as a guiding example — about what constitutes a domestic transaction in cryptocurrency trading.

The case illustrates “the difficulty of trying to determine whether you have a transaction in the United States,” said Proskauer Rose LLP attorney Jonathan Richman. The decision also underscores the challenges of dealing with these issues class-wide.

“You’re going to have to deal with differences between class members as to whether or not they have transactions that fall under US securities laws,” Richman said.

Cryptocurrency Investor Class Actions Are on the right track to reach an all-time high in 2022, according to a recent report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. Ten class actions were filed in the first half of 2022, compared to 11 throughout last year.

“Not only do we not have guidance from the United States Supreme Court on what national transactions mean in general, but we do not have guidance in the context of crypto assets, which in themselves are different. any other kind of security,” University of Arkansas law professor Carol Rose Goforth said.

National transactions

Investors sued Cayman Islands-based Block.one in 2020, alleging the company defrauded them “through an illegal one-year Initial Coin Offering”.

Block.one agreed the previous year to pay $24 million to settle Securities and Exchange Commission allegations that it sold unregistered securities.

Block.one, which has maintained The investors’ lawsuit is “without merit” and “full of numerous inaccuracies,” reached a separate $27.5 million settlement with them, culminating in a recent New York court hearing.

In his ruling, Kaplan referenced a 2010 Supreme Court decision in Morrison v. National Australia Bank, who limited the scope of US securities law to securities listed on national stock exchanges and “domestic transactions” in other securities.

“Which blockchain transactions are domestic and which are not remains a relatively new question,” Kaplan wrote.

Various circuit courts, including the United States Court of Appeals for the Second Circuit, agree that a transaction is domestic if “irrevocable liability” passes from the seller to the investor in the United States. Courts have, however, questioned what “irrevocable liability” means in the context of a blockchain transaction.

“The more complex an international transaction, the more difficult it is often to tell where it belongs,” said Robert Schwinger, attorney for Norton Rose Fulbright US LLP.

With blockchain, “when the thing goes through many, many computer nodes around the world, it’s a lot more complicated than your traditional securities scenario,” Schwinger said. A node refers to a computer linked to the cryptocurrency network.

In a case involving the Tezos blockchain project, a California district court judge said a transaction became irrevocable “after being validated by a network of global ‘nodes’ clustered more densely in the United States than in any other country”.

A New York judge, in a case brought by investors who bought the HelbizCoin cryptocurrency, focused on the buyer’s location at the time of the transaction. In Utah, a district court found that transactions in securities sold over the Internet occur at both the seller’s and the buyer’s.

“There are at least nuanced differences in the existing case law regarding the attempt to determine where irrevocable liability arises between buyer and seller in a blockchain transaction,” Richman said. “It’s certainly evolving.”

Kaplan appeared to question some of the existing approaches in the case against Block.one. The judge ultimately suggested that a proper test to determine if a cryptocurrency transaction is domestic is to determine which computer “node” verified the transaction first.

Such a test “appears to be manageable” and follows Second Circuit precedent, he said.

One advantage of such a test is that it’s simple, said Samuel Dibble, an attorney at Baker Botts LLP, although it’s unclear if it can scale to all blockchain transactions. The simplicity of the test has the potential to create problems.

“People will try to evade US jurisdiction by directing traffic out for first node verification,” said Indiana University law professor Sarah Hughes.

Complicated cases

At the heart of Kaplan’s decision were concerns about whether the lead plaintiff adequately represents the proposed class of investors.

He worried that Crypto Assets would be incentivized to accept a lower settlement offer than would have been demanded by investors who primarily engaged in transactions in the United States.

He noted that the deal was 75% below the alleged total loss “largely due to the presence of foreign purchases”.

The judge said it ‘involves no fault or criticism of the principal plaintiff or his experienced and well-regarded lead counsel’. Rather, it was “a structural problem with its roots in the unusual market involved in the case”.

There could be solutions to this type of problem, say the lawyers. On Monday, an individual who said almost all of his token purchases were domestic asked be substituted as lead plaintiff in the litigation.

Still, Kaplan’s decision is “definitely a warning that [these cases] are complicated,” Richman said.

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