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The Challenges With Crypto Lawsuits

Updated: Jul 21

Cryptocurrency litigation is on the rise, especially with investor losses mounting. Before running to court, carefully consider the jurisdictional and liability issues that may present some challenges.




by David Russell (David@RussellLawPC.com)


In the last few years, the cryptocurrency market has exploded. With this new interest, we are beginning to see disputes related to these novel currencies, especially as the crypto values drop in the market. As case law relating to cryptocurrency disputes continues to develop, we want to flag two issues that seem to be prevalent in multiple crypto cases. First, because of the nature of crypto currency, plaintiffs often have a difficult time locating, serving, and establishing personal jurisdiction over defendants. Some courts have been willing to allow hard-to-reach defendants to be served by email and social media, and respect plaintiffs’ requests for such alternative service to continue in the further. Second, theories of tort liability related to these new currencies continue to develop. We expect the law to continue developing regarding theories of liability tailored to cryptocurrency-related disputes.


Locating, Serving, and Establishing Jurisdiction Over Defendants


Defendants in cryptocurrency cases are often very different than defendants disputes relating to traditional currencies. And, indeed, some defendants may not have a traditional headquarters that would give a court jurisdiction over them. In Reynolds v. Binance Holdings Ltd., 481 F. Supp. 3d 997, 1001 (N.D. Cal. 2020), the plaintiff attempted to sue Binance, a global cryptocurrency exchange for which the plaintiff previously worked, alleging that the company seized nearly $300,000 of digital currency in his accounts. Binance filed a motion dismiss on the grounds that the Court did not have personal jurisdiction over it, which the court granted, holding: “Binance's lack of any headquarters does not make California its jurisdictional home, and has Mr. Reynolds has failed to identify any other facts, alleged or otherwise, that would make this case exceptional under Daimler and place Binance ‘at home’ in California.” Reynolds v. Binance Holdings Ltd., 481 F. Supp. 3d 997, 1003 (N.D. Cal. 2020).


Because of the ethereal nature of the currency, companies involved in crypto-related disputes may also be difficult to locate and serve. For example, Nowak v. XAPO, Inc., No. 20-CV-03643-BLF, 2020 WL 5877576, at *1 (N.D. Cal. Oct. 2, 2020), the plaintiff alleged that 500 Bitcoin he stored in a Northern California-based cryptocurrency exchange were stolen and deposited into cryptocurrency exchanges owned by companies located in Gibraltar and Indonesia, where he was unable to locate addresses at which they could be served. The Court allowed alternative service on one of the defendants by email, Twitter, and Facebook, but denied the other request for alternative service of the other company, holding that the request was premature. Id. at *4.


Tort Liability


In crypto cases, it seems that courts often dismiss plaintiffs’ initial complaints as they explore how to state a claim against a defendant. See, e.g., Shin v. ICON Found., No. 20-CV-07363-WHO, 2021 WL 3493740 (N.D. Cal. Aug. 9, 2021) (dismissing initial complaint); In Terpin v. AT&T Mobility, LLC, 399 F. Supp. 3d 1035 (C.D. Cal. 2019); Berk v. Coinbase, Inc., No. 18-CV-01364-VC, 2018 WL 5292244 (N.D. Cal. Oct. 23, 2018) (same). In these cases, plaintiffs have had more luck making claims stick on subsequent pleading attempts. See, e.g., Shin v. ICON Found., No. 20-CV-07363-WHO, 2021 WL 3493740, at *1, 3-8. (N.D. Cal. Aug. 9, 2021); Terpin v. AT&T Mobility, LLC, No. 218CV06975ODWKSX, 2020 WL 883221, at *3 (C.D. Cal. Feb. 24, 2020); Terpin v. AT&T Mobility, LLC, No. 218CV06975ODWKSX, 2020 WL 5369410, at *2 (C.D. Cal. Sept. 8, 2020); Berk v. Coinbase, Inc., No. 18-CV-01364-VC, 2019 WL 3561926, at *4 (N.D. Cal. Aug. 6, 2019) , rev’d and remanded on other grounds, 840 F. App’x 914 (9th Cir. 2020).


Often, traditional theories of tort liability can apply to crypto disputes—even disputes that involve novel issues. In Shin v. ICON Found., for example, the plaintiff exploited a loophole in the ICON blockchain that allowed him to obtain 14 million ICX tokens, which he then transferred to other crytpo-asset exchanges. Subsequently, the defendant instructed those exchanges to freeze the plaintiff’s ability to access the ICX tokens. See Shin v. ICON Found., No. 20-CV-07363-WHO, 2021 WL 1893117 (N.D. Cal. May 11, 2021). After initially granting a motion to dismiss the complaint without prejudice, the court found that—on his second attempt—the plaintiff pleaded claims under the traditional tort theories of conversion and trespass to chattels. See In Shin v. ICON Found., No. 20-CV-07363-WHO, 2021 WL 3493740, at *1, 3-8. (N.D. Cal. Aug. 9, 2021).


Whether plaintiffs can assert claims for negligence against cryptocurrency exchange platforms is still an open issue. In Berk v. Coinbase, Inc., the plaintiffs alleged that the cryptocurrency exchange platform, Coinbase, negligently launched a dysfunctional trading market for Bitcoin Cash. Berk v. Coinbase, Inc., No. 18-CV-01364-VC, 2019 WL 3561926, at *1 (N.D. Cal. Aug. 6, 2019). The federal district court, interpreting California law, determined that crypto exchange platforms had a duty to maintain a functional marketplace, and allowed plaintiffs who purchased Bitcoin Cash (but not those who sold Bitcoin cash) to pursue a negligence claim, while dismissing fraud and UCL claims. Id. at *2.


The Ninth Circuit, however, indicated that it disagreed. When overturning the district court’s denial of a motion to compel arbitration, it held that “California law provides a business entity has no duty to prevent financial loss to others with whom it deals directly.” Berk v. Coinbase, Inc., No. 19-16594, 2020 WL 7658357, at *1 (9th Cir. Dec. 23, 2020); see also BMA LLC v. HDR Glob. Trading Ltd., No. 20-CV-03345-WHO, 2021 WL 949371, at *16 (N.D. Cal. Mar. 12, 2021). Until state appellate courts start to weigh in on this issues, expect dissonance on these issues to continue.


One theory of liability courts appear to have definitively rejected relates to “forked currencies.” Forked currencies are cryptocurrencies modified to “fork” off from an established cryptocurrency’s blockchain. For example, in Archer v. Coinbase, Inc., 53 Cal. App. 5th 266 (2020), the plaintiff sued Coinbase alleging various claims related to Coinbase’s purported refusal to allow him to access a “forked currency,” called Bitcoin Gold, stored in his Coinbase account. Bitcoin Gold divided the original Bitcoin blockchain/ledger “into two distinct, but identical, copies, (i) the original Bitcoin, and (ii) the new Bitcoin.” Id. at 270 (quotations omitted). The result of this fork was “ that any individual who owned the original Bitcoin now owns an identical amount of the new Bitcoin.” Id. Coinbase, however, made the decision to not support the new currency.


Plaintiff sued Coinbase for its decision, alleging that Coinbase failed to allow him to receive his Bitcoin Gold Currency and that Coinbase retained control over the currency for its own benefit, and asserting breach of contract, conversion, and negligence causes of action. Relying on a similar decision by a federal district court, the Court of Appeal affirmed the trial court’s grant of summary judgment disposing of contract, conversion, and negligence claims. The California Court of Appeal disposed of the contract claim because the user agreement at issue did not obligate Coinbase to provide Bitcoin Gold to plaintiff. Id. at 272, 277-78 (citing BDI Cap., LLC v. Bulbul Invs. LLC, 446 F. Supp. 3d 1127 (N.D. Ga. 2020)).


Conclusion


As cryptocurrency disputes become more common, we expect to see more issues with serving players in the cryptocurrency space without traditional headquarters that are hard to serve. Additionally, as the body of law dealing with cryptocurrency continues to flesh out, attorneys litigating crypto-related disputes paying close attention to the small body of law directly dealing with cryptocurrency disputes, traditional theories of liability, and feedback from the court.


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