New Solutions Seek to Bring Cryptocurrencies Closer to Mainstream
This past week, a leading operator of global exchanges, clearing houses, data and listing services announced that it has partnered with a multinational technology company, one of the world’s largest and most well-known coffeehouse chains, and a major global management consulting firm to launch a new cryptocurrency platform. The new platform will develop open technology to enable consumers and institutions to more easily buy, sell, store and spend cryptocurrencies. The ecosystem created by the new platform is expected to include federally regulated markets as well as merchant and consumer applications. Subject to U.S. Commodity Futures Trading Commission review and approval, the new platform plans to launch in November with a one-day bitcoin futures contract that will be physically delivered, meaning owners will receive bitcoin, not cash, upon expiration of the contract. The coffeehouse chain, as the flagship retailer, will leverage the platform to give consumers the ability to convert cryptocurrencies into U.S. dollars to pay for coffee and other items at its retail locations.
In related news, a global investment banking, securities and investment management firm recently announced that it is considering offering custody services for crypto funds to provide protection to clients from risk of loss in the case of a cyberattack. Also, cryptocurrency exchange platform Coinbase recently launched a plug-in for a major e-commerce platform that will allow more web merchants to accept cryptocurrency as a form of payment.
In international news, while Thai banks continue to be prohibited from engaging in cryptocurrency activities, on Aug. 1 the Bank of Thailand published a regulatory announcement allowing bank subsidiaries to issue digital tokens, provide crypto brokerage services, run crypto-related businesses and invest in cryptocurrencies, subject to certain rules.
Blockchain Developments for Shipping, Food, Pharmaceuticals and Diamonds
This week, a major global technology firm and the world’s largest shipping company announced TradeLens, a blockchain-enabled shipping solution and “joint collaboration” between the two companies. Built on Hyperledger, the system has reportedly captured more than 150 million shipping events worldwide. The companies assert TradeLens will allow shippers to cut middlemen from the supply chain, saving customers up to 40 percent on shipping costs. With 92 firms already signed up (representing some 20 percent of the global supply chain’s market share), TradeLens expects to have a commercially available platform by year end.
In developments related to food supply chain solutions, Wyoming ranchers are working on a blockchain solution to track their beef’s provenance, with the hope that consumers will pay a premium for beef with verified origins. Additionally, Nestlé recently announced that it is testing whether fruits and vegetables used in baby food products can be traced using blockchain technology to improve recalls.
In Austria, a startup named Grapevine World recently announced a blockchain pilot for tracking healthcare data for a Forbes 100 pharmaceutical corporation’s clinical trials. The pilot will be hosted on a major cloud network, leverage existing health care interoperability standards and use Hyperledger Fabric. In China, ZhongAn Technology, an insurance company subsidiary, announced a new blockchain network to provide assurances on the origin and quality of diamonds using existing industry certification standards. The network reportedly has already uploaded data on 760,000 diamonds.
Cryptocurrency Scams and Enforcement Actions Perpetuate Uncertainty
Cryptojacking schemes continue to proliferate, with security researchers recently uncovering a massive wave of such attacks specifically targeting unpatched MikroTik routers to spread Monero-mining malware to every web page that a user may visit using the vulnerable router. The campaigns compromised more than 210,000 routers in total, with 183,700 in Brazil alone. Tokyo-based security firm Trend Micro discovered an on-demand malware business on the dark web at a price of $25,000, which allows users to exploit bitcoin ATM vulnerabilities to pilfer the bitcoin equivalents of up to 6,750 in U.S. dollars, euros or pounds.
The Wall Street Journal recently published the results of a study that determined that so-called “pump and dump” groups have generated more than $825 million in trading activity over the past six months by artificially increasing the price of certain cryptocurrencies to sell them at a profit. And researchers studying Twitter bots have uncovered a significant number of bots being used to entice users to give away small amounts of cryptocurrencies based on false promises of a larger payout in the same currency. The research team identified one botnet consisting of more than 15,000 bots that operated on a structure where some bots spoof legitimate cryptocurrency accounts and other bots “like” the fraudulently generated tweets.
A recent Bloomberg article stated that the SEC has begun scrutinizing brokerages that deal in cryptocurrencies, seeking information about fees generated from trading, financing and initial coin offerings. According to another report, FinCEN intends to go after foreign crypto exchanges doing business in the U.S. that do not comply with anti-money laundering rules. An additional report released this week discussed strategies for how cryptocurrency exchanges can avoid regulatory scrutiny by implementing the right policies and procedures, designated compliance roles, board oversight, and other measures. On Aug. 1, a bitcoin trader was forced to forfeit 81 bitcoins and was sentenced to 41 months in prison for money laundering.
Analysis: Tezos Securities Class Action Survives Motion to Dismiss
Earlier this week, the federal court in the Tezos consolidated securities class action proceeding addressed several thorny jurisdictional issues prevalent in many initial coin offerings (ICOs) made in 2017 and earlier. Over the past year, the SEC and plaintiffs in class actions have been bringing claims against parties allegedly involved in ICOs, mostly where there are allegations of fraud involved, with the primary claims based upon the sale of unregistered securities. In many of these cases, the ICOs were done in foreign jurisdictions or by foreign defendants or entities. So the interesting question that arises is this: Under what circumstances may these plaintiffs appropriately haul foreign defendants into U.S. courts to defend themselves? Several courts nationwide are now grappling with that issue, and the first decision substantively addressing those points has come down with a fair analysis heavily dependent upon the facts and allegations in the pleading.
In the putative class action involving the July 2017 Tezos ICO, which the defendants had characterized as a fundraiser for the Swiss-based Tezos Foundation, about $232 million was raised by the Foundation, with a portion going to a California husband and wife team, the Breitmans, and their company, Dynamic Ledger Solutions (DLS). The couple’s home was the corporate headquarters of DLS. Other defendants included the well-known venture capitalist Timothy Draper and his firms, which made a minority investment in DLS in May 2017, and Bitcoin Suisse, a foreign firm specializing in the crypto-financial sector, which provided intermediary services for the ICO such as conversion of U.S. dollars to Bitcoin and Ethereum, the transfer of the crypto to Tezos, and the creation of digital wallets.
The defendants moved to dismiss the consolidated complaint, which alleged violations of Sections 12 and 15 of the Securities Exchange Act of 1934, on several grounds, including lack of personal jurisdiction, forum non conveniens, that they were not a “statutory” seller or that there was the improper extraterritoriality application of the courts being used for the Exchange Act claims. Only the Draper defendants and Bitcoin Suisse were successful on their motions to dismiss.
Judge Richard Seeborg had little problem finding that the Breitmans (U.S. citizens living in Northern California) as well as DLS and the Foundation (both effectively controlled by the Breitmans) purposely directed their activities for the offering and met jurisdictional due process requirements. Equally easy was dismissing the Draper defendants, as neither Draper nor his entities solicited the purchase of the tokens, as required to be a “statutory” seller. There were no allegations of face-to-face buyer-seller contact for liability to attach.
Separately, the Foundation, organized in Switzerland, as the only “seller” of the token, argued that it was an extraterritoriality application of the U.S. Supreme Court’s Morrison decision, because the sale occurred in Alderney, a remote British outpost, and thus was not a “domestic transaction” for which U.S. courts should take jurisdiction. The Foundation further argued there was a forum selection clause, which made the U.S. courts forum non conveniens. However, the Court held that despite significant law enforcing such provisions, given it was based upon a “browsewrap” agreement, it would not be enforced, subject to later proof of the plaintiff’s actual knowledge of the provision.
It seems that certain allegations would influence any court deciding these kinds of issues. Here, the plaintiffs alleged that the Foundation engaged in little or no marketing of the ICO anywhere other than in the United States, the Breitmans were U.S.-based, and a significant portion of the 30,000 contributors to the ICO were U.S. citizens. It will be interesting to follow the case law development as more foreign defendants are sued in U.S. courts for foreign ICOs and challenge the fling on both personal and subject matter jurisdictional grounds.
In re Tezos Securities Litigation, 17-cv-06779 (N.D. Cal.) (J. Seeborg).