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Follow the Money: 4 Lessons in Blockchain Lawsuits

Litigation Column
A s the popularity of blockchain increases, so does the likelihood that it will be involved in a lawsuit. In the article “10 Things a General Counsel Needs to Know about Blockchain,” authors Bertrand Alexis and Iohann Le Frapper recommend monitoring blockchain and cryptocurrency developments. We took their advice, and conducted a survey of lawsuits in the United States involving blockchain. To identify significant cases to analyze, we used blockchain related terms1 to search for discussions of the technology in state and federal courts. Here are some observations and tips from what we found:

The technology itself is not yet creating disputes in the court system.

Plaintiffs have not yet alleged that the technology is unreliable. Indeed, the premise of most cases is that the technology works and it provides the foundation for the factual allegations.

Most of the cases we identified relate to using blockchain technology as cryptocurrency. We observed the following general categories of disputes:
  • Breach of contract or fraud in the delivery, mining, etc. of cryptocurrency;
  • Use of cryptocurrency as the method of payment for criminal enterprises (e.g., the illegal Silk Road or Alpha Bay marketplaces). These are primarily forfeiture cases; and,
  • Employment related disputes, including trade secret theft and unjust enrichment, with blockchain only relevant as part of the technology stolen.
These cases were filed in six states (each having one or two cases), but New York was the preferred venue with six blockchain-related cases.

Beyond these cases, smart contracts and other uses of blockchain have not yet hit the courts. We were surprised by the scarcity of cases that met our search criteria, considering how large businesses and banks are increasingly accepting and investing in blockchain technology and cryptocurrencies.

[Related: From Government to Startup: Sindeo GC Joge Danganan's Unique Fintech Perspective]

Among mostly routine disputes where blockchain is a side issue, there are a few cases raising questions that will begin to shape the law for blockchain. Other significant issues raised in these litigations include: Should cryptocurrency be regulated as money? How will courts enforce smart contracts and contracts for the purchase or mining of cryptocurrency?

Parties are using public blockchain information to support allegations.

The distributed public ledger is a cornerstone for blockchain technology, and it allows anyone to observe the recorded transactions and use them to support a complaint or legal argument. Consider the following:

US v. $817,426.12: The government uses public ledger information when seeking forfeitures. In a complaint, the government alleged: “[The Special Agent] utilized the website to observe the public ledger for the purported theft. [The Special Agent] was able to confirm that on November 21, 2013, 5358.69878 Bitcoins were transferred into 14 Bitcoin addresses over the course of less than three hours.”2 This constituted approximately US$6.6 million at the time. Note how you can also use for information on Bitcoin transactions, as well as other such public sites for different cryptocurrencies.

Bitvestment v. Coinlab: Coinlab agreed to provide “100 percent of its mining output…to producing Bitcoin” to Bitvestment. No discovery or audit was required for Bitvestment to confirm that Coinlab had not provided all its output, because “It is publicly documented that CoinLab has successfully mined at least 922.88703245 Bitcoins” since the parties’ agreement.3 Even without a smart contract, you can take advantage of the way Bitcoin works by connecting contractual performance of another party to information available in the distributed public ledger.

Parties can attempt to attribute knowledge of public blockchain information to others.

Blockchain’s transparency raises a question that is already in dispute: When does the distributed public ledger information become attributable to a party? In Leidel v. Coinbase, the plaintiff argued that Coinbase knew or should have known that its customer Cryptsy was engaged in fraud, in part, based on how funds deposited in the Cryptsy’s account exceeded the amount that Cryptsy’s owner could have mined personally. “Had Coinbase even cursorily audited or reviewed the blockchain history,” it would have uncovered the fraud, the plaintiff contended.4  

[Related: The Future of Automation, Blockchain, and Smart Contracts]

Coinbase is subject to anti-money laundering “know your client” procedures and so has a heightened obligation to know about the third parties it transacts with, but it may not be long until a case will involve the attribution of distributed public ledger information to a party not subject to this obligation. With the use of cryptocurrency on the rise, you should start considering what blockchain knowledge others may try to attribute to your business, and whether third-party partner due diligence should include a review of blockchain transactions.

Use of cryptocurrency creates business risk.

Many of these cases involve unreliable partners, including employers and employees, and have undertones of fraud or theft. According to Bitvestment, Coinlab is refusing in bad faith to perform its agreement to mine Bitcoin. Cryptsy allegedly defrauded customers and then failed. In a different case, Teather and iFinex, foreign entities with offices in Taiwan, filed suit when a North American bank allegedly suddenly stopped wiring funds to customers, apparently concerned about money laundering.5 Teather and iFinex argued the bank’s action was unwarranted because they performed detailed due diligence on their customers.

For businesses that depend on cryptocurrency, the cases highlight the importance of developing a business continuity plan given the elevated risks inherent in using a cryptocurrency outside the mainstream banking system and also conducting appropriate due diligence for new hires, third-party partners, and customers.

1 We used terms like "distributed ledger technology" (DLT), "shared ledger technology" (SLT), "consensus ledger" technology, cryptography, "mutual distributed ledger" technology, and decentralized or "distributed database."
2 United States v. $817,426.12, no. 3:16-CV-633-J-39JRK (MDFL May 24, 2016) (Complaint at 11-12).
3 Bitvestment Partners LLC v. Coinlab, Inc., no. 13-CV-7632 (SDNY October 29, 2013) (Complaint at 2).
4 Leidel v. Coinbase, Inc., no 9:16-CV-81992-KAM (SDFL December 13, 2016) (Complaint at 13).

5 iFinex Inc. v. Wells Fargo & Company, no. 3:17-CV-01882 (NDCA April 5, 2017) (Complaint)

About the Authors

Noah WebsterNoah Webster serves in a general counsel role for the AtHoc division of BlackBerry, which provides networked crisis communication to government agencies and leading commercial enterprises worldwide. He cares for the company's general legal needs and is a trusted business advisor for AtHoc management. Noah has previously held roles at BlackBerry managing the global compliance program and leading the patent litigation team.

Aaron CharfoosAaron Charfoos is co-chair of Dykema’s Privacy and Data Security Practice. He is an accomplished privacy and data protection lawyer specializing in incidence response and litigation, as well as helping clients develop US and EU privacy and data security compliance programs that also serve the needs of the business. Charfoos is a certified information privacy professional for the US Sector (CIPP/US).

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