Ethereum Node Location Won’t Help Fraud Accusation – Corporate/Commercial Law


United States:

Ethereum Node Location Won’t Help Fraud Accusation


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In January 2021, the U.S. District Court for the Southern
District of New York considered a motion to dismiss a class action
lawsuit filed against Helbiz, Inc. and other defendants that
concerned Helbiz’s issuance of HelbizCoin, a
cryptocurrency.1 The suit included claims arising under
United States securities laws. The Court granted the motion because
it held the cryptocurrency purchases did not occur in the United
States, despite computing activity occurring in the United States
that made the purchases possible.

Helbiz allegedly promoted the purchase of HelbizCoin as the
exclusive currency that Helbiz would accept for its Helbiz
transportation rental platform. The HelbizCoins were issued in an
initial coin offering (ICO) to HelbizCoin purchasers in exchange
for fiat currency. Helbiz would then use those funds to build out
its rental platform.

Despite Helbiz’s alleged promise to only accept HelbizCoins
in its rental business, it ultimately accepted fiat currencies as
well. That fact meant HelbizCoins never gained their anticipated
value. They lost most, if not all, of their value. Before the price
collapsed, Helbiz and other defendants supposedly sold most of the
HelbizCoins they still possessed.

The court held that HelbizCoins met the definition of
“investment contracts” under the Securities Act of 1933
and the Securities Exchange Act of 1934, and were thus
“securities” regulated by those acts. Section 10(b) of
the Securities Exchange Act of 1934 makes it unlawful to “use
or employ in connection with the purchase or sale of any
security” a “manipulative or deceptive devise or
contrivance in the contravention of such rules and regulations as
the [SEC] may prescribe.” The court noted that the U.S.
Supreme Court has held that for securities not listed on an
American stock exchange, Section 10(b) only governed securities
purchased or sold “in the United States.”2
HelbizCoin was not listed on an American stock exchange

The HelbizCoin offering materials stated that U.S. citizens,
U.S. residents or green card holders could not participate in the
HelbizCoin ICO. The only evidence submitted of who had purchased
HelbizCoins were declarations of individual purchasers with no
apparent relevant connection to the United States. The plaintiffs
nevertheless argued that the transactions had more nexus with the
United States than any other country because most of the
Ethereum3 blockchain nodes (called
“Ethernodes”) that validated the HelbizCoin transactions
were located in the United States. For that reason, the plaintiffs
believed that Section 10(b) did apply. Blockchain nodes are
computers that record, transmit and then verify cryptocurrency
transactions with other blockchain nodes, and they perform other
functions as well.

The court accepted that the United States had more Ethernodes
than any other country, but it held that fact was irrelevant to
whether Section 10(b) applied. The court observed that “all
that machinery for generating, administering, and delivering the
bitcoin4 could be located in Kansas, Germany or Brazil
without affecting the location of the offer and acceptance of
the purchase
.” (emphasis added). The court concluded that
because the purchase did not occur in the United States, Section
10(b) did not apply.

The plaintiffs’ claims were dismissed without prejudice to
refile them in the appropriate jurisdictions. Some commentators
have speculated about how blockchain node geographic distribution
might affect jurisdictional questions.5 Based on this
court’s reasoning in the circumstances presented in this case,
the answer is that blockchain node location is irrelevant. The
decision has been appealed.

Footnotes

1 See Barron v. Helbiz, Inc., 2021 WL 229609
(S.D.N.Y. 2021), Opinion and Order on Motion to
Dismiss.

2 Morrison v. National Australia Bank, Ltd., 561
U.S. 247 (2010).

3 “. . . Ethereum is an open-source,
blockchain-based, decentralized software platform used for its own
cryptocurrency, ether.” Jake Frankenfield, Ethereum,
Investopedia (Feb. 18, 2021), https://www.investopedia.com/terms/e/ethereum.asp.
The Ethereum network can also support other cryptocurrencies.
See Why Most New Tokens Are Ethereum ICOs, Skalex
(2017), https://www.skalex.io/why-ethereum-icos/.

4 The Court presumably used the term “bitcoin”
colloquially in a way to include HelbizCoin.

5 See, e.g., John Salmon and Gordon
Myers, Blockchain and Associated Legal issues for Emerging
Markets
, 63 EM Compass – IFC, a member of the World Bank Group
1 (2019).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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