A recent decision in the United States District Court for the Southern District of New York has sent shockwaves through the world of cryptocurrency investing.  In re Bibox Group Holdings Ltd. Securities Litigation, the Court ruled that a plaintiff did not have standing to assert class claims on cryptocurrency assets he did not own.  However, it was what the court didn’t rule on that made this a landmark case in the legal field developing around cryptocurrency, as the Court took no issue with the fact that the Plaintiff brought a case alleging securities violations against a cryptocurrency issuer and exchange.

The background on this matter is as follows.  In October 2017, Bibox Group Holdings Ltd. and their affiliates funded the launch of their new crypto exchange by launching a new ERC-20 cryptocurrency called BIX.  In this offering of BIX, Bibox raised approximately $19 million in funding.  Bibox told investors that they could exchange BIX for tokens on their exchange, and Bibox would use a portion of the funds raised in the offering to buy back some of the BIX that was issued.  BIX was one of six ERC-20 tokens on the exchange, with the others being EOS, TRX, OMG, LEND, and ELF.

The Plaintiff, Mr. Alexander Clifford, was one of the initial investors who bought BIX.  Mr. Clifford ended up exchanging his BIX for Bitcoin in December 2018.  Mr. Clifford never purchased or owned any of the other tokens.  On April 3, 2020, Mr. Clifford then filed an action in the Southern District of New York against Bibox and their affiliates.  In his complaint, Mr. Clifford alleged that Bibox had violated federal securities law and state Blue Sky law in connection with the trading activities of the six tokens.  Defendants moved for a motion to dismiss, arguing that Mr. Clifford lacked standing since he was asserting claims based on the five tokens he did not purchase, and that his claims pertaining to the one token he owned were time-barred.

Judge Denise Cote of the Southern District of New York granted the motion to dismiss as to all claims, ruling that Plaintiff lacked standing to assert claims based on the five tokens he had never purchased.  This was for two reasons.  First, the Plaintiff did not suffer any injury from the unpurchased tokens.  Second, the Court precluded standing on the grounds that “such conduct implicates the same set of concerns as the conduct alleged to have caused injury to other members of the putative class[1]” because all the tokens were made by different entities and had distinct characteristics and advertising history, meaning the injuries could not be proven in a similar enough way to allege standing.

The Court also dismissed the remainder of claims Plaintiff asserted on the token he did purchase, BIX.  In doing so, the Court rejected the argument that the one-year statute of limitations began to run when the cryptocurrency Plaintiff discovered the token could qualify as a security.  This is because the SEC had previously issued a publication on April 3, 2019 stating that cryptocurrencies may be qualified as securities under the Howey test in the right circumstances.  Rather, the Court held that the statute of limitations began to run when Plaintiff became aware of his injury, which was his last transaction in April 2018.

The main takeaway here is that the Court did not rule that securities laws did not apply to crypto, but rather took issue with the Plaintiff’s standing.  It makes it clear that cryptocurrency issuers and exchanges could be held liable under securities law for their actions.  In addition, while the Court precluded the “same set of concerns is implicated” argument, it is possible another court could find otherwise.  This is due to the fact that the six tokens were on the same exchange, used the same blockchain and were based on the same technological standard.  In conclusion, the rapidly developing field of law around cryptocurrency is one that continues to require close monitoring because of major developments such as this.

[1] Ret. Bd. of the Policemen’s Annuity & Ben. Fund of the City of Chicago v. Bank of N.Y. Mellon, 775 F.3d 154, 161 (2d Cir. 2014)

Tags: Advanced Technology, Corporate Litigation, Securities