September 28, 2022
  • September 28, 2022

Delaware court determines value of cryptocurrency for damages

By on April 27, 2022 0

CONTEXT

This month, the Delaware Superior Court’s Complex Commercial Litigation Division answered a new question from Delaware law: “When the consideration to be paid on a contract is in cryptocurrency and the contract is breached, how does the Court calculate the judgment to be rendered?”1 Noting that these issues are “new issues for Delaware,” Judge Paul R. Wallace prima facie determined the value of a normally free-flowing cryptocurrency and awarded $25 million in breach damages. of contract.2

ANALYSIS

In Diamond Fortress Technologies Inc. v. EverID Inc.defendant EverID, Inc. (EverID) has failed to compensate plaintiffs, Diamond Fortress Technologies, Inc. (Diamond Fortress) and its CEO Charles Hatcher II, for their work in assisting in the development of the crypto-trading platform currency of EverID.

Diamond Fortress is a biometrics software company that has developed software that enables smartphone cameras to detect and verify a user through fingerprint recognition. EverID is an entity active in the blockchain and cryptocurrency industry. He created a cryptocurrency called “ID tokens”. EverID licensed software from Diamond Fortress to integrate with EverID’s cryptocurrency platform to verify and confirm user identities. EverID also engaged Mr. Hatcher to serve as an advisor for the onboarding process. Under the terms of the license agreement, Diamond Fortress was to receive 10 million ID tokens and Mr. Hatcher was to receive 2.5 million. Both parties were to receive the ID tokens after its Initial Coin Offering (ICO).3

The ICO took place on February 8, 2021. EverID, however, did not make a payment. Diamond Fortress attempted to contact EverID several times between February 8 and March 4, but received no response. Diamond Fortress and Mr. Hatcher then sued for breach of contract. EverID never responded to the complaint or otherwise defended itself, and the plaintiffs sought default judgment.

As Justice Wallace noted, the otherwise simple breach of contract case raised new questions: what is the remedy when the counterparty is a new cryptocurrency with “volatile and unregulated” value,4 and in calculating that value, should the court classify that cryptocurrency as a “security/investment contract, commodity, property, or currency?”5

First, the court noted that other “[c]Ours generally classify a cryptocurrency as a security when the economic harm is directly related to or stems from its ICO.6 Here, the court found that EverID’s failure to distribute the ID tokens on the date of the ICO was the direct cause of the plaintiffs’ harm.7 The court further noted that the license agreement provided that the distributions were subject to regulatory compliance under Rule 144 of the Securities Exchange Act of 1933. Therefore, the court considered the ID tokens in these circumstances as a security.

Next, the court had to find a reliable source of cryptocurrency valuations to determine the value of the ID tokens. The court noted that other courts have used CoinMarketCap as a reliable valuation tool to determine the value of cryptocurrency tokens and that The Wall Street Journal and the FinancialTimes also use CoinMarketCap to report virtual currency prices.

Finally, the court was required to determine the appropriate method of calculating damages so as to place the plaintiffs in the same position as they would have been had the license agreement been fully performed. The court noted that in similar “failure to deliver securities” cases, Delaware courts calculate damages by determining “the highest market price of the security within a reasonable time of discovery of the violation by the plaintiff”.8 The court determined that the three-month period from March 4, 2021 to June 3, 2021 was a “reasonable time.” According to CoinMarketCap, the highest market price for ID tokens between March 4 and June 3 was $2.01.

Therefore, using this analysis, the court calculated the damages for the 10 million ID tokens of Diamond Fortress at US$20,100,000 and the damages for the 2.5 million ID tokens from Mr. Hatcher at US$5,025,000.

KEY POINTS TO REMEMBER

As Justice Wallace observed, “[b]but for the novelty of the instrument in question being units of cryptocurrency, this lawsuit mirrors any other failure to deliver a securities case – a common action for Delaware courts.9 The court’s decision – in which Judge Wallace noted that the “lack of cryptocurrency regulatory policy” was “fully visible” – came as Congress considered the asset market structure law. and Investor Protection, which would regulate digital assets and digital asset securities. . The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission would be required to publish a regulatory proposal within 150 days of the enactment of the bill ranking top digital assets by their highest market capitalization or market capitalization. highest daily trading volume. The legislation, Justice Wallace also observed, referred both federal agencies to CoinMarketCap as the appropriate public source for digital asset data.

The decision reflects the proliferation of digital assets, cryptocurrencies and other applications supported by blockchain technology and provides useful guidance on how courts will value cryptocurrencies when tasked with calculating compensation .

FOOTNOTES

1 Diamond Fortress Technicians. Inc.. against EverID Inc., CA N21C-05-048-PRW-CCLD (April 14, 2022).

2 Identifier.

3 As the court explained, an ICO occurs when “a new species of cryptocurrency token is issued in exchange for fiat or virtual currencies already in circulation to raise capital.” ID. at 12.

4 ID. at 30.

5 ID. at 14.

6 ID. at 23 (citing US Sec. & Scale Common c. Kik Interactive Inc., 492 F. Supp. 3d 169 (SDNY 2020)).

7 ID. at 24.

8 ID. at 32 (citing A m. Gen. Corp. against Cont’l Airlines Corp.., 622 A.2d 1 (Del. Ch. 1992)).

9 ID. at 32–33.