Cryptocurrency disputes: multi-jurisdictional lines and global reach | S2 EP1

Blockchain technology is, by definition, borderless. But what happens when such a widespread ledger becomes the focus of litigation? In this episode, hosts Andrew McCoomb and Ailsa Bloomer welcome Robert (Bob) Schwinger, commercial litigator and FinTech lawyer from our New York office. Bob brings us up to speed on just what, exactly, cryptocurrencies are, raising interesting jurisdictional questions as they become an increasingly frequent subject of litigation. 

Bob is author of the New York Law Journal’s “Blockchain Law” column. Check out his last installment for recent updates: Blockchain Law: Out to sea? Extraterritoriality challenges in US crypto litigation. 

CPD credits: This episode qualifies for 0.68 hours of Substantive credit in Ontario and 0.66 hours of Substantive credit in British Columbia.

Transcript

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Transcript:

Andrew McCoomb  00:16
Hi, and welcome to Disputed, a Norton Rose Fulbright podcast. We are your hosts Andrew McCoomb from Toronto and Ailsa Bloomer from Calgary. In this episode, we're talking about cryptocurrency disputes. And in particular, we're focused on questions of jurisdiction. One of the interesting things about blockchain technology is how easily it flows over borders, and how a decentralized ledger can be supported by computers in many different jurisdictions at the same time. When that ledger becomes the focus of litigation, a central question may be where that litigation is properly brought, and what law governs the relationships and legal liabilities in play. Crypto litigation in Canada is in its relative infancy and so to seek a perspective from further ahead on the curve, we spoke to Bob Schwinger. Bob is a commercial litigator in our New York office, Bob focuses his practice on complex high stakes business disputes and has successfully represented both domestic and international clients and matters involving media and technology, private civil antitrust, financial fraud, securities and intellectual property, including copyright and trademark litigation, trade secrets and theft of ideas. He also advises clients on risk issues surrounding financial technology. And he writes a column, the Blockchain Law column for The New York Law Journal. As a result, Bob follows developments in crypto litigation in the United States, and in other jurisdictions very closely. And so we thought he was the perfect resource to speak to for this conversation. We hope you enjoy.

Ailsa Bloomer  01:54
Bob, welcome to the podcast. Thank you very much for joining us.

Bob Schwinger  01:58
Good to be here. 

Ailsa Bloomer  02:00
Now, as we've noticed, you've taken a great interest in blockchain related litigation, and you write a regular column in the New York Law Journal on issues related to blockchain and cryptocurrency litigation. And we are going to go into the specifics in a moment, but we just want to get a handle on the technical stuff here first. So to start, can you give us, high-level, an explanation of what blockchain is and how it works?

Bob Schwinger  02:26
Sure. A blockchain is really just another kind of database technology. And it's often referred to as what's called a distributed ledger as opposed to something which is more centralized. We typically, when we think of someone maintaining a ledger of business records, there's one person who's the-- the master of the ledger. All information has to pass through that person. They record everything in the ledger. And so, this is a centralization of all the data. Blockchain is designed to be a system where instead of having one central copy of the ledger that one person maintains, there are many, many copies of the ledger out there, that many, many people have access to. And the idea is that through various cryptographic techniques, you can keep all these ledgers in sync. And so that they're as reliable as the old centralized ledger. And since they all have to be in sync, there is less concern that one person could disrupt it because they all have to match, all the time. And that enables you to perhaps solve certain problems or perform certain functions that maybe you're not so as easily suited to existing centralized database technologies.

Andrew McCoomb  03:41
So that distributed nature across a lot of systems, with a lot of people looking at it, is what I guess reinforces the strength and security of it. I mean, for someone listening who’s heard the term blockchain, Bob, can you-- can you help us visualize where that term comes from, as you-- as you sort of apply it to that framework you've described?

Bob Schwinger  04:00
Sure, part of the way the database is set up, or the ledger is set up, is each item of information is sort of referred to as a block. And so if you imagine, say, a series of transactions, A sells to B, B sells to C, C sells to D, each one is a block on the chain. And it's just a new code. For example, if you have a blockchain that represents ownership of an asset, you know, for example, like, you know, the way a clerk, you know, keeps a register of who owns a piece of land, you can track the passage of the ownership through the blockchain as A sells to B and B sells to C and so on, through all the various steps in there. And every time a block is added, there are these very complex processes which are followed to make sure that it's legitimate and that all the other copies of the ledger are being updated at the same time, and in the same way.

Ailsa Bloomer  04:50
Just on that point on these complex processes that are followed to make sure that the-- whatever's recorded is legitimate, the transaction is legitimate, I just wonder where the protocol or rules come from to process and verify these kinds of transactions. Is it all in a trust-based system amongst a global network of computers where people don't actually know each other? I mean, what's the protocol around the process?

Bob Schwinger  05:14
Well one of the protocols certainly is-- is that it is sort of anonymous, or at least pseudonymous. No one really knows who anyone else is, they're all working within the system to do it, and this gets into a level of technicality which is perhaps beyond the scope of what we want to get into here. But they are using incredible amounts of computing power to perform very, very high-level mathematical problems, often in certain versions of the database, which helps ensure each node on the database is proceeding correctly. I will admit that the cryptography of that sort of is the precise details that elude me, but I'm not a computer scientist. But it appears to be, you know, sort of pretty-- pretty reliable. Although, you know, new developments in computing power are always possible and if it was a tremendous breakthrough, all of a sudden computers were 10 times, 10,000 times more powerful than they were today, those systems perhaps might need to be reevaluated as to whether they are still impregnable to hacking, and you know, in tricking, and so on. But right now, people feel that they can keep everything in sync and keep everything legitimate.

Andrew McCoomb  06:18
So we talked at the outset about blockchain and cryptocurrency as terms and I think most people out there are going to appreciate that Bitcoin is probably the best known example of a cryptocurrency. But of course, cryptocurrencies aren't the only sorts of things being recorded on the blockchain. And you started Bob, by saying, I think quite helpfully that, you know, this is just a different way of recording information. So can you give us a sense of what some of the applications are for the technology, as we currently understand them, beyond the Bitcoin example?

Bob Schwinger  06:50
Sure, you know, the-- basically a lot of times what the individual blocks on the-- on the chain, which are also sometimes referred to as a token, because essentially you pass the token from one block to the next along the chain, they are an electronic representation of an asset of some kind or the rights to the ownership of an asset. And it could be an asset which is intended to be a-- function as a currency, or it could be an asset that's intended to function as something else. Among the ones that are intended to function as currencies, like cryptocurrencies or like Bitcoin, you have sort of, I guess, two-- two main groups. The ones that people are most familiar with, like Bitcoin, the assets are volatile, their-- their asset-- their value is not necessarily fixed, they can go up or down. That's why you always-- people say, you know, yeah but what is Bitcoin worth today? There are another group of essentially currency-like assets which are referred to as stable coins, and somewhat like a money market mutual fund, their value is intended to be stable at all times. And that can actually be, you know, very useful in payment situations because if you have a coin or a cryptocurrency which is going to go up or go down dramatically in value tomorrow, the holder may not want to spend it or the-- the seller, who's selling something, may not want to take it, if its value is gonna, depending on which way its value is going to go. Whereas a stable coin, much like say a $1 bill, it'll be $1 today, it'll be $1 tomorrow, so that may have a-- more application in situations where people are not looking to sort of speculate on the value of the assets going up or down. Sometimes, people have used tokens to essentially function kind of like securities, where people are raising money to develop a project or develop a company or-- or something along those lines. And sometimes it’s not always clear if the token is-- whether if it's supposed to be a currency or a security, and sometimes the line legally may not be clear. Sometimes you have things called utility tokens which are kind of like, you know, if you go into a casino and you buy chips, you know, I can't take a casino chip out in the real world and spend it. But, in the world of a casino, it has value and I can use it, to you know, to play games. And so, that's another type of application that you can-- you can use it for. And also, conceivably, you could use it for things which are really just really mundane such as, for example, if you maintain a registry of who owns title to a property or who owns a particular share of stock. The token could be nothing more than simply the ownership rights to a plot of land or, you know, 1,000 shares of XYZ Corporation.

Andrew McCoomb  09:19
And it doesn't necessarily have to be only one category, right? I take it a token could be-- something it can do is security and then also function as that utility token within an ecosystem to be used for whatever it is that that company is developing itself to be.

Bob Schwinger  09:35
In-- in general, that's correct and that's one of the issues which has become a very complicated issue legally right now. Because sometimes these things have characteristics of a security. Sometimes they have characteristics of a currency. Sometimes they have characteristics of a-- a utility token. And, it's not entirely clear right now whether they only have to have one characteristic or could they be both at the same time. Which then raises complicated questions of, if they are multiple things that multiple government agencies get to regulate, then do multiple sets of rules apply to them? And often people fiercely debate even which of them they are. And there's obviously a lot of litigation, for example in the US about whether things which are marketed as currencies are really, in effect, securities.

Ailsa Bloomer  10:20
And so just picking up on that point then, can you talk a bit generally about the new legal issues that are being raised by the emergence of blockchain and the products that you just mentioned.

Bob Schwinger  10:30
One of the, I guess, the-- certainly the biggest issue in the last two years has been the-- the issue of whether these things are-- are securities. In the US, there's a legal test that comes from nearly 80 years ago at this point. You basically look at say, if you are asking a group of people to give you money and say, I'm going to take all your money, I'm going to pool it together, I'm going to do something wonderful with it, and you all will earn a profit. That's basically-- that makes you a security. And it seems like for many of the cryptocurrencies that have been issued in one way or another, they are kind of telling that story. You're telling people is that, you know, you give me your money, and I'll make you a profit. And that usually is a hallmark that gets you into the camp of being a security. This is a very-- still developing area, but a lot of the regulators believe that a lot of judges who have heard cases believe that most of the time these facts make things out to be a security. This is not a totally resolved issue. Even if it's not a security, it's still like anything else that has value, it's likely considered to be a commodity under the federal commodity laws in the US. Just the same way you could speculate on the value of pork bellies, or wheat or oil, you could speculate on the value of what Bitcoin will be. Will it go up or down? You know, are you going to go long, or are you gonna go short? So even if you're not a security, you could be a commodity. And some people have suggested there are times when it could be both. And these are issues that the legal system in the US is grappling with constantly right now.

Andrew McCoomb  12:01
And ours, too, Bob, I mean it's interesting, we've dealt with cases and there's been a number of cases as well in Canada at the regulatory level dealing with the same questions and, in many cases, following the same analysis. The SCC, for example, is going to apply and considering whether an initial coin offering on the blockchain is something that is, in fact, a security and therefore, you know, subject to regulatory requirements. But I think that's a good jumping off point to talk about sort of a big picture question. And one of the reasons, the primary reason really we wanted you on the podcast is being a US-based litigator focused on-- on this area and following developments. And you know, so much of what happens in the Canadian litigation landscape, with all due respect to everything happening in our provinces, does tend to follow a little bit what's happening in a larger set of jurisdictions like we have in the US. So you're maybe a little bit ahead of the curve on us in seeing what's happening. So-- so what is it, in your view, about blockchain that raises new legal issues when it comes to something like, you know, commercial disputes?

Bob Schwinger  13:06
Well, there are a few things. One is that first of all, we have essentially created kind of a new class of asset which never really existed before digital assets. You know, we went to law school, you know, 40 years ago, the world was sort of divided into personal property and real property. And, you know, it's in categories like that. And now, there's a digital asset that we haven't really quite written the rules for. And so a lot of things are being done by analogy and by extension, and if people feel that the analogies and extensions aren't working well, perhaps they will write new laws or write different regulations for this particular situation. But right now, we're in the very indeterminate state, it's like, being a railroad lawyer in the year 1830. There's a lot of-- most things haven't yet been resolved. And so that's it. So as a lawyer, it's an interesting stage, as a client, unfortunately, you know, clients want certainty. And-- but unfortunately, the legal system is really not quite at that point yet. Another factor which comes in here is, because it's so electronic, it's very easy for it to be international. You know, when you-- when you buy and sell a piece of real estate, if it's in Ontario, Canada, or in New York City, you know where you are. And you know, you're not going to wind up in California or, you know, someplace else. But with electronic tokens, you know, the purchasers and the sellers and everyone else involved, they could be anywhere on the planet. And that can lead to a lot of complex jurisdictional and other procedural issues in the practical world of litigation because as all lawyers know, it's great to have a right in theory, but unless you can walk into a court someplace and get it enforced through a judgment that literally could involve someone you know, going there and seizing assets from the wrongdoer and giving them to you, your rights as a-- in a practical says really aren't worth all that much.

Andrew McCoomb  14:51
And it's a bit cyclical, too, right? Because, you know, what you described earlier with the regulatory uncertainty about whether a token offering is a security or not, that regulatory uncertainty in places like Canada and the United States, I think in some cases leads issuers to look to organizations offshore to help them run their coin offerings from a different jurisdiction, from a different domicile, so as to give them some regulatory or jurisdictional cover down the road when people ask questions about well, what exactly are you trying to do? And so-- so that tends to sort of feed this international nature of these relationships, because they’re not just starting and getting sold in one place. And--and that's probably another good jumping off point with you, Bob, because we know you've written a couple of pieces, among many others, on first of all, on the question of personal jurisdiction, in-- in the US law, so maybe can you take us through that issue of personal jurisdiction and how that's been developing in US law, as you've seen it?

Bob Schwinger  15:50
Sure, as anyone knows, if you speak with lawyers from around the world, they all know that the United States is very aggressive in asserting jurisdiction any way it can, at least its courts are. And that the, you know, often very, very small contacts with the United States will be used as the hook to say it's appropriate for this lawsuit to be heard in the US courts, even though it involves perhaps many foreign parties and things which took place in other countries if there's enough of a linkage to the United States. And the-- the courts and aided by the lawyers for the parties who obviously want to-- looking for United States jurisdiction, will often search very aggressively for those hooks in order to keep the case in the United States, because we have a theory that a plaintiff is usually entitled to have the case heard, you know, where they decided to bring it, if it's an appropriate jurisdiction. We don't necessarily require the best jurisdiction, it just has to be in the pool of places that's, you know, that's one of the acceptable choices. And so, you have cases which look at these complex international fact patterns and, you know, they-- they see if there's a basis there for conducting US personal jurisdiction over the parties.

Andrew McCoomb  17:00
But one of the first of those cases that you read about, that's the Alibaba case, right? 

Bob Schwinger  17:04
Right. Which strangely enough, really isn't really a crypto case in and of itself. It was a-- it was a trademark dispute. But it involves someone who was using the-- the Alibaba name to issue a coin and they're being sued for trademark infringement and they were attempted to be sued in the United States, and in New York. And they had a battle over whether there was anything linking the issuance of this coin to United States such that they could hold jurisdiction over them in the US courts. Often these transactions involving with blockchain and cryptocurrency are involving a string of different countries. And in that case, for example, when they sold the coin, the Alibaba coin, in that case, they said, well, our contract says that the transaction occurs in the place where we make the change in the ledger and we keep our server in Belarus, therefore all the transactions take place in Belarus. You know, even though you know, people who were engaged in these transactions, some of them were in the United States. And therefore they said we're entirely outside the United States, you can't have jurisdiction over us. And perhaps not surprisingly for a US court, the US court did not agree.

Ailsa Bloomer  18:11
Did you say, it's interesting the Alibaba one, because I think both the plaintiff and the defendant were, I mean, the plaintiff is in China and the defendants in Belarus and I think Dubai, as well as the other one, it was-- it seemed to me that it was the mere fact that it was possibly one or two investors were resident in New York. And that seemed to be sufficient for the court to find personal jurisdiction in New York. And so, what, specifically, did it say when it-- when it sided with the plaintiff over finding jurisdiction in the state of New York?

Bob Schwinger  18:42
Well, the main thing with the court date is that and this is not uncommon for courts generally, courts-- courts don't like to be hidebound by legal formalisms that don't really comport with reality. But they view that as you know, clever lawyer games that they're not really want to have a part of. Of course, you can write whatever you want to in your contract, but if it strains the normal way of thinking of things that if someone in New York buys this thing by sitting at his computer in New York and pressing a button in New York, then you haven't engaged in a transaction in New York, you know, and the fact that on the back-end somewhere the computer that's running all this is sitting in Belarus is not really the operative factor. Certainly the plaintiff in New York never thought they were doing business in Belarus. They thought they were doing business in New York. And in this case, perhaps because it was a trademark case, you wanted-- they needed to really show that the mark was being used and the infringing markers being used in the United States. And at least in that context, it probably didn't matter whether it was three customers or 10,000 customers, because once you're using the mark in the United States you’ve sort of crossed the line that's relevant to that particular case. And it was a bunch of other factors there as well. They-- they said look, you know, people are doing transactions in dollars. If you're doing it purely, fine. I mean, dollars are used around the world, but generally, you do transactions in your local currency. If you're doing transactions in dollars that suggests you know, you're doing transactions with US people. Sometimes you look at what they did to-- to check to see if they knew that they were dealing with US people. I mean, it's one thing if you're dealing with someone completely in another country, and then they say, surprise, I happen to have a US passport. But, if you're dealing with someone who has a New York mailing address, and is operating out of a-- an IP address, which indicates it’s from the US, you can say that you're on notice that you must be dealing with an American, and you know, not someone from Belarus or Cyprus or, you know, Germany or wherever.

Ailsa Bloomer  20:34
I mean, it's just an interesting idea that you could set up a foreign website to sell these coins, and you might not have much oversight as to who is buying them. But if it happens to be somebody that's accessing the site from the US, then you could find yourself kind of unknowingly, unwittingly drawn into litigation in the US. I mean, where's the end to that principle? Is it ever realistic that you could avoid personal jurisdiction if you're offering a global product or something on a global platform?

Bob Schwinger  21:03
It-- it can be tricky. I mean, there are sort of-- there are-- there are ups and downs with having a global product and one of those is that you can engage in global sales and your-- you may be establishing jurisdictional contacts in all sorts of places. So for example, you know, in the early days, people would have the purchaser check a box on the website that says, I certify I'm not a United States resident or citizen. And then the courts say, well, that's fine, but you know, you can check the box, and everybody probably checks the box blindly. But once again, are they paying in dollars? Are they using US financial institutions to process the money? You have to, perhaps, do a bit more of an inquiry, and not just take someone on their-- on their word that they say that they're-- they're not in the United States, if you really want to claim that I had no idea I was dealing with Americans. But then also considering, you know, how much of the world economy in the and the world of cryptocurrency, you know, that Americans are involved in, it's hardly a surprise to find that an American, you know, might be engaging in this kind of transaction. So they will usually want some sort of fairly robust, check-in before they will say-- they go, I had no idea I was dealing with an American.

Ailsa Bloomer  22:09
And there's no scope for doing as you would normally do in a commercial transactional context where you'd have a jurisdiction clause and have some certainty as to where a claim would be brought, like, is that not possible in the smart contract context?

Bob Schwinger  22:23
Oh, it is. I mean, you could have, for example, because it-- well you could have terms and conditions, just like, you know, in a kind of online transaction we said, there's an arbitration clause, that you can say that we all agree that all disputes will be resolved here, and you'd click a box and check-- check your agreement to that. And some people have suggested that that really is, ultimately, is the only way you could have certainty if you're, say the, promoter of this scheme. You know, you don't want to be facing lawsuits in countries all over the world and say, look, we're doing everything-- it’s going to be arbitration in Switzerland and that's how we're doing it. And, you know, that's a-- that's a not unreasonable approach. If you chose a crazy jurisdiction, that had, you know, have no link to anyone, and it was not sort of a well-recognized and respected jurisdiction, you may perhaps get a different reaction, if you chose a court that didn't sort of follow typical Western rule of law type of rules for commercial matters.

Andrew McCoomb  23:13
And-- and our Canadian listeners who are familiar with class actions law in Canada, their ears may be burning on this topic just because we've had recent decisions thinking about foreign arbitration clauses, and you know, attorning to foreign jurisdictions and the Supreme Court of Canada has looked pretty critically at the-- at those. So that's maybe fodder for our-- our next episode with you, Bob. But going back to your-- your first paper, I mean, I think some of the comments that you made are an interesting jumping off point to the second case you reference, a Plex Corp case, which is a case with a bunch of Canadian links, but again, one where—where, as Ailsa mentioned and you were discussing, you know, a company's making efforts to try to show that-- that maybe it's not engaging with US investors, but of course, the court still finds that it has jurisdiction.

Bob Schwinger  23:59
Right. Anyway, that was the case that had some-- some fun facts, because there were some issues of the promoters that traveled to the United States that said, oh, well, that was-- that was just personal travel. But there were indications they engaged in business meetings or perhaps promotional events while in the United States, or perhaps they were traveling to United States for promotional purposes.

Andrew McCoomb  24:18
It sort of looked like a roadshow, like a securities roadshow.

Bob Schwinger  24:22
Of a kind, or at least-- at least a very limited one, perhaps. And they also focused on the payment method for people who want to put in the money. They said, well, you're using a lot of US-based services, like PayPal and Stripe and Square and so on. Although, it seems to be those could be used all over the world so, that's perhaps another example of a rather aggressive American approach to jurisdiction. And I believe, the court in-- in that case didn't necessarily rule with so much that there was jurisdiction, but rather that they couldn't rule that there was absolutely no jurisdiction. I think they said, we need to take a little more jurisdictional discovery to get to the bottom of some of these facts like you know, that this for the roadshow and things like that. So they-- well all they basically said was, this is not a slam dunk that the defendants were going to win. And it's perhaps it's quite possible they're going to lose, but we need more information to really sort this out.

Ailsa Bloomer  25:08
Yeah, I mean, just to add a-- a comment there. I think it's interesting the focus in that case and, to an extent, the Alibaba case on the marketing and promotional activities that occur in the jurisdiction. And-- and to what extent are you targeting consumers and investors in that jurisdiction? I mean, the analysis is obviously useful, because it is so applicable in the Canadian context. I mean, when our courts are faced with a jurisdictional challenge, they'll-- they'll first ask whether the court has jurisdiction as simpliciter over the subject matter. And that’s based on the test that looks at is there a real and substantial connection between the case and the jurisdiction? And part of the elements that go into assessing real and substantial connection, they look at, you know, was the defendant carrying on business in the jurisdiction? And where was the contract actually concluded? And that links back to the earlier point, we were discussing it, you know, where-- where is-- where are these contracts actually made, you know? It's not where the transaction is processed on the server that is out in some random part of the world, it's where the consumer, the investor, clicks the button to engage or to buy the product. So I think there are definitely some types of factors in the US courts that are weighing very similar and going to be useful to when these situations arise in Canada.

Bob Schwinger  26:21
Yes, I think, you know, in the US, and I think sounds-- sounds somewhat similar to what you were describing as the Canadian rule. The phrase that is often used is whether the defendant purposely availed themselves, or the benefits and privileges of conducting business in the jurisdiction that you're in and say, if you're in the commercial context. And so for example, you know, if you go into the jurisdiction to advertise, then you're going to be held, perhaps you're liable to jurisdiction, if you're being sued over the thing-- the very thing you're advertising. It's usually this-- very specific, you know, you can't generalize outside the context. But if you are advertising the potential transaction in the US, you probably can get sued over the transaction in the US. If you visited the US over the transaction, you could well get sued over it in the United States, look to things like that. If you're working with a number of other US parties, that could matter. You look at, you know, where was the transaction negotiated? Where does performance occur? Where are payments made? All these things that basically say, look, you were-- you were making use of the United States and its institutions, and it's instrumentalities of interstate and foreign commerce. So you-- you can hardly complain now that the United States is taking an interest in, you know, in what you did if-- when someone claims that what you did was wrong.

Andrew McCoomb  27:35
And given the way you've described the-- the sort of international nature of these transactions in the first place, and the difficulty that you'd have in-- in setting up real barriers to prevent those types of links from emerging, it does seem like everybody-- everybody in this business is engaging in a real risk that they're exposing themselves to-- to personal jurisdiction in the US. That's a good-- it's a good pivot point to talk about your latest article about extraterritorial application of US law, because I think that's an interesting extension of the same or similar ideas and similar factual findings. So can you-- can you take us through sort of high-level what we're looking at with that kind of analysis?

Bob Schwinger  28:18
Sure. Extraterritoriality is a-- is a different legal issue from personal jurisdiction. But they-- a lot of the similar themes emerge in it. Personal jurisdiction is whether-- it's a question of whether it's fair to ask this individual defendant to come to the United States to defend the case. Extraterritoriality is almost more of a question of the political power of the court, which is basically is, how far does US law extend? I mean, you know, can-- can US law, you know, dictate what, you know, a Frenchman and German can do in a transaction that's done in Europe? You know, it seems-- it seems somewhat odd. We do have, you know, territorial boundaries to countries and it’s supposed to mean something. And so sometimes, but sometimes, our laws do project outside our geographic boundaries if there are certain links to the United States, and we have some rules about when we think that's appropriate to be done, and, when not. And also, there are some rules that basically say, even though that power may theoretically exist, it isn't always clear that a Congress really intended to exercise it. And so for example, you know, sometimes the courts say, if you're telling me that Congress is going to do this unusual thing of reaching beyond our borders, we'd like a really clear signal from Congress that that was their intention and not just, you know, have a sort of a kind of a silent, ambiguous statute that you assert can be applied anywhere on the planet. And that's where the issue of extraterritoriality comes in. It really comes down to the-- the, you know, the power of the quarter to the legislature was passing the statutes to how far out they push their laws beyond the geographical boundaries of the country.

Andrew McCoomb  29:56
So in the blockchain context, that takes us to the Helbiz case, can you-- can you take us through Helbiz?

Bob Schwinger  30:03
Sure, Helbiz was a-- sort of a rather typical case in which someone alleges that a defendant conducted a coin offering and they found that the coin offering really was an effectively an offering of security. And they accuse the defendant of running, you know, what's called a pump and dump scheme, where you get a lot of people excited about the price, you raise a lot of money, and then you disappear with all the assets and everything crashes. But interestingly, even though it sort of sounded like a typical securities fraud case, the plaintiffs did not plead it as a claim under the US federal securities laws. Instead, they pled state law claims in the US, an equivalent to provincial law claims, under New York statutory law and New York common law. And they avoided all the-- the federal law, in part, probably because they were somewhat worried about the extraterritoriality issue. And they knew that under federal securities laws, they might have a problem with that. And then the question was, you know, what sort of context did this whole situation have with the US? Apparently, while the Helbiz company itself was I guess, nominally, you know, based in Delaware, all the people who were doing things were allegedly based outside of the country, and I believe that the plaintiffs were outside the country as well. And so the defendants said that, look, this is an extraterritorial situation, everyone is outside the United States, the transaction is outside the United States, there's no reason for, you know, any kind of US law to apply here. Strangely, the-- the trial court looked at this and said, well, I know they don't call it a federal securities claim, but it really effectively it is. And as a federal securities claim, we would say this is too extraterritorial to be in the US courts, so I'm going to throw out this case. And on appeal, the appeals court said, look, that's the analysis that's used by the federal courts for federal law claims about extraterritoriality. But it doesn't necessarily apply to the laws of a different sovereign entity, New York State's, when it is accused of extraterritoriality. And it didn't get into what the analysis was, so look, I've got to go back down to the lower court for it to do the analysis. But it noted that there's some authority out there, which says that the extraterritoriality analysis by New York State may not be identical to the federal one, and also potentially, that it might not be identical, depending on whether the New York State law claims or statutory claims or common law claims. So there's a whole bunch of analysis that needed to be done. And in fact, the states are all not-- not uniform on that. Different states have different rules about extraterritoriality. So it's all a very specific analysis as to what it might be. And all the court in that case basically said is, all we know is that, you know, equating it to federal law was not the right thing to do. So, go back and, you know, let's have a do-over and do it right this time.

Andrew McCoomb  32:48
So obviously big questions remain to be answered, but it-- it is a curious result insofar as it suggests that federal laws could be prevented from being applied extraterritorially, but state level laws could potentially apply extraterritoriality. And there's obviously as you noted, there's-- there's diverging case law on whether that's a possibility, at least at this stage.

Ailsa Bloomer  33:13
I think it's-- and also common law as well, the potential for state common laws to be applied extraterritorially too, I think, is really interesting and important. And just on that point, very briefly on the common law point, I’m just thinking about the nature of the relationship between all the actors that are involved in blockchain and-- and these types of products. And so, for example, whether that's the investors, those that are operating the platform, or between Bitcoin miners themselves, for example, what is the nature of the relationship between those actors? And does it-- what common law duties, if any, does it give rise to?

Bob Schwinger  33:52
This goes back to my comment earlier that it's like being a railroad lawyer in the year 1830. Because most of these issues really haven't been hashed out yet. Obviously, in a direct contractual relationship, we have a normal rules of contract. But many people are interacting with each other in these scenarios, who aren't contractually bound to each other. You know, A is contractually bound to B and B has relationships with C and D and E. What happens if A tries to sue C directly? In certain legal theories, it depends on contracts while others don’t. So, for example, on a fraud theory, you can sue a lot of people who are participating in the fraud or aiding and abetting the fraud in some way, who you’ve never had a contract with. But what is-- what duties does one party owe the other in this situation? You know, we haven't resolved that yet. We have-- we have a lot of, you know, case law about you know, the relationship of parties you know, on a-- on a railroad and when people are driving automobiles on the same road and so on. And even, you know, just conventional, you know, vendor purchaser situations or something with the laws of product liability. But we haven't quite resolved these things, you know, what relationships are too far? To-- to this point we’re like, no those two people are too far apart, one can’t sue the other. We're sorting all that out. I mean, we know it took time. And it took time, for example, in the-- in the common law of torts, to get past a rule of direct privity for product liability, where you could only sue the person you bought it from. They said, no, if you're involved in the chain of manufacturing, this is US law, you can often go back to them because they knew ultimately you were going to buy it. That's why they were making it. They didn't make it to sell, they didn't make the automobile to sell it to the dealer, they made the automobile with knowing that the dealer was going to sell it to you. So it's-- you-- you could have a lawsuit directly against the manufacturer. We haven't resolved those issues yet in the world of blockchain.

Andrew McCoomb  35:36
Outside of the issues that we've identified talking about jurisdiction and extraterritoriality, Bob, is there an issue that you see, having studied this area for some time now, that you think is sort of the most interesting or most perplexing issue that's sort of coming down the pike to get resolved in this space? Is there anything outstanding for you that you're particularly engaged in looking for an answer on from the courts?

Bob Schwinger  36:03
I think in terms of-- in terms of civil liability, it's almost-- it's a little bit too early right now to-- to really know, but pretty much the whole gamut of things you would normally see in commercial litigation, could expect to arise here. And we've seen some things, for example, in the area of antitrust and competition law, where because as we mentioned, the blockchain ecosystem depends on a lot of people working together in coordinated ways. And you know, when you say people working together in coordinated ways, antitrust lawyers, their ears start to perk up a little bit. There was some case a little while ago, where one of the ways that the-- the blockchain keeps things consistent is they use what's called consensus mechanisms. And sometimes basically, sort of vote, for lack of a better term, essentially, in a kind of electronic way. But you know, sort of-- if 85% of the crowd is going one way, the system says, okay, look, that's the way we're going because we go with the majority. And the people say, well, what happens if people start to collude, in some way on this thing? So essentially, to gain the consensus mechanism? Is that-- could that be an antitrust violation? That's a, you know, that-- that's an interesting issue, once again, depends on your sense of who owes what duties to whom, in this context. And there-- you know, depends on what-- what role do you play in the ecosystem? In that case, you know, there are-- there were, you know, allegations about the people who were what's-- what's called the-- the miners who are sort of, you know, mine the cryptocurrency. And they’re the ones who validate each transaction and put it on the-- on the block, and they were accused of being part of the conspiracy. That may be, you know, a bit of a stretch. Maybe someone a little bit closer to the action, maybe it's more plausible to have them be a part of the conspiracy. And what also-- what's going to drive interesting cases, just, you know, as we know, just you know, a certain number of things systems fail. A certain number of systems always fail for whatever reason. You know, there's going to be a flash crash, there's going to be a power outage, and all of a sudden, people can't get their transactions. Who was bearing the risk that the power was going out? Or that the system couldn't handle, you know, over X transactions per minutes, if it ever got stressed to that point? If a cryptocurrency fails somewhere, some cryptocurrency, and all of a sudden, this sparks the crypto equivalent of a bank run. Everyone gets panicking, wants to pull their money out of cryptocurrency all at once. You know, cryptocurrency A fails and then people start having essentially bank runs for cryptocurrencies B, C, D, and E. They have nothing to do with really a cryptocurrency A, other than they’re sort of there in the same overall marketplace at the time. Does that give the people who may get injured, you know, in-- as to those cryptocurrencies, rights against the people who cause cryptocurrency A to fail?

Andrew McCoomb  38:41
It's almost like umbrella purchaser law in the-- in the antitrust context. Yeah, and-- and the other thing that goes with this, right is, the commercial reality of litigation is that you need, to some extent, a reasonably deep pocket of-- of interest and investment in sorting out your dispute to take it to court to get to a decision after you know, all those dollars and all those years of time to get there. And-- and that, I would think, becomes more realistic as more institutions are comfortable wading into this space and allowing their own clients to get invested in blockchain through their systems. And we're seeing more and more of that every day.

Bob Schwinger  39:17
Yeah, that's a very good point. Because as we mentioned, these things can be electronically all over the world and you may say, okay, I know who the bad guy is. But the bad guy is sitting across the world in Singapore. Or is living off the grid, in you know, in some place, God knows where. You can’t find him, you don’t even know his name. You just may know, his computer, you know, his-- his identifying, you know, electronic pseudonym. So, like I said, theoretically, you could sue that person, but you can't really get effective relief against them. But a bank that's sitting on the corner with brick and mortar assets, played some minor supporting role in the transaction chain, it would be so much easier just to sue them and come up with a theory of why they are at least you know, partially responsible, or at least share the liability with the wrongdoer because they were working with him. And that's where the issues will really be pushed to the extreme because people have no choice. See look, either-- either I drag in the bank or I get nothing. And you know, people, you know, typically in the legal system, don't just throw up their hands and go home. They will keep going after people until they find someone who they-- for which they can get effective relief, and you can't blame them if they've been victimized. But that's what our society has to sort out is, where are we going to draw the lines, ultimately, in this area.

Andrew McCoomb  40:28
And-- and Canadian listeners are also-- many of whom are going to be familiar with the Quadrica example of the founder of this blockchain-based company allegedly passing away and overseas and everything sort of disappearing and getting locked up. So-- so that example hits-- hits very close to home. Bob, the one thing I'm sure of is, if you'll entertain it, we will, I think have to have you back for further conversation about developments as you're following them because this has been super, super useful for us and I think resourceful for our listeners. So thank you very much for-- for your time and for joining us.

Ailsa Bloomer  41:04
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