Balestra v. ATBCoin LLC

Balestra v. ATBCoin LLC, No. 17-cv-10001 (S.D.N.Y. Mar. 31, 2019) [Link]

Summary: ATBCoin marketed itself as an innovative new cryptocurrency. Plaintiffs claim that ATBCoin fraudulently marketed unregistered securities. ATBCoin challenges jurisdiction and the claim. The Court finds jurisdiction and a plausible claim.


  • ARBCoin marketed its new cryptocurrency as “the fastest blockchain-based cryptographic network in the Milky Way galaxy,” capable of delivering “blazing fast, secure and near-zero cost payments to anyone in the world. Based on its marketing materials, “participants in the ICO expected the value of the ATB Coins they purchased to increase as more users adopted the ATB Blockchain.”
  • “Defendants launched the ATB Blockchain on September 14, 2017 at the close of the ICO; however, the blockchain is not capable of the technological feats Defendants advertised.”
  • “Defendants did not file a registration statement for the ATB ICO with the SEC at any point, either before, during, or after the ICO.”

Issues, Holdings, and Discussion:

  1. Does the Court have jurisdiction? Yes:

Plaintiff’s claims arise under the Securities Act, which authorizes nationwide service of process. See 15 U.S.C. § 77v(a) (permitting service “in any [judicial] district of which the defendant is an inhabitant or wherever the defendant may be found”). When a civil case arises under federal law and a federal statute authorizes nationwide service of process, courts often consider “contacts with the United States as a whole” as the “relevant contacts for determining personal jurisdiction.” In re Platinum & Palladium Antitrust Litig., No. 1:14-cv-9391-GHW, 2017 WL 1169626, at *40 (S.D.N.Y. Mar. 28, 2017) (internal quotation marks omitted)[.]

. . . .

Plaintiff has provided ample evidence that both Ng and Hoover targeted the U.S. market in an effort to promote the sale of ATB Coins, the very unregistered security at issue in this litigation. . . .

In sum, Hoover’s residence in New York (thereby making the United States his place of domicile), Hoover’s and Ng’s management of a business based in the United States, and their participation in conferences in the United States aimed at promoting the ATB Coin to United States investors clearly demonstrate that both Hoover and Ng “purposefully avail[ed themselves] of the privilege of conducting [business] activities within” the United States with respect to the ATB Coin and its corresponding ICO. Burger King, 471 U.S. at 475 (internal quotation marks omitted).

2. Is ATBCoin a security? Yes:

Both parties agree that Howey governs the determination of whether ATB Coin constitutes a “security,” (see Defs.’ Br. 7-8; Pl.’s Opp. 5),[9] and Defendants do not dispute that the first prong of the test—i.e., an investment of money—is satisfied here, where Plaintiff exchanged 2.1 ETH for 388.5 ATB Coins, (see Compl. Ex. 1).

. . . .

A plaintiff may demonstrate a common enterprise by pleading the existence of “horizontal commonality.”[10] Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994). In an enterprise marked by horizontal commonality, “the fortunes of each investor in a pool of investors” are tied to one another and to the “success of the overall venture.” Id.(internal quotation marks omitted). . . . [T]he funds raised through the ICO were pooled together to facilitate the launch of the ATB Blockchain, the success of which, in turn, would increase the value of Plaintiff’s ATB Coins. Cf. Zaslavskiy, 2018 WL 4346339, at *6 (finding horizontal commonality in case involving two “virtual currency investment schemes” where it could “readily be inferred from the facts alleged that [defendant’s] investment strategies depended upon the pooling of investor assets to purchase real estate and diamonds”).[11]

. . . .

The third prong of the Howey test is satisfied where investors have been “led to expect profits solely from the efforts of the promoter.” United States v. Leonard, 529 F.3d 83, 88 (2d Cir. 2008) (quoting Howey, 328 U.S. at 299). The Second Circuit has established that “the word `solely’ should not be construed as a literal limitation; rather [courts] consider whether under all the circumstances, the scheme was being promoted primarily as an investment.” Id. (internal quotation marks omitted)[.]

. . . .

The Complaint satisfactorily pleads that the success of ATB Coins was entirely dependent on Defendants’ following through on their promise to launch and improve the ATB Blockchain. As the Complaint alleges, “the value of ATB Coins was expected to rise from the speed of transactions on the ATB Blockchain that was promoted as `the fastest blockchain-based cryptographic network in the Milky Way galaxy.'” (Compl. ¶ 42 (quoting 4/27/18 Kupka Decl. Ex. 2, at 1).) When the ATB Blockchain failed to deliver the groundbreaking technology that Defendants touted, users did not adopt it and the value of the ATB Coins plummeted. (See id. ¶¶ 36, 42 (“Given that the ATB Blockchain is not capable of such feats and has generally not been adopted or successful, ATB Coins have minimal value.”).)

Although Defendants argue that ATB Coin purchasers “had complete control over [their ATB] coins as soon as they were purchased, including the decisions of when and for how much to sell,” (Reply Br. 7),[14] purchasers had no control over whether the new ATB Blockchain technology worked. See Zaslavskiy, 2018 WL 4346339, at *7 (“Though [defendant] suggested that [] investors could trade [digital] coins on an external exchange and make more profit, there is no indication that investors were to have any control over the management of [defendant’s business].”); see also Munchee, 2017 WL 10605969, at *7 (finding that “[i]nvestors had little choice but to rely on Munchee and its expertise” to generate profits because, “[a]t the time of the offering and sale of MUN tokens, no other person could make changes to the Munchee App or was working to create an `ecosystem’ to create demand for MUN tokens”). The failure of that technology was likely to—and, in fact, did—render ATB Coins undesirable, regardless of the individual purchaser’s “business skills.” (Compl. ¶ 35.)


  • A useful reminder about the long arm of the federal securities laws and one further data point supporting the now broadly accepted conclusion that many crypto projects are investment contracts.

ZG Top Tech. Co. Ltd. v. Doe, No. C19-92-RAJ (W.D. Wash. Feb. 25, 2019)

ZG Top Tech Co. Ltd. v. Doe, No. C19-92-RAJ (W.D. Wash. Feb. 25, 2019) [Link]

Summary: ZG Top crypto exchange seeks subpoenas for Bittrex and others to identify hacker stealing crypto. Court grants subpoena against Bittrex but denies subpoenas to others or “facilitating the tracking, freezing, and recovery of the allegedly stolen cryptocurrency.”


  • ZG TOP, a Mongolian company, describes itself as a “global blockchain asset trading platform[.]”
  • As alleged in the Complaint, on or about November 25, 2018, ZG TOP’s systems were attacked by a John Doe actor, causing ZG TOP to lose cryptocurrency in the amount of 330,000 Tether (“USDT”) and 100 Ether (“ETH”). Id. at ¶¶ 13-14. ZG TOP submits transactional evidence that it contends shows that all the 330,000 USDT and 100 ETH have been fully transferred to an account at Bittrex, Inc. (“Bittrex”)[.]

Issues, Holdings, and Discussion:

  1. May ZG Top issue subpoena to Bittrex prior to the normally required discovery conference? Yes:

In the present Motion, ZG TOP argues that expedited discovery from Bittrex “and possibly others” is necessary to “(1) identify the defendant so he/she can be named and served in this case, and (2) trach [sic] and freeze the stolen cryptocurrency immediately so that plaintiff may recover as much of its stolen USDT and ETH as possible, and (3) preserve digital evidence that might otherwise be subject to being altered, deleted, or destroyed.” Dkt. # 2 at 2. The Court finds that good cause supports ZG TOP’s request for leave to take expedited discovery to ascertain sufficient identifying information about John Doe. ZG TOP has provided evidence that appears to trace the allegedly stolen funds to an account on Bittrex, and ZG TOP’s conversation with Bittrex indicates that John Doe’s identity as the account holder is likely already known or ascertainable. Dkt. # 2, Ex. A. The Court also finds that ZG TOP’s request seeking identifying information related to John Doe is reasonably likely to lead to the production of information that will permit ZG TOP to serve process. See Semitool, 208 F.R.D. at 277 (granting expedited discovery where narrowly tailored requests will “substantially contribute to moving this case forward”). Upon service of a Rule 45 subpoena to Bittrex, John Doe or Bittrex will have an opportunity to raise objections through a motion to quash, including in order demonstrate to the Court that prejudice to them outweighs ZG TOP’s need for the information sought. Moreover, the Court finds little reason at this point to doubt that ZG TOP’s claims, which describe the theft of large amounts of cryptocurrency, could survive a motion to dismiss.

Accordingly, the Court GRANTS ZG TOP’s Motion to the extent it seeks expedited discovery on Bittrex.

2. May ZG Top pursue discovery against others? No:

ZG TOP also does not identify any other entities it seeks to serve discovery upon, and the Court is reluctant to afford ZG TOP unchecked leave to serve discovery on anyone before the Rule 26(f) conference has taken place.

3. May ZG Top use the Court’s authority to track or freeze assets? No:

[T]he Court does not find that ZG TOP has provided good cause for its other forms of requested relief, such as facilitating the tracking, freezing, and recovery of the allegedly stolen cryptocurrency. These requests seek affirmative relief from this Court that is the subject of this lawsuit, and go well beyond the request for expedited discovery.


  • A good opinion on the nuts-and-bolts of federal discovery practice in crypto cases. The Court is reluctant to permit preemptive discovery, but will do it where necessary. But open-ended discovery requests (e.g. let us subpoena anyone) or requests for substantive relief (e.g. freeze assets) will get little traction.

U.S. v. Stetkiw, No. 18-20579 (E.D. Mich. Feb. 1, 2019)

U.S. v. Stetkiw, No. 18-20579 (E.D. Mich. Feb. 1, 2019) [Link]

Summary: Stetkiw prosecuted for conducting Bitcoin exchange business without a license. Claims that Bitcoin is not money and his actions are not money transmitting. He fails.


  • Stetkiw charged with buying and selling Bitcoin without a license. For these transactions, he charged commissions or fees. No evidence that he acted as an intermediary to set up transactions between two unrelated third parties. Rather, he apparently bought Bitcoin, held it in his wallet, and sold it at times and for prices he chose.

Issues, Holdings, and Discussion:

  1. Is Bitcoin “money” such that an alleged transmitter must obtain a license? Yes:

In support of his first argument — that Bitcoin is neither money nor funds within the meaning of § 1960 — Stetkiw relies on United States v. Petix, 15-CR-227A, 2016 WL 7017919 (W.D.N.Y. Dec. 1, 2016) — a magistrate judge’s report and recommendation never adopted by the district court. Stetkiw’s argument and Petix are unpersuasive.

Even though § 1960 does not specify what counts as “money” for purposes of determining a violation, it is clear that it pertains to the transmission of funds. See § 1960(b)(2). Undefined terms in statutes are to be given their ordinary meaning. Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560, 566 (2012). “The ordinary meaning of `funds[]’ . . . is `available pecuniary resources.’ `Pecuniary’ is defined as `taking the form of or consisting of money.’ And `money,’ in turn, is defined as `something generally accepted as a medium of exchange, a measure of value, or a means of payment.'” United States v. Murgio, 209 F. Supp. 3d 698, 707 (S.D.N.Y. 2016) (internal citations omitted).

Federal District Courts have repeatedly found that Bitcoin constitutes “money” and “funds” within the meaning of 18 U.S.C. § 1960. For example, see Murgio, 209 F. Supp. 3d at 707 (“bitcoins `clearly qualif[y] as money or funds’ under § 1960 because they `can be easily purchased in exchange for ordinary currency, act[ ] as a denominator of value, and [are] used to conduct financial transactions'”) (quoting United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014) (internal quotation marks in Faiella omitted)); see also United States v. Mansy, No. 2:15-CR-198, 2017 WL 9672554, at *1 (D. Me. May 11, 2017).

2. Do Stetkiw’s actions make him a money transmitter? Yes:

[A] typical Bitcoin purchase from Stetkiw involved Stetkiw electronically transferring the Bitcoins to the purchaser’s Bitcoin address or account after the purchaser pays Stetkiw the value of the Bitcoins plus a commission/fee. [See ECF No. 20-2, PgID 52].

This falls within the plain meaning of “transferring funds on behalf of the public by any and all means,” such that Stetkiw’s Bitcoin transactions constitute “money transmitting” under 18 U.S.C. § 1960(b)(2). Specifically, Stetkiw is a “money transmitter” — and his transfer of Bitcoin to the virtual accounts of purchasers constitutes money transmitting — because his transactions were “transmission[s] of . . . funds . . . to another location.” See 31 C.F.R. § 1010.100(ff)(5)(i)(A) (“acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means”) (emphasis added); Faiella, 39 F. Supp. 3d at 546 (citing §1010.100(ff)(5)(i)(A)); United States v. Lord, No. CR 15-00240, 2017 WL 1424806, at *4 (W.D. La. Apr. 20, 2017) (same).

. . . .

Stetkiw cites an administrative ruling issued by FinCEN on January 30, 2014. He relies on the following excerpt of the ruling to argue that buying and selling Bitcoin through two-party transactions is not “money transmitting” under § 1960:

To the extent that the Company purchases and sells convertible virtual currency, paying and receiving the equivalent value in currency of legal tender to and from counterparties, all exclusively as investments for its own account, it is not engaged in the business of exchanging convertible virtual currency for currency of legal tender for other persons.

FinCEN Ruling, FIN-2014-R002, at p. 4.[2]

While the above excerpt would likely be relevant if Stetkiw was engaged in buying and selling Bitcoin strictly as an investment for his own account, the government alleges that Stetkiw engaged as a business in the exchange of Bitcoin for real currency; and, as the FinCEN Guidance explains, his transfer of Bitcoin constitutes money transmission to another location. Moreover, as part of his business, Stetkiw allegedly charged a per-transaction commission/fee for the exchange and transfer of Bitcoin.

The paragraph immediately following the above excerpt from the FinCEN ruling makes clear that Stetkiw’s alleged conduct constitutes money transmitting under § 1960:

. . . [S]hould the Company begin to engage as a business in the exchange of virtual currency against currency of legal tender (or even against other convertible virtual currency), the Company would become a money transmitter under FinCEN’s regulations. . . .

FinCEN Ruling, FIN-2014-R002, at p. 4 (emphasis added).


  • It does seem that Stetkiw was conducting a Bitcoin exchange business here. But other than the emphasis on Stetkiw accepting commissions / fees, the process by which the court gets there is opaque.
  • The emphasis on transfer to another location is nonsensical. Admittedly, that is what the regulations say. But any buying and selling of Bitcoin – on a national exchange, with your neighbor, to get a pizza, etc. – is transfer to another location. If the regulations reach that far, then the “buying and selling on your own account” exception does not really exist.
  • There needs to be a more workable definition for the “own account” definition, or the practical rule will actually be “whoever FinCEN decides to prosecute is a money transmitter.”

Surety As a Blockchain Progenitor

Fascinating article about the Surety service, which incorporated several ideas similar to blockchain tech as far back as 1995:

As Haber and Stornetta realized, timestamping a digital document would require solving two problems. First, the data itself would have to be time stamped “so that it is impossible to change even one bit of the document without the change being apparent.” Second, it would have to be impossible to change the timestamp itself.

. . . .

Clients use Surety’s AbsoluteProof software to create a hash of a digital document, which is then sent to Surety’s servers where it is timestamped to create a seal. This seal is a cryptographically secure unique identifier that is then returned to the software program to be stored for the customer.

At the same time, a copy of that seal and every other seal created by Surety’s customers is sent to the AbsoluteProof “universal registry database,” which is a “hash-chain” composed entirely of Surety customer seals. This creates an immutable record of all the Surety seals ever produced, so that it is impossible for the company or any malicious actor to modify a seal. But it leaves out an important part of the blockchain equation: Trustlessness. How can anyone trust that Surety’s internal records are legit?

Instead of posting customer hashes to a public digital ledger, Surety creates a unique hash value of all the new seals added to the database each week and publishes this hash value in the New York Times. The hash is placed in a small ad in the Times classified section under the heading “Notices & Lost and Found” and has appeared once a week since 1995.


Pressing ahead with adopting the Petro:

Venezuela is facing hyperinflation and international sanctions that have brought the economy and its people to their knees. In response, President Nicolás Maduro recently mandated that his Petro crypto will become the nation’s second official currency starting tomorrow, August 20.

But it would be interesting to see a study demonstrating how much of the Venezuelan economy has moved to barter and non-Petro crypto as the bolivar deteriorates.

Blockchain Bill Fails in Colorado

Unfortunate that Colorado is not following states like Wyoming and opening up their state to innovation:

HB 1426, a piece of state legislation that would have created guidelines for identifying “open blockchain tokens” as securities, was voted down in the Colorado state Senate on May 9, according to public records.