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 Ethereum[3] 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 bitcoin[4] 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.
[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).