Case of the Day: James v. Ifinex, Inc., Case No. 450545/2019 (N.Y. Sup. Ct. Aug. 19, 2019)

Summary:

Defendants are Bitfinex and Tether, major cryptocurrency companies based in Hong Kong and other parts of Asia. New York attorney general investigated them for potential violation of the Martin Act, and the defendants challenged the personal and subject matter jurisdiction, as they consciously avoided New York contact in order to avoid being subject to such investigations.

The court rejected the defendants' arguments. The court found the defendants had sufficient New York contacts, as they allowed New York customers to access trading platform, opened accounts in New York bank and had an executive based in New York. The court also held Martin Act was applicable to the defendants, and documents located abroad were subject to discovery.

Takeaway:

We are back from vacation!

The opinion is available here. The opinion itself is not surprising or radical--it is a standard application of the personal jurisdiction doctrine and Martin Act coverage. But because digital currency is new and the companies have consciously attempted to avoid New York contact, it makes for a notable news.

Media Appearance: "A Comparison of Developments in Crypto Law in South Korea" in Asia Business Law Journal

Together with my Kobre & Kim colleagues Michael S. Kim and Daniel S. Lee, I gave an update on South Korea's crypto regulations on Asia Business Law Journal:

On 7 March 2019, the FSC announced that it would focus on passing the amendment to the Act on Reporting and Using Specified Financial Transaction Information, initially proposed on 21 March 2018. The proposed amendment, if passed, would significantly strengthen the banks’ discretion to cease doing business with cryptocurrency exchanges based on concerns over money laundering or terrorism funding.

Market participants have criticized this proposal, claiming it would effectively mean a death sentence for all but the largest exchanges, as mid-sized exchanges would be unable to comply with the rigorous legal requirements.

A Comparison of Developments in Crypto Law in South Korea [Asia Business Law Journal]

Media Appearance: "Korean Bar Association Urges Clarity in Bitcoin, Cryptocurrency Regulations" on Law.com

It's been a hiatus for the blog! My wife and I welcomed our second daughter to the world recently, and the times have been crazy. I managed to squeeze in this interview as I was taking care of the newborn:

Such sparsely regulated “favorable conditions” have lead to some investment fraud, said a Washington, D.C.-based attorney.  

“South Korea’s market is so hot, a lot of fraud and Ponzi schemes are happening at a crazy level,” said Kobre & Kim of counsel Nathan Park. “The government has been looking into protecting systems for regular investors and not necessarily big companies.” 

South Korea’s won is the third-most traded national currency for bitcoins, behind Japan’s yen and the U.S. dollar, according to bitcoin-tracking website Coinhills. Park said fintech is popular in South Korea without government regulations because of the fast speed of innovation in the country, although government oversight and clear laws are needed to protect investors and regulate companies.

Korean Bar Association Urges Clarity in Bitcoin, Cryptocurrency Regulations [Law.com]

South Korea is a very important market for cryptocurrency, and the regulations there will have international implications. All eyes are on the South Korean regulators--particuarly on the Financial Services Commission--who are expected to announce a comprehensive regulatory scheme soon.

Case of the Day: United States v. Lamborghini Aventador LP700-4, 2018 U.S. Dist. LEXIS 133880 (E.D. Cal. Aug. 8, 2018)

Summary:

Plaintiff United States filed an in rem civil forfeiture action against numerous pieces of property, including luxury vehicles, bank accounts, real properties and cryptocurrencies belonging to several individuals and entities affiliated with AlphaBay, the "eBay-style underworld marketplace." The forfeiture is connected with the criminal indictment issued against Alexandre Cazes, a Canadian citizen who was operating AlphaBay.

The court issued a default judgment as to the properties. The court found the complaint sufficiently alleged personal and subject matter jurisdiction, and there was sufficient notice through US government website and mail.

Takeaway:

Many, many interesting aspects in this case. First of all, I always love case captions for an in rem action where it looks like the defendant is a piece of property. (Who's the lawyer for the Lamborghini?) But the substance of the case is even more interesting. AlphaBay is one of the largest "dark web" marketplaces, and Cazes was residing in Thailand when he was arrested. (He committed suicide eight days after the arrest, while being under Thai police custody.) The US court did not only feel comfortable ordering arrest of a Canadian citizen residing in Thailand; it also felt comfortable ordering the seizure of real estate located in Thailand. (How will the US court enforce its order if the real estate is under encumbrance?) 

Further, although AlphaBay had many transactions in cryptocurrency which is supposed to be untraceable, the US government had no trouble seizing the cryptocurrency belonging to Cazes and his affiliates. I always tell my clients that the supposedly "untraceability" of cryptocurrency is greatly overrated, and this is another case in point. It doesn't matter how well the transaction itself is encrypted, as long as there is an actual person sitting at the end of the transaction.

Case of the Day: Pearce v. Mizuho Bank, 2018 U.S. Dist. LEXIS 146005 (E.D. Pa. Aug. 27, 2018)

Summary:

Plaintiff was a bitcoin investor with Mt. Gox, previously one of the world's most prominent bitcoin exchanges. On behalf of those similarly situation, plaintiff sued Mt. Gox's president and Mizuho Bank, the exclusive processor of all bank deposits and withdrawals made by Mt. Gox during relevant time period. Plaintiff alleged that, in an attempt to pressure Mt. Gox into severing the banking relationship, Mizuho made it difficult for Mt. Gox's customers located abroad to withdraw funds from Mt. Gox accounts, which eventually led to Mt. Gox's bankruptcy.

The court granted Mizuho's motion to dismiss based on lack of personal jurisdiction. The court found there was no purposeful availment of the Pennsylvania forum, as refusing to do business with a customer in Pennsylvania is not an activity, but an absence of activity.

Takeaway:

This is the correct result: despite the valiant attempt to flip the negative to the affirmative, there is no specific jurisdiction when the defendant didn't do something in the forum. It is also ironic to see traders in bitcoin--something that was intended to transcend artifices like countries and borders--are being stymied by a classic application of the territoriality principle.

Media Appearance: "Cryptocurrency Laws and Regulations in Asia" in Asia Business Law Journal

Vacation is over--time to get back in the saddle! Here is my contribution, together with Michael S. Kim and Daniel S. Lee of Kobre & Kim LLP, giving an overview of cryptocurrency laws of South Korea.

Under the proposed regulatory scheme, digital currency exchanges would be required to register with South Korea’s Financial Intelligence Unit, a sub-organization of the FSC that monitors transactional flows to prevent money laundering or other attempts to evade capital control measures. The exchanges would also need to comply with “Know Your Customer” and anti-money laundering regulations at levels similar to banks. The proposed legislation is currently pending before the National Assembly.

In addition to the FSC’s proposed regulatory scheme, there are several other pending bills regarding digital currency trades and taxation measures. These bills have remained pending due to local elections in South Korea, but given a general lack of resistance toward digital currency regulation, they are expected to pass in the National Assembly soon.

Cryptocurrency Laws and Regulations in Asia: South Korea [Asia Business Law Journal]

Case of the Day: Alibaba Grp. Holding Ltd. v. Alibabacoin Found., 2018 U.S. Dist. LEXIS 72282 (S.D.N.Y. Apr. 30, 2018)

Summary:

Plaintiff Alibaba is the massive e-commerce company incorporated in the Cayman Islands with the principal place of business in China. Defendant Alibabacoin is a creator of a cryptocurrency of the same name. Plaintiff filed for a preliminary injunction claiming violation of trademark. Defendant moved to dismiss.

The court first ruled there was subject matter jurisdiction under the Lanham Act, even though Alibabacoin was not yet sold on any trading platform. However, the court dismissed based on the lack of personal jurisdiction. The court found insufficient that the defendant's website, which is accessible from New York, could be used to buy and sell Alibabacoin, because the plaintiff failed to establish "reasonable probability" that New York customers would use the website to transact business. Nor did it matter to the court that a New York company hosted Alibabacoin's website. That the defendant contemplated listing its coins in New York-based exchange was also insufficient. Using U.S. dollars to project the value of the cryptocurrency was likewise irrelevant. Further, the court held the situs of the injury was China, the plaintiff held the trademark.

Takeaway:

My two worlds intersect! Digital currency and personal jurisdiction!

There is a lot more to consider when it comes to a government agency like the SEC or the CFTC asserting a long arm jurisdiction in a civil suit, but when it comes to litigation between two private parties, this case is greatly clarifying. Oddly, the opinion does not state where the defendant is incorporated or does business.

Media Appearance: Coin Talk with Jay Caspian Kang and Aaron Lammer

I appeared on Coin Talk, a podcast run by Jay Caspian Kang of the New York Times and Aaron Lammer of longform.com about cryptocurrency, in order to discuss the digital currency mania in Korea. A lightly edited excerpt from the transcript:

Aaron Lammer: Yeah, what should we expect from Korean crypto in 2018?

Nathan Park: In my view, this has become a major priority in the Korean domestic policy making. In 2018, you will see a major policy and some level of major regulation. There’s already the KYC ["Know Your Customer" rules] element to it, which is a pretty strict and significant thing, as in you can only trade in real names.

Jay Kang: Is that to limit out some of the Chinese money laundering?

Nathan Park: That is certainly the case. The KYC element is there to prevent money laundering basically, and just by strictly implementing the KYC regulations means that a lot of the incentives to trade through Korea will be gone now, because the reason why there was so much volume in Korea was to do money laundering. I expect the KYC rules to be implemented pretty strictly. Also, a shutdown of all exchanges is a possibility. . . .I do know that it is in the cards. It is an option that the Korean government is considering very seriously. I don’t know if they will actually do it. Currently the expectation is they won’t do it.

Coin Talk #2: Korean Crypto-Mania and the Kimchi Spread [Medium]

If I would point to just one takeaway from the discussion, it would be that the Korean government regulation of digital currency is coming soon. The speculative mania for digital currency is reaching a fever pitch in Korea such that it managed to become one of the top domestic agenda priorities for the Korean government. Considering much of the reason behind such active cryptocurrency trading in Korea is money laundering, even a relatively light level of regulation would significantly affect the manner in which the money flows in the digital currency sector.

Media Appearance: "Cryptocurrency Clamp Down May Encourage Regulatory Arbitrage" on the Investor

My recent speaking engagement at the Inside Fintech Conference in Seoul got some media coverage:

Nathan Park, lawyer at US litigation boutique firm Kobre & Kim, stressed the importance of considering cryptocurrency regulations for all major markets with all players going forward. “The way to navigate the global regulatory scheme is to be aware of the regulatory structure in all the major markets where the company will be represented,” Park said. 

Cryptocurrency Clamp Down May Encourage Regulatory Arbitrage [The Investor]

This is a very important point in understanding digital currency regulation. The naive initial assumption about the digital currency was that it was beyond national regulation, because it is so easy for those engaged in the digital currency business to move onto a different country. But the actually emerging picture is each country going beyond their national borders to assert regulatory jurisdiction. Rather than being freed from the national regulation, those engaged in the digital currency business are in fact subject to even more national regulations, depending on the level of business they attract from different corners of the world.

Media Appearance: "A Recent Pair of US Enforcement Actions: a Harbinger for Chinese Digital Currency Companies" on Hong Kong Lawyer

Here is my latest contribution on digital currency, co-authored by Kobre & Kim's Benjamin Sauter. The upshot:

These enforcement actions by US authorities are occurring on somewhat contradictory theories advanced by the SEC and the CFTC: the SEC claims many digital currencies are "securities", while the CFTC claims they are also "commodities" under US law. Both agencies have taken a global view when it comes to personal jurisdiction over companies that transact business which could harm US investors. As the turf war between the two agencies continues, it is highly likely that the two agencies will take more adventurous enforcement actions to mark their jurisdiction in markets around the world. In doing so, it is highly likely that the SEC and the CFTC will target Chinese companies with increasing frequency.

A Recent Pair of US Enforcement Actions: a Harbinger for Chinese Digital Currency Companies [Hong Kong Lawyer]

Digital currency is an important emerging issue in Asia, as the majority of the Bitcoin and Ethereum trade occurs in China and Korea. As the Chinese and Korean regulatory authorities tighten their oversight, as the U.S. regulatory agencies venture out into Asia, all kinds of clashes will be coming soon. Many of them, no doubt, will come awash the U.S. courts.

In a related topic, will you be in Seoul from November 30 to December 1? If you are, come hear me speak about this very topic at the Inside Fintech Conference. If you are attending, you can contact me to obtain a 40 percent discount coupon for the conference.