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Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 1 of 85
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`
`CHASE WILLIAMS and WILLIAM ZHANG,
`individually and on behalf of all others similarly
`situated,
`
`
`Plaintiffs,
`
`
`
`
`
`v.
`
`
`HDR GLOBAL TRADING LIMITED, ABS
`GLOBAL TRADING LIMITED, ARTHUR
`HAYES, BEN DELO, and SAMUEL REED,
`
`
`No. ______________
`
`
`
`JURY DEMANDED
`
`Defendants.
`
`CLASS ACTION COMPLAINT
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`Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 2 of 85
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`Individually and on behalf of all others similarly situated, Plaintiffs Chase Williams and
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`William Zhang bring this action against Defendants HDR Global Trading Limited, ABS Global
`
`Trading Limited (together with HDR Global Trading Limited, “BitMEX”), Arthur Hayes, Ben
`
`Delo, and Samuel Reed. Plaintiffs’ allegations are based upon personal knowledge as to
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`themselves and their own acts, and upon information and belief as to all other matters based on the
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`investigation conducted by and through Plaintiffs’ attorneys, which included, among other things,
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`a review of press releases, media reports, whitepapers of the digital tokens addressed herein, and
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`other publicly disclosed reports and information about Defendants. Plaintiffs believe that
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`substantial additional evidentiary support will exist for the allegations set forth herein, after a
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`reasonable opportunity for discovery. Plaintiffs hereby allege as follows:
`
`I.
`
`INTRODUCTION
`
`1.
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`On behalf of (a) a class of investors who purchased securities and commodities
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`futures that BitMEX sold through its exchange since July 1, 2017 (the “Class”), and (b) a subclass
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`of investors who purchased digital-tokens futures that, without registering under applicable federal
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`and state securities laws as an exchange or broker-dealer and without a registration statement in
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`effect, BitMEX sold through its exchange since July 1, 2017 (the “Subclass”), Plaintiffs and
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`members of the Class and Subclass seek to recover the damages suffered from Defendants’
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`unlawful actions, the consideration paid for the products, and the fees they paid to BitMEX in
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`connection with their purchases.
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`2.
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`BitMEX is one of the largest cryptocurrency exchanges in the world, with a daily
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`trading volume that regularly surpassed $3 billion in January 2020. BitMEX exclusively trades
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`derivative products based on cryptocurrencies, in particular bitcoin and ether. In doing so,
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`Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 3 of 85
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`however, BitMEX acts like a casino with loaded dice, manipulating both its systems and the market
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`its customers use for its own substantial financial gain.
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`A. Market Manipulation
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`3.
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`At its inception, as Defendant Arthur Hayes described it, BitMEX was to serve
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`Wall Street institutional investors “who were going to want the same type of products” they were
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`used to trading at sophisticated multinational banks. Yet for the first six months after BitMEX
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`went live in late 2014, “no one came” to the trading platform. And Wall Street never came to
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`BitMEX. So, in the words of its co-founder and CEO, BitMEX changed its business model to
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`“focus[] on degenerate gamblers; [also known as] retail investors” and by offering “100X
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`leverage” trades.
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`4.
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`In allowing customers to leverage at the extraordinary ratio of 100:1—about twenty
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`times higher than the common ratio in trading—BitMEX positioned itself to benefit consistently,
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`significantly, and predictably from the combination of attracting overly hopeful investors and
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`small price fluctuations on other exchanges. This structure creates substantial incentives for
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`BitMEX to surreptitiously cause such fluctuations.
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`5.
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`Implementing its business approach, BitMEX deliberately based the price of its
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`futures on spot-market exchanges that have limited liquidity and are thus relatively easy to
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`manipulate. BitMEX would then engage in manipulative trading on those exchanges to change
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`the price of bitcoin or ether. Even if only temporary, these price changes would then affect the
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`prices of the futures offered on BitMEX in a way that benefitted BitMEX by allowing it to make
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`margin calls and liquidate its highly leveraged traders.
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`6.
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`Automatically liquidating contracts that were out of the money, BitMEX would
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`cover the investor’s losses but would also take all of the investor’s collateral. By setting the
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`liquidation point higher than necessary to protect against the risk of a loss greater than the
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`investor’s collateral, BitMEX generally profited from these liquidations. BitMEX would place
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`these profits in its “Insurance Fund,” marketed as a way to ensure that BitMEX has cash on hand
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`for the rare occasions where the losses exceeded the collateral. Despite its name, the Insurance
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`Fund is almost never drawn upon and instead has grown consistently such that it now contains
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`assets worth hundreds of millions of dollars.
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`7.
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`BitMEX also acted on similar financial incentives by trading against its customers,
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`a secret BitMEX kept as long as it could. BitMEX employed an undisclosed trading desk with
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`special privileges and insights that allowed BitMEX to take favorable positions opposite its own
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`customers. BitMEX only revealed the existence of the desk in 2018, under pressure from an
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`independent analyst armed with trade data reflecting its existence. As a desk with access to
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`otherwise-hidden information, it was in a perfect position to enhance BitMEX’s manipulation.
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`8.
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`BitMEX has compounded the effect of these manipulative schemes by routinely
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`freezing its servers—which BitMEX blames on technical glitches and limitations—to profit during
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`moments of high volatility. During these freezes, customers are unable to change their positions,
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`but the market continues to operate and BitMEX trades. BitMEX would thus prevent its customers
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`from escaping positions until they fell to a level at which BitMEX could liquidate those positions
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`at a profit to itself.
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`9.
`
`BitMEX’s operations on March 12, 2020, are a recent and good example. During
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`a period in the day with high market volatility and crashing bitcoin prices (from nearly $8,000 to
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`$4,000 per bitcoin), resulting in a substantial sell-off, BitMEX’s trading platform went offline for
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`twenty-five minutes. As a result of the outage, BitMEX did not dip into its Insurance Fund, but
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`rather liquated $800 million of its customers’ highly leveraged positions for its own profit. This
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`server outage, in short, effectively protected BitMEX and the Insurance Fund from the cascading
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`effects of sell-offs of BitMEX’s highly leveraged and volatile products.
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`10.
`
`BitMEX and its founders have thus manipulated the price of bitcoin and ether,
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`harming Plaintiffs and the Class who had their positions liquidated, in violation of the Commodity
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`Exchanges Act, 7 U.S.C. §§ 9, 25.
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`B. Securities Violations
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`11.
`
`In addition to offering derivative products on commodities such as bitcoin and
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`ether, BitMEX also operates as an unregistered securities exchange that offers security futures
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`products on certain digital tokens, including derivative products that reference the tokens EOS and
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`SNT (together, the “Tokens”).
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`12.
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`A digital token is a type of digital asset that exists on a “blockchain,” which is
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`essentially a decentralized digital ledger that records transactions. Various digital assets can reside
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`on blockchains, including cryptocurrencies as well as so-called “smart contracts” that operate
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`under a set of predetermined conditions agreed on by users. When those conditions are met, the
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`terms of the contract are automatically carried out by the software underlying the digital tokens
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`(which, as relevant here, are referred to as “ERC-20 tokens” and exist on the Ethereum
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`blockchain).
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`13.
`
`Certain of these digital tokens are sometimes classified as “utility tokens.” Their
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`primary purpose is to allow the holder to use or access a particular project. For example, one
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`private-jet company issues utility tokens to participants in its membership program, who can then
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`use them to charter flights on the company’s planes. A utility token presumes a functional network
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`on which the token can be used.
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`14.
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`Other tokens are more speculative and are referred to as “security tokens,” and, like
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`a traditional security, essentially represent one’s investment in a project. Although the tokens take
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`value from the startup behind the project, they do not give the holder actual ownership in that
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`startup. Rather, investors purchase these tokens with the idea that their value will appreciate as
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`the network in which the token can be used is expanded based upon the managerial efforts of the
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`issuer and those developing the project. Because such “security tokens” are properly classified as
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`securities under federal and state law, the issuers of these Tokens (the “Issuers”) were required to
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`file registration statements with the U.S. Securities and Exchange Commission (“SEC”), and
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`BitMEX was required to register itself as an exchange with the SEC. Neither the Issuers nor
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`BitMEX filed any such registration statements. Instead, BitMEX and the Issuers entered into
`
`contracts to list these Tokens for sale on the BitMEX exchange in violation of federal and state
`
`law. As a result, BitMEX and the Issuers reaped billions of dollars in profits.
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`15.
`
`The scheme worked as follows: working to capitalize on the enthusiasm for
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`cryptocurrencies like bitcoin, an Issuer would announce a revolutionary digital token. This token
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`would typically be billed as “better,” “faster,” “cheaper,” “more connected,” “more trustworthy,”
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`and “more secure.” The Issuer would then sell some of its tokens in an initial coin offering (“ICO”)
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`to a small group of investors and then turn to exchanges to list the new token, at which point these
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`exchanges would undertake its own efforts to promote sales, and to solicit and encourage
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`purchases, by a wide universe of investors. The Issuers would thereby raise hundreds of millions,
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`even billions, of dollars from purchasers of the tokens.
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`16.
`
`The Issuers were generally careful to describe these tokens both as providing some
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`specific utility and as something other than “securities.” But the vast majority of these new tokens
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`turned out to be empty promises. They were not “better,” “faster,” “cheaper,” “more connected,”
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`“more trustworthy,” or “more secure” than what existed in the marketplace. In reality, they often
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`had no utility at all. The promises of new products and markets went unfulfilled, with the networks
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`never fully developed, while investors were left holding the bag when these tokens crashed.
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`Indeed, most of these tokens are now trading at a tiny fraction of their 2017-2018 highs.
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`17.
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`Investors were provided with scant information when deciding whether to purchase
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`a token. In fact, the only offering materials available to investors were “whitepapers” that would
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`describe, in highly technical terms, the supposed utility of a token. These whitepapers would omit,
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`however, the robust disclosures that the securities laws and the SEC have long codified as essential
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`to investor protections in initial public offerings, including use of “plain English” to describe the
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`offering; a required list of key risk factors; a description of key information and incentives
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`concerning management; warnings about relying on forward-looking statements; an explanation
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`of how the proceeds from the offering would be used; and a standardized format that investors
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`could readily follow. Instead, these ICOs were the “Wild West”—with investors left to fend for
`
`themselves. Without the mandatory disclosures that would have been required had these ICOs
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`been registered with the SEC, investors could not reliably assess the representations made or the
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`risks of their investments.
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`18.
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`In 2017 and 2018, at the height of this frenzy of activity, hundreds of ICOs raised
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`over $20 billion with virtually no regulatory oversight or guidance to investors. Issuers and
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`exchanges, preying on the public’s lack of familiarity with the technology underpinning these
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`tokens, characterized these tokens as “utility tokens,” even though they were in effect bets that a
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`particular project would develop into a successful venture. In truth, these tokens were securities
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`under federal and state securities laws.
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`19.
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`On April 3, 2019, in a “Framework for ‘Investment Contract’ Analysis of Digital
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`Assets” (the “Framework”), the SEC clarified that the Tokens are “investment contracts” and
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`therefore securities under Section 2 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C.
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`§ 77b(a)(1), and Section 3 of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.
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`§ 77c(a)(10).1 Prior to that time, a reasonable investor would not have believed that these Tokens
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`were securities that should have been registered with the SEC. But the Tokens are securities. For
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`example, on September 30, 2019—nearly six months after releasing its Framework, and more than
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`two years after the relevant ICO began—the SEC completed an investigation and found that
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`Block.one had violated the Securities Act by selling the digital token EOS, an unregistered
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`security, to the public. As a result of this SEC enforcement action, Block.one was required to pay
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`a $24 million fine.2 The SEC’s determination that EOS was an unregistered security applies with
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`equal force to other tokens, such as SNT.
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`20.
`
`BitMEX wrongfully engaged
`
`in millions of
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`transactions—including
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`the
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`solicitation, offer, and sale of securities—by selling its derivative products. Because the Tokens
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`were unregistered securities, the derivatives BitMEX sold referencing the Tokens were themselves
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`securities that needed to be registered. BitMEX did not register these derivatives as securities, and
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`did not itself register with the SEC as an exchange or broker-dealer. As a result, investors were
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`not informed of the significant risks inherent in these investments, as federal and state securities
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`laws require.
`
`
`1 Framework for “Investment Contract” Analysis of Digital Assets, SEC (April 3, 2019),
`https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets#_ednref1.
`2 Press Release, SEC Orders Blockchain Company to Pay $24 Million Penalty for Unregistered
`ICO (Sept. 30, 2019), https://www.sec.gov/news/press-release/2019-202; Block.one, Exchange
`Act Release No. 10714, 2019 WL 4793292 (Sept. 30, 2019).
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`21.
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`BitMEX participated in illegal solicitation and sales of security futures products
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`referencing these Tokens for which no registration statement was in effect, and as to which no
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`exemption was available. BitMEX offered these security futures products using statements posted
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`on the Internet and distributed throughout the world, including throughout the United States, and
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`the security futures products were offered and sold to Plaintiffs and the general public in the United
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`States. Because these sales violated both the Securities Act and the Exchange Act, Plaintiffs and
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`the Subclass are entitled to recover the consideration paid for these futures with interest thereon at
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`the legal rate, or the equivalent in monetary damages plus interest at the legal rate from the date of
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`purchase, as well as the fees they paid BitMEX on such purchases.
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`22.
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`In addition, numerous Subclass members resided, and were present at the time they
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`traded in the Tokens, in States that provide their own “Blue Sky” protections for investors,
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`including New Jersey and Texas.3 These States generally provide that the investors in these States
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`who purchased these unregistered tokens are entitled to rescission or damages, as well as interest
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`thereon, attorneys’ fees, and costs.
`
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`3 These “Blue Sky” statutes are so named because they are designed to protect investors from
`“speculative schemes which have no more basis than so many feet of blue sky.” Hall v. Geiger-
`Jones Co., 242 U.S. 539, 550 (1917) (internal citations omitted). Like the federal securities laws,
`each of the state statutes pursuant to which Plaintiffs bring causes of action defines “securities” to
`include “investment contracts,” and the term “investment contracts” in each statute has been
`interpreted at least as broadly as the standard set forth by the Supreme Court in SEC v. W.J. Howey
`Co., 328 U.S. 293 (1946).
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`Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 10 of 85
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`II.
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`PARTIES
`
`A. Plaintiffs
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`23.
`
`Plaintiff Chase Williams is a resident of Houston, Texas. Williams and members
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`of the Class purchased EOS and ADA derivative products on BitMEX and pursuant to contracts
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`with BitMEX, from Texas during the period between July 1, 2017 and the present (the “Class
`
`Period”).
`
`24.
`
`Plaintiff William Zhang is a resident of New York, New York. Zhang and members
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`of the Class purchased EOS and TRX derivative products on BitMEX and pursuant to contracts
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`with BitMEX, from New Jersey during the Class Period.
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`25.
`
`Plaintiffs and the members of the Subclass purchased the derivative products based
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`on the Tokens on BitMEX and pursuant to contracts with BitMEX.
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`B. Defendants
`
`26.
`
`Defendant HDR Global Trading Limited launched in 2014 (“HDR”). By January
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`2017, it had become, and remains, the largest cryptocurrency derivatives exchange in the world,
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`with the highest trading volume of any such futures exchange. HDR Global Trading Limited is
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`incorporated in Seychelles, with its principal office located at Global Gateway 8, Rue de la Perle,
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`Providence Mahé, Seychelles. HDR Global Trading Limited is the owner of the trading platform
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`called BitMEX and operated BitMEX out of an office in Manhattan.
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`27.
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`ABS Global Trading Limited is Delaware corporation created in 2017 and entirely
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`owned by HDR Global Trading Limited. According to New York public records, it is
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`headquartered at 31 Conduit Road, Flat 17B, The Morgan, Hong Kong, Hong Kong. ABS Global
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`Trading Limited is responsible for technical aspects of the BitMEX platform, including security
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`services and implementing the user interface traders use to buy and sell products.
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`28.
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`Defendant Arthur Hayes is the founder and CEO of both HDR Global Trading
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`Limited and ABS Global Trading Limited. On information and belief, he resides in Hong Kong.
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`29.
`
`Defendant Samuel Reed is the Chief Technical Officer (“CTO”) of both HDR
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`Global Trading Limited and ABS Global Trading Limited and co-founded them along with Hayes.
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`On information and belief, he resides in Hong Kong.
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`30.
`
`Defendant Ben Delo co-founded both HDR Global Trading Limited and ABS
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`Global Trading Limited with Hayes and Reed. On information and belief, he resides in Hong
`
`Kong.
`
`III.
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`JURISDICTION AND VENUE
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`31.
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`Jurisdiction of this Court is founded upon 28 U.S.C. § 1331 because the Complaint
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`asserts claims under Section 22 of the Commodity Exchange Act, 7 U.S.C. § 25.
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`32.
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`Jurisdiction of this Court is also founded upon 28 U.S.C. § 1331 because the
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`Complaint asserts claims under Sections 5, 12(a)(1), and 15 of the Securities Act, 15 U.S.C.
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`§§ 77e, 77l(a)(1), 77o. This Court further has jurisdiction over the Securities Act claims pursuant
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`to Section 22 of the Securities Act, 15 U.S.C. § 77v.
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`33.
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`Jurisdiction of this Court is also founded upon Section 27 of the Exchange Act, 15
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`U.S.C. § 78aa(a), which provides that federal courts have exclusive jurisdiction over violations of
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`the Exchange Act, including Sections 5, 15(a)(1), 20, and 29(b), 15 U.S.C. §§ 77e,  78o(a)(1), 78t,
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` 78cc(b).
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`34.
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`This Court has jurisdiction over the statutory claims of violations under N.J. Stat.
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`Ann. § 49:3-71 and Tex. Rev. Civ. Stat. art. 581 pursuant to this Court’s supplemental jurisdiction
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`under 28 U.S.C. § 1367(a).
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`35.
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`This Court has personal jurisdiction over Defendants as a result of acts of
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`Defendants occurring in or aimed at the State of New York in connection with Defendants’
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`manipulation of its secondary market, offer or sale of unregistered securities, and failure to register
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`with the SEC as an exchange or broker-dealer.
`
`36.
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`Venue is proper pursuant to each of 15 U.S.C. § 77v(a) and 15 U.S.C. § 78aa(a) in
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`that this is a district wherein one or more defendants is found or is an inhabitant or transacts
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`business, or in which the offer or sale took place. Venue is similarly proper pursuant to 7 U.S.C.
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`§25(c) in that this is a district wherein a defendant is found, resides, or transacts business, or
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`wherein any act or transaction constituting the violation occurred. Throughout most, if not all, of
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`the Class Period, BitMEX maintained an office in Midtown Manhattan, and was actively recruiting
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`individuals for this office on websites such as angel.co and builtinnyc.com. According to public
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`profiles on LinkedIn, at least some employees in the greater New York City area claim to work for
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`BitMEX. In addition, BitMEX employees regularly speak and solicit business at large
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`cryptography and blockchain conferences hosted in New York. For example, Defendant Hayes
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`spoke at CoinDesk’s annual Consensus: Invest conference in New York in 2017 and 2018, and
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`other business development employees solicited business during the 2016 event in New York.
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`37. Moreover, a plethora of circumstantial evidence suggests other strong connections
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`between BitMEX and New York and the United States as a whole. Beyond clear evidence of New
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`York-based social media users interacting with BitMEX, “[s]everal sources close to the company”
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`have disclosed to media sources that nearly 15 percent of the BitMEX’s 2019 trading volume—or
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`about $138 billion worth—is attributable to traders located in the United States. This trading from
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`the United States is possible because, as Defendant Hayes concedes and journalists and other
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`commentators have explained, and BitMEX’s marketing of itself in the United States
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`demonstrates, accessing BitMEX is trivially easy from the United States using virtual private
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`networks that mask a trader’s location.
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`IV.
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`FACTUAL ALLEGATIONS – BACKGROUND
`
`A. The First Cryptocurrency: Bitcoin
`
`38.
`
`A cryptocurrency is a digital asset designed to work as a medium of exchange, a
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`store of value, or both. Cryptocurrencies leverage a variety of cryptographic principles to secure
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`transactions, control the creation of additional units, and verify the transfer of the underlying
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`digital assets.
`
`39.
`
`Bitcoin was the world’s first decentralized cryptocurrency. It is also the largest and
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`most popular cryptocurrency, with a market capitalization of approximately $126 billion. Bitcoin
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`spawned a market of other cryptocurrencies that, together with bitcoin, have a current market
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`capitalization of $192 billion. (The term “bitcoin” can refer to both a computer protocol and a unit
`
`of exchange. Accepted practice is to use the term “Bitcoin” to label the protocol and software, and
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`the term “bitcoin” to label the units of exchange.)
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`40.
`
`At its core, Bitcoin is a ledger that tracks the ownership and transfer of every bitcoin
`
`in existence. This ledger is called the blockchain.
`
`41.
`
`Blockchains act as the central technical commonality across most cryptocurrencies.
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`While each blockchain may be subject to different technical rules and permissions based on the
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`preferences of its creators, they are typically designed to achieve the similar goal of
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`decentralization.
`
`42.
`
`Accordingly, blockchains are generally designed as a framework of incentives that
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`encourages some people to do the work of validating transactions while allowing others to take
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`advantage of the network. In order to ensure successful validation, those completing the validation
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`are also required to solve a “Proof of Work” problem by expending computational resources,
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`which has the effect of making the blockchain more accurate and secure. For Bitcoin, those who
`
`validate the blockchain transactions and solve the “Proof of Work” program are rewarded with
`
`newly minted bitcoin. This process is colloquially referred to as “mining.”
`
`43. Mining is one method by which an individual can acquire cryptocurrencies like
`
`Bitcoin. A second and more common manner is to obtain cryptocurrencies from someone else.
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`This is often accomplished by acquiring it through an online “cryptocurrency exchange.”
`
`44.
`
`Online cryptocurrency exchanges are one place to purchase Bitcoin and other
`
`cryptocurrencies. These exchanges are similar to traditional exchanges in that they provide a
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`convenient marketplace to match buyers and sellers of virtual currencies.
`
`45.
`
`In April 2013,
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`there were only
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`seven cryptocurrencies
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`listed on
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`coinmartketcap.com, a popular website that tracks the cryptocurrency markets. As of this filing,
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`the site monitors more than 2,000 cryptocurrencies.
`
`46.
`
`For a time, Bitcoin was the only cryptocurrency available on exchanges. As
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`cryptocurrencies grew in popularity, exchanges began listing other cryptocurrencies as well, and
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`trading volumes expanded. In early 2013, daily Bitcoin trading volumes hovered between $1
`
`million and $25 million. By the end of 2017, daily Bitcoin trading volumes ranged between $200
`
`million and $3.8 billion.
`
`47.
`
`In September 2015, the Commodity Futures Trading Commission (“CFTC”)
`
`designated Bitcoin a commodity.
`
`B. Ethereum As A Commodity
`
`48.
`
`Ethereum is the second-most popular cryptocurrency, with a market capitalization
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`of approximately $16 billion. The Ethereum blockchain functions similarly to the Bitcoin
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`blockchain insofar as its miners act as the validators of the network. Miners of the Ethereum
`
`blockchain are paid for their services in the form of newly minted ether. (The term “Ethereum”
`
`refers to the open software platform built on top of the Ethereum blockchain, while the term “ether”
`
`is the unit of account used to exchange value within the Ethereum “ecosystem,” i.e., the overall
`
`network of individuals using Ethereum or participating in the development of its network. This
`
`distinction is thus similar to the “Bitcoin” versus “bitcoin” distinction noted above.) Like bitcoin,
`
`ether has been designated a commodity by the CFTC.
`
`C. Ethereum As A Tool For Creating Securities
`
`49.
`
`Unlike Bitcoin’s blockchain, Ethereum was designed to enable “smart contract”
`
`functionality. A smart contract is a program that verifies and enforces the negotiation or
`
`performance of a contract. Smart contracts can be self-executing and self-enforcing, which
`
`theoretically reduces the transaction costs associated with traditional contracting.
`
`50.
`
`As an example of how a smart contract works, consider a situation where two
`
`people want to execute a hedging contract. They each put up $1,000 worth of ether. They agree
`
`that, after a month, one of them will receive back $1,000 worth of ether at the dollar exchange rate
`
`at that time, while the other receives the rest of the ether. The rest of the ether may or may not be
`
`worth more than it was at the beginning of the month.
`
`51.
`
`A smart contract enables these two people to submit the ether to a secure destination
`
`and automatically distribute the ether at the end of the month without any third-party action. The
`
`smart contract self-executes with instructions written in its code which get executed when the
`
`specified conditions are met.
`
`15
`
`
`

`

`Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 16 of 85
`
`
`52.
`
`In order to enable widespread adoption and standardized protocols for smart
`
`contracts, the Ethereum community has created certain out-of-the box smart contracts called
`
`Ethereum Request for Comments (“ERCs”).
`
`53.
`
`An ERC is an application standard for a smart contract. Anyone can create an ERC
`
`and then seek support for that standard. Once an ERC is accepted by the Ethereum community, it
`
`benefits Ethereum users because it provides for uniform transactions, reduced risk, and efficient
`
`processes. This is because it allows individuals who are less technically proficient to make use of
`
`smart contract functionality. The most widespread use of ERCs is to allow individuals to easily
`
`launch and create new digital tokens.
`
`D. ERC-20 Tokens
`
`54.
`
`ERC-20 is an application standard that the creator of Ethereum, Vitalik Buterin,
`
`first proposed in 2015. ERC-20 is a standard that allows for the creation of smart-contract tokens
`
`on the Ethereum blockchain. These tokens are known as “ERC-20 tokens.”
`
`55.
`
`ERC-20 tokens are built on the Ethereum blockchain, and therefore they must be
`
`exchanged on it. Accordingly, ERC-20 tokens are functionally different than cryptocurrencies like
`
`Bitcoin and Ethereum because they do not operate on an independent blockchain.
`
`56.
`
`ERC-20 tokens all function similarly by design—that is, they are compliant with
`
`the ERC-20 application standard. Some properties related to ERC-20 tokens are customizable,
`
`such as the total supply of tokens, the token’s ticker symbol, and the token’s name. All ERC-20
`
`tokens transactions, however, occur over the Ethereum blockchain; none of them operates over its
`
`own blockchain.
`
`57.
`
`ERC-20 tokens are simple and easy to deploy. Anyone with a basic understanding
`
`of Ethereum can use the ERC-20 protocol to create her own ERC-20 tokens, which she can then
`
`16
`
`
`

`

`Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 17 of 85
`
`
`distribute and make available for purchase. Even people without any technical expertise can have
`
`their own ERC-20 token created for them, which can then be marketed to investors.
`
`E. The Advent Of The “ICO”
`
`58.
`
`Between 2014 and 2016, bitcoin’s price fluctuated between $200 and $800. During
`
`this same time frame, ether’s price fluctuated between roughly $1 and $10.
`
`59.
`
`By the end of 2016, interest in cryptocurrencies began to accelerate, with prices
`
`growing at a rate historically unprecedented for any asset class. Over the course of 2017 alone,
`
`bitcoin’s price increased from approximately $1,000 to approximately $20,000. Ethereum’s
`
`growth was even more startling. On January 1, 2017, Ethereum was trading at approximately $8
`
`per ether. Approximately one year later, it was trading at over $1,400 per ether—a return of
`
`approximately 17,000 percent over that period.
`
`60.
`
`Seeking to capitalize on the growing enthusiasm for cryptocurrencies, many
`
`entrepreneurs sought to raise funds through initial coin offerings, or ICOs, including ICOs for
`
`newly created ERC-20 tokens, such as the Tokens. Many of these issuers improperly chose not to
`
`register their securities offerings with the SEC in order to save money and not “open their books”
`
`to the SEC, even though investors thereby were denied access to critical information they would
`
`have received from an SEC-registered offering. As a result, investors, including investors in digital
`
`tokens, were denied access to critical information before making their investment decision.
`
`61.
`
`Potential purchasers were reached through various cryptocurrency exchanges and
`
`social media sites that published active and upcoming ICOs.
`
`62.
`
`Between 2017 and 2018, nearly $20 billion dollars was raised through ICOs. None
`
`of these ICOs was registered with the SEC. Of the approximately 800 ICOs launched between
`
`2017 and 2018, the vast majority were issued using the ERC-20 protocol.
`
`17
`
`
`

`

`Case 1:20-cv-02805-ALC Document 1 Filed 04/03/20 Page 18 of 85
`
`
`63.
`
`ERC-

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