Choose Paul Wallace of the Delaware Superior Court docket issued a current opinion in Diamond Fortress Technologies, Inc. v. EverID, Inc., clarifying the therapy of cryptocurrency property when calculating damages.  The opinion additionally lays a framework for analyzing the therapy of cryptocurrency property in future actions and gives helpful steering in deciphering current laws.
Plaintiffs Diamond Fortress Applied sciences, Inc., and its CEO Charles Hatcher II (plaintiffs), contracted with defendant EverID, Inc. (EverID) to offer EverID digital ID verification companies. EverID created cryptocurrency “ID Tokens” and developed a associated blockchain-based monetary platform. As part of this, EverID sought to make use of Diamond Fortress’s ONYX software program for id verification. The ONYX software program permits for touchless verification of a person’s id by scanning the person’s fingerprint with a telephone’s digital camera. EverID additionally retained Hatcher as a guide, and the agreements prohibited Diamond Fortress or Hatcher from working with different blockchain suppliers.
Fairly than pay them in conventional foreign money, EverID agreed to compensate the plaintiffs via distributions of ID Tokens on the preliminary coin providing (ICO) and later at common token distribution occasions (TDEs). EverID held an ICO for the ID Tokens on February 8, 2021 however didn’t distribute them to Diamond Fortress or Hatcher. The plaintiffs thereafter made casual and formal calls for for the contractually agreed upon token distributions with out response from EverID earlier than sending a ultimate communication on March 4, 2021, declaring the plaintiffs’ intent to deal with the contracts as breached. Shortly after delivering that ultimate communication, the plaintiffs filed swimsuit. EverID did not reply the criticism. The plaintiffs moved for default judgment.
As a result of EverID’s legal responsibility was not at problem, the one query earlier than the courtroom was the right measure of damages. Because the plaintiffs had been to be paid in cryptocurrency with a fluctuating worth pursuant to the contract, the courtroom needed to decide learn how to compensate the plaintiffs for his or her loss, which required two steps: “First, the Court docket should discover a dependable cryptocurrency valuation supply to make sure the right enter of values. Then the Court docket should verify the right technique for calculating damages.”  The courtroom utilized CoinMarketCap, an internet site posting each day cryptocurrency pricing knowledge, as its valuation supply, noting different courts had completed so, and Congress had expressed approval of the web site in laws. 
Extra considerably, the courtroom additionally decided that the ID Tokens supplied by EverID had been securities as a result of they had been “funding contracts” topic to regulation underneath the Securities Act of 1933 and the Change Act of 1934. Damages subsequently ought to be calculated underneath Delaware’s current precedent coping with failure to ship pursuant to contracts for the sale of securities. The courtroom first examined whether or not cryptocurrency constitutes a safety or a commodity, noting that each the CFTC and the SEC have claimed jurisdiction over regulation of cryptocurrency. The courtroom regarded to laws launched in July 2021 within the Home of Representatives by Donald S. Beyer, Jr. (D-VA) — the Digital Asset Market Construction and Funding Safety Act  — to create a take a look at that analyzes whether or not a cryptocurrency constitutes an asset or safety primarily based on “a cryptocurrency’s traits at a given time.” 
To make this willpower, the courtroom utilized the Howey take a look at  to ID Tokens and decided that, on the time that the plaintiffs incurred damages, the ID tokens constituted a safety. First, the courtroom discovered the plaintiffs’ dedication to offer software program and consulting companies in trade for cryptocurrency constituted an funding of cash. Second, the courtroom discovered the Token ID cryptocurrency amounted to a standard enterprise as a result of, each pre- and post-ICO, the worth of the ID tokens was inextricably linked to the efficiency of EverID’s blockchain and platform as a complete. Third, the courtroom discovered that the plaintiffs anticipated their income to be derived from the efforts of others as a result of the plaintiffs couldn’t be reimbursed till after the ICO was full. Because the courtroom famous, “[t]he Plaintiffs’ general funding into the platform was primarily based on their expectation to be paid in eventual distributions of ID Tokens after the ICO. This expectation is not any totally different than that of a conventional funding contract entered into earlier than an IPO, and thus, ID Tokens is on this circumstance like a safety.” 
After figuring out the ID Tokens constituted securities owed to the plaintiffs underneath the related agreements, the courtroom utilized current Delaware legislation governing damages calculations for failure to ship securities. Making use of the New York rule, which Delaware courts have adopted, the courtroom discovered the very best worth for ID Tokens within the three months after EverID’s failure to ship and calculated damages primarily based on that, in the end awarding Diamond Fortress greater than $20,000,000 and Hatcher greater than $5,000,000. 
The courtroom’s opinion lays out a helpful analytical framework for figuring out how cryptocurrency property could also be labeled, whereas acknowledging that some cryptocurrencies — as they achieve widespread adoption — could shift from being labeled as securities to commodities. However early-stage cryptocurrencies whose use is tied to a particular platform could represent securities, no less than underneath the analytical framework laid out by this courtroom. In essence, the courtroom’s take a look at asks whether or not the acquisition of a cryptocurrency is predicated on a perception within the worth of the token itself or the blockchain platform underlying the token in query. Right here, the courtroom discovered Diamond Fortress and Hatcher agreed to obtain fee in ID Tokens not due to a perception within the intrinsic worth of the ID Token, however due to a perception that the ID Token’s worth would rise as EverID’s blockchain platform was adopted on a wider scale.
Essential to the courtroom’s evaluation on this case was the truth that the plaintiffs reached their settlement with EverID earlier than the ID Token ICO, that means that the plaintiffs’ “funding” was essentially speculative primarily based on future efficiency, akin to the acquisition of a safety, and never the acquisition of an current commodity. Underneath the courtroom’s framework, pre-ICO agreements to buy cryptocurrency could extra possible than not be correctly labeled as securities. Even post-ICO purchases, nonetheless, could represent securities underneath this courtroom’s framework the place the worth of the cryptocurrency itself is closely tied to the efficiency of a bigger product utilizing the cryptocurrency’s blockchain. If the worth of cryptocurrency rises and falls with the efficiency of a product using a proprietary blockchain, the acquisition of cryptocurrency represents an funding within the bigger product, and thus possible constitutes a purchase order of securities.
Underneath this courtroom’s evaluation, as a cryptocurrency grows and reaches widespread adoption, nonetheless, it could transition from a safety to an asset. Whereas the courtroom on this case didn’t delineate precisely when such a transition happens, the impartial use of the foreign money as a unit of trade is probably going an excellent indicator. Underneath the courtroom’s framework, there’s a clear distinction between bitcoin or ethereum — currencies which might be accepted by some distributors and function a unit of trade with widely-adopted blockchain platforms — as in comparison with currencies tied to the efficiency of a particular software or enterprise with its personal blockchain, such because the ID Tokens on this case. Whereas the biggest and most utilized cryptocurrencies could classify as property, smaller tokens created by startups usually tend to be securities, particularly when bought on the pre-ICO stage.
Cryptocurrency issuers and firms contemplating ICO occasions ought to be aware of this courtroom’s ruling and be aware that different courts and regulators could not categorically classify cryptocurrencies as property or securities however could as an alternative have a look at the person circumstances of every case together with the potential for a fluid evolution. Firms wishing to attain a sure classification ought to take efforts to show their cryptocurrency is or will not be a safety underneath the courtroom’s framework. On the identical time, traders ought to make the most of the courtroom’s framework to guage potential cryptocurrency investments and the protections accessible to them. The courtroom’s opinion gives very important clarification within the in any other case murky realm of cryptocurrencies, whereas nonetheless acknowledging that cryptocurrencies are novel, evolving, and proof against categorical classification.
 — A.3d –, C.A. No. N21C-05-048, 2022 WL 1127217 (Del. Tremendous. Ct. Apr. 14, 2022).
 Id. at *13.
 H.R. 4741, 117th Cong. (2021).
 2022 WL 1127217, at *6-7 (emphasis in unique).
 Id. at *7 (“an funding contract is ‘a contract, transaction or scheme whereby an individual invests his cash in a standard enterprise and is led to anticipate income solely from the efforts of the promoter or a 3rd occasion.'”) (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946)).
 Id. at *11.
 Id. at *15.