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Cryptocurrency mining rig parts sit in a stack at the Bitfarms technology lab in Saint-Jean-sur-Richelieu, Quebec, Canada, on Thursday, July 26, 2018. Bitcoin has rallied more than 30 percent in July, shrugging off security and regulatory concerns that have plagued the virtual currency for much of this year.

(bloomberg)

(Bloomberg) -- A high-profile “Crypto-Valley" legal dispute over the Tezos initial coin offering will move forward in a court closer to Silicon Valley -- for now at least.

In a preview of how litigation may play out in cryptocurrency fights with tentacles spanning the Atlantic, if not the globe, a U.S. judge rejected a bid by the Zug, Switzerland-based Tezos Foundation to toss an investor lawsuit, ruling the case will move forward in federal court in San Francisco.

The suit aims to hold the Tezos Foundation, which promised a new model for the blockchain technology that underpins cryptocurrencies, liable under U.S. law -- specifically for the sale of unregistered securities. Despite the enormous sums the ICO raised, investors claim the foundation reneged on its promises of Tezos tokens, also known as tezzies or XTZ, in exchange for their contributions.

The foundation contends the ICO investors agreed that any disputes would be resolved by courts in Zug. The foundation also argued that the transactions at issue, paid in Ethereum and Bitcoin, could only have taken place in the remote British Crown outpost of Alderney, where the company’s software resides.

Swiss Cryptocurrency Haven Lands in $1 Billion U.S. Lawsuit

U.S. District Judge Richard Seeborg, while conceding the jurisdictional disputes are likely to reemerge later in the lawsuit, was unconvinced that the case can’t proceed before him.

Focusing on the location of ICO transactions, Seeborg wrote, "the operative question quickly surfaces: where does an unregistered security, purchased on the internet, and recorded ’on the blockchain,’ actually take place?"

"Try as the Foundation might to argue that all critical aspects of the sale occurred outside of the United States, the realities of the transaction" are that the lawsuit’s lead investor participated in the ICO using a website hosted on a server in Arizona, run by a company founder in California, and based on marketing that almost exclusively targeted United States residents, Seeborg wrote.

Neal A. Potischman, a lawyer representing the Tezos Foundation, declined to comment.

Arthur, Kathleen Breitman

The Tezos project was originally conceived by Arthur and Kathleen Breitman, a husband and wife team based in Northern California. In 2015 they formed Dynamic Ledger Solutions, or DLS, to hold Tezos-related intellectual property, which attracted venture capitalist and cryptocurrency enthusiast Tim Draper as a minority shareholder.

As Seeborg noted in his ruling Tuesday, Draper "brought publicity along with his cash." The couple established the Tezos Foundation in Switzerland as a purportedly independent organization to oversee the ICO. When it commenced in July 2017, the ICO “bore ample evidence of the Breitmans’ handiwork," according to Seeborg.

The Tezos ICO raised $232 million last year. By January 2018 the investments were worth more than $1 billion due to the surge in cryptocurrencies, but the startup was embroiled in controversies culminating in the San Francisco lawsuit that also named Draper as a defendant.

The billionaire won a request to get the suit against him thrown out, as did Bitcoin Suisse, a firm that converted U.S. dollars to Bitcoin and Ethereum for investors, and transferred the cryptocurrencies to the Tezos Foundation.

The Breitmans and Dynamic Ledger Solutions remain as defendants along with Tezos.

While the ruling was a disappointment for the Breitmans, “this was not a decision on the merits of the case," Brian Klein, a lawyer for the couple, said in an email. "We believe Kathleen, Arthur, and DLS will ultimately be fully vindicated. They did not violate any laws and Tezos contributors were not harmed."

The case is In Re Tezos Securities Litigation, 17-cv-06779, U.S. District Court, Northern District of California (San Francisco).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

To contact the editors responsible for this story: Elizabeth Wollman at ewollman@bloomberg.net, Peter Blumberg, Reed Stevenson

©2018 Bloomberg L.P.

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