Decide Paul Wallace of the Delaware Superior Courtroom issued a latest opinion in Diamond Fortress Technologies, Inc. v. EverID, Inc., clarifying the remedy of cryptocurrency belongings when calculating damages.  The opinion additionally lays a framework for analyzing the remedy of cryptocurrency belongings in future actions and supplies helpful steerage in deciphering latest laws.
Plaintiffs Diamond Fortress Applied sciences, Inc., and its CEO Charles Hatcher II (plaintiffs), contracted with defendant EverID, Inc. (EverID) to supply EverID digital ID verification providers. 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 consumer’s id by scanning the consumer’s fingerprint with a cellphone’s digicam. EverID additionally retained Hatcher as a guide, and the agreements prohibited Diamond Fortress or Hatcher from working with different blockchain suppliers.
Somewhat than pay them in conventional foreign money, EverID agreed to compensate the plaintiffs by 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 remaining communication on March 4, 2021, declaring the plaintiffs’ intent to deal with the contracts as breached. Shortly after delivering that remaining 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 challenge, the one query earlier than the courtroom was the correct measure of damages. For the reason that plaintiffs had been to be paid in cryptocurrency with a fluctuating worth pursuant to the contract, the courtroom needed to decide tips on how to compensate the plaintiffs for his or her loss, which required two steps: “First, the Courtroom should discover a dependable cryptocurrency valuation supply to make sure the correct enter of values. Then the Courtroom should verify the correct technique for calculating damages.”  The courtroom utilized CoinMarketCap, a web site posting day by day cryptocurrency pricing information, as its valuation supply, noting different courts had accomplished so, and Congress had expressed approval of the web site in laws. 
Extra considerably, the courtroom additionally decided that the ID Tokens provided by EverID had been securities as a result of they had been “funding contracts” topic to regulation beneath the Securities Act of 1933 and the Trade Act of 1934. Damages subsequently must be calculated beneath Delaware’s present 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 appeared 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 based mostly 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 supply software program and consulting providers in change for cryptocurrency constituted an funding of cash. Second, the courtroom discovered the Token ID cryptocurrency amounted to a typical 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 based mostly on their expectation to be paid in eventual distributions of ID Tokens after the ICO. This expectation isn’t any completely different than that of a standard 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 beneath the related agreements, the courtroom utilized present Delaware regulation 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 based mostly on that, finally 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 belongings could also be categorized, whereas acknowledging that some cryptocurrencies — as they acquire widespread adoption — might shift from being categorized as securities to commodities. However early-stage cryptocurrencies whose use is tied to a particular platform might represent securities, not less than beneath 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.
Vital 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, which means that the plaintiffs’ “funding” was essentially speculative based mostly on future efficiency, akin to the acquisition of a safety, and never the acquisition of an present commodity. Beneath the courtroom’s framework, pre-ICO agreements to buy cryptocurrency might extra seemingly than not be correctly categorized as securities. Even post-ICO purchases, nevertheless, might represent securities beneath 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 seemingly constitutes a purchase order of securities.
Beneath this courtroom’s evaluation, as a cryptocurrency grows and reaches widespread adoption, nevertheless, it may well transition from a safety to an asset. Whereas the courtroom on this case didn’t delineate precisely when such a transition happens, the unbiased use of the foreign money as a unit of change is probably going indicator. Beneath the courtroom’s framework, there’s a clear distinction between bitcoin or ethereum — currencies which are accepted by some distributors and function a unit of change 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 might classify as belongings, smaller tokens created by startups usually tend to be securities, particularly when bought on the pre-ICO stage.
Cryptocurrency issuers and corporations contemplating ICO occasions ought to pay attention to this courtroom’s ruling and be aware that different courts and regulators might not categorically classify cryptocurrencies as belongings or securities however might as an alternative take a look at the person circumstances of every case together with the opportunity of a fluid evolution. Corporations wishing to realize a sure classification ought to take efforts to exhibit their cryptocurrency is or is just not a safety beneath the courtroom’s framework. On the similar time, traders ought to make the most of the courtroom’s framework to judge potential cryptocurrency investments and the protections accessible to them. The courtroom’s opinion supplies 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 typical enterprise and is led to count on income solely from the efforts of the promoter or a 3rd social gathering.'”) (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946)).
 Id. at *11.
 Id. at *15.