Superior Court Classifies Cryptocurrency as a Security and Calculates Contract Damages
Diamond Fortress Techs., Inc. v. Everid, Inc., C.A. No. N21C-05-048 PRW CCLD (Del. Super. Ct. Apr. 14, 2022)
Plaintiff Diamond Fortress contracted with the defendant company to provide its software to develop a trading platform for the defendant’s cryptocurrency. In exchange, the defendant agreed to pay plaintiffs in cryptocurrency at the time that defendant made its initial coin offering and at subsequent token distribution events. After the offering and events, the defendant failed, however, to make any payments to the plaintiffs. Plaintiffs filed claims against the defendant for breach of contract, and a default judgment was entered after the defendant failed to appear or respond. After finding that defendant had repudiated and breached the contract, the Court then determined how to calculate damages resulting from breach of a contract to be paid in cryptocurrency, which involved the novel issue under Delaware law of how to classify and value cryptocurrency.
The Court first examined whether the parties’ cryptocurrency-based contract constituted an investment contract governed by federal securities laws. Relying on the U.S. Supreme Court’s investment-contract test in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), the Court found that the cryptocurrency was a security, that the plaintiffs’ economic harm arose from an initial coin offering, that plaintiff Diamond Fortress had committed its software to defendant’s venture as a common enterprise and was exposed to potential financial harm, and that plaintiffs expected to derive profits from the venture. Further, the Court noted that the contract expressly incorporated SEC regulations. To calculate damages, the Court relied on the widely-accepted website CoinMarketCap for historical pricing data on the cryptocurrency, and applied the “failure to deliver securities” damages framework (the “New York Rule”) that adopts the highest market price of a security within a reasonable time of a plaintiff’s discovery of the breach. The Court’s damages calculation for the total amount of cryptocurrency that the defendant had agreed to pay under the agreement was $25.125 million.
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