To date, virtual currency exchanges in the United States have structured their operations in an effort to avoid being required to register as an exchange with either the Securities and Exchange Commission or the Commodity Futures Trading Commission. While these efforts may be entirely legal, without the regulatory protections of exchange registration, they could create enhanced risks for customers, particularly in the case of a fund's insolvency or collapse. A recent federal case highlights these risks and provides a roadmap for asserting personal jurisdiction over a virtual currency exchange.
The plaintiff here, a Colorado resident, sought to bring a class action in federal district court for the District of Colorado against the operators of a defunct online digital currency exchange after it froze customer funds and the plaintiff was unable to withdraw his Bitcoin. The plaintiff asserted state law claims for breach of contract, conversion, constructive fraud, and unjust enrichment. Neither the exchange nor any of the other named defendants responded to the plaintiff's complaint or otherwise made an appearance before the court, so the plaintiff moved to enforce a default judgment against them. Before the court could rule on that motion, it first had to consider the fundamental due process question as to whether the court had personal jurisdiction over the defendants.
Personal jurisdiction comports with the constitutional guarantee of due process when a defendant has minimum contacts with the forum state (here, Colorado) and when those contacts are such that assuming jurisdiction does not offend "traditional notions of fair play and substantial justice." Minimum contacts may be established under the doctrines of general jurisdiction or specific jurisdiction. Where general jurisdiction is asserted over a nonresident defendant who has not consented to suit in the forum, minimum contacts exist if the plaintiff demonstrates that the defendant maintains "continuous and systematic general business contacts" in the state. Because the plaintiff did not argue that the defendants were subject to general jurisdiction in Colorado, the court limited its discussion to the issue of specific jurisdiction.
Specific jurisdiction exists only if a lawsuit arises out of or relates to the defendant's contacts with a particular forum. First, the court was required to determine whether a defendant has such minimum contacts with Colorado that the defendant "should reasonably anticipate being haled into court" there. Specifically, the court must determine whether the defendant purposefully directed its activities at residents of the forum, and whether plaintiff's claim arises out of or results from actions by the defendant that create a substantial connection with the forum state." Second, if the defendant's actions create sufficient minimum contacts, the court must consider whether the exercise of personal jurisdiction over defendant offends "traditional notions of fair play and substantial justice." i.e., whether the court's exercise of personal jurisdiction over the defendant is reasonable in light of the circumstances of the case. To satisfy this latter test, the court must consider whether the defendants' conduct indicated any continuing relationship with forum state residents, deliberately exploited the forum state's market, or suggested intentional conduct that targeted and had substantial harmful effects in the forum state.
In this case, the plaintiff merely alleged that he created an online account with the exchange. According to the court, he did not identify what this process included, what information defendants collected about accountholders, or whether the exchange even knew he was in Colorado. Assuming that the plaintiff entered into a contract with the exchange, the court stressed that fact alone is insufficient to establish a continuing relationship. The court also found that the plaintiff's complaint offered no evidence that the account creation process involved any negotiations or that the parties contemplated any future consequences. The plaintiff did not provide the terms of any contract between the parties. He did not indicate that the defendants engaged in any solicitation or direct communication that would show a course of dealing among them. Furthermore, the plaintiff failed to show that the defendants purposefully directed their activities at Colorado or knew that the brunt of plaintiff's injury would be felt there. Drawing an analogy to older cases involving other types of internet-based businesses, the court remarked that the emphasis is on "the internet user or site intentionally directing his/her/its activity or operation at the forum state rather than just having the activity or operation accessible there." Accordingly, the court determined that it did not have personal jurisdiction over the defendants and dismissed the case without prejudice.
It is possible that the court would have ruled differently had the plaintiff pleaded additional facts to show greater interaction in Colorado, and by dismissing without prejudice, it left the door ajar for plaintiff to do just that. It is also possible that the plaintiff could find another more appropriate forum, either elsewhere in the United States or abroad; the court was unable to find such a forum here due to the paucity of the pleadings. While the case does not blaze a new legal trail, it underscores the difficulty of pursuing litigation against virtual currency exchanges—many of which are decentralized, do not engage in traditional marketing activities and have no traditional physical presence anywhere. Even were the court to enter a default judgment against a defunct exchange, collecting on that judgment poses its own separate challenges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
