Landmark Jury Verdict Finds Digital-Asset Products Linked to Cryptocurrency Mining Are Not Securities

Winston & Strawn LLP | Michael Tomasulo | Nov 8, 2021

On November 2, a Connecticut jury found that a series of digital-asset products linked to a cryptocurrency mining operation did not count as securities. The landmark jury verdict is among the first to decide whether cryptocurrency assets and products may count as securities.

The case presented the novel issue of whether the digital assets of GAW Miners LLC, a virtual mining company, were considered investment contracts.

The company originally sold physical mining equipment but began to offer a series of digital assets to customers. These assets included “hashlets,” or portions of the supposed computing power the company owned, “Hashpoints,” which could be converted into GAW’s “Paycoin” currency, and “Hashtakers” for storing Paycoin.

In a class-action suit, customers stated that these digital assets were unregistered securities being sold to defraud customers because GAW did not have the physical equipment they purported to sell. Ultimately, the jury found that the products were not unregistered securities, despite contrary findings by the SEC in a related action.

Continue to the full article –> here

---

Law360 | Elise Hansen | Nov 2, 2021

Crypto Mining-Linked Products Weren’t Securities, Jury Finds

Law360 (November 2, 2021, 6:03 PM EDT) — A series of digital-asset products linked to a cryptocurrency mining operation do not count as securities, a Connecticut jury found Monday in what a defense lawyer called a first-of-its-kind verdict.

The jury on Monday cleared Stuart Fraser of liability for GAW Miners LLC’s alleged misconduct and found the products in question, which included a virtual currency and a digital wallet, were not investment contracts. Whether certain crypto-related products are securities has been a hot-button question among regulators and in the cryptocurrency industry.

See:  Top US regulator tells crypto exchanges they need to ‘come in and talk to us’

“It’s the first case that we know of where a jury addressed whether cryptocurrency products were securities”

Daniel Weiner of Hughes Hubbard & Reed LLP told Law360 on Tuesday. Weiner helped represent Fraser.

The case, which dates back to 2016, centers around cryptocurrency mining operations, which refers to the use of computing power to verify cryptocurrency transactions.

GAW Miners LLC initially sold physical mining equipment to customers but, along with a company called ZenMiner LLC, began offering remote management software that purportedly allowed customers to control their mining hardware online, according to the class of customers bringing the action.

The customers alleged GAW and ZenMiner never actually had as much equipment as they claimed. GAW Miners and ZenMiner were found in default earlier in the case, court filings show.

Faced with potential demands to send customers equipment they didn’t have, the companies turned to selling “hashlets,” which gave purchasers a portion of the computing power the companies purportedly owned without receiving the physical hardware, according to the suit.

See:  As regulators circle above, how should the DeFi industry respond?

The plaintiffs alleged that even with the “hashlets,” the companies did not have as much computing power as claimed and instead used the money from new customers to pay off older customers.

GAW Miners and ZenMiner also sold so-called “Hashpoints,” which the purchasers described as promissory notes that could be converted into the companies’ virtual currency, Paycoin. “Hashstakers” were virtual wallets for storing Paycoin.

Homero Joshua Garza, the companies’ co-founder, pled guilty to wire fraud in a related criminal action in 2017 and agreed to pay damages in a case brought by the U.S. Securities and Exchange Commission. He was dropped from the customers’ case in 2016.

That left Fraser, a 41% investor in GAW Miners, as the sole remaining defendant in the trial.

The customers alleged all four of the products — Hashlets, Hashpoints, Paycoin and HashStakers — were unregistered securities, and that Fraser was liable for the sales because his role at the companies was comparable to that of a partner or director.

But the jury disagreed, finding none of the products were securities, not even Hashlets, which the SEC described as a security in its case against Garza. Weiner said the defense had argued, apparently convincingly, that Hashlets were not a passive investment and that customers actively controlled their investment.

Continue to the full article –> here

---

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada’s Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

Source: https://ncfacanada.org/landmark-jury-verdict-finds-digital-asset-products-linked-to-cryptocurrency-mining-are-not-securities/