Bancor Protocol Lawsuit Dismissed by Texas Federal Judge Over Jurisdiction Issues
Texas Federal Judge Robert Pitman has dismissed a securities class action against the operators of the Bancor cryptocurrency protocol. The ruling followed the recommendation of U.S. Magistrate Judge Mark Lane, who concluded that the transactions at the heart of the lawsuit do not qualify as domestic under the Morrison standard set by the U.S. Supreme Court.
In his decision, Judge Pitman adopted Judge Lane’s report, which recommended dismissing the lawsuit without prejudice. The plaintiffs had filed the suit against BProtocol Foundation, LocalCoin Ltd., and their operators, claiming to have incurred losses while trading on the Bancor Protocol, an automated platform for crypto asset trading.
The defendants contended that the case should be dismissed due to a lack of personal jurisdiction and argued that U.S. securities laws do not apply to their activities conducted outside the United States. Judge Lane’s report outlined that while the plaintiffs had shown sufficient evidence that Bancor Protocol had connections to the U.S. through LocalCoin and BProtocol, these connections did not extend to the individual defendants. No direct interactions between the individual defendants and the U.S. were alleged, leading Judge Lane to assert that the claims of “effective day-to-day control” over Bancor were too vague and did not meet legal standards for specific jurisdiction.
Furthermore, Judge Lane indicated that personal jurisdiction could not be established over LocalCoin and BProtocol because the plaintiffs failed to demonstrate that they were harmed by the defendants’ U.S. contacts. The report noted that plaintiffs did not claim to have been influenced to invest based on any conferences hosted by the defendants or that they were specifically targeted as U.S. investors. Most of the communications cited in the complaint were social media posts accessible globally, not tailored to American audiences.
On the matter of whether the investments constituted domestic transactions subject to U.S. federal securities laws, Judge Lane sided with the defendants. He referenced the Morrison v. National Australia Bank Ltd. case, which delineated that such laws apply only to securities listed on domestic exchanges or domestic transactions involving other securities. The defendants argued that the plaintiffs’ claims did not meet this standard, as there were no factual assertions indicating that the obligations of the investments were formed within U.S. territory.
The plaintiffs contended that their actions—investing from the U.S. and accepting terms via computer—should classify these transactions as domestic. However, Judge Lane countered that this interpretation could erroneously categorize any online transaction as domestic.
The plaintiffs also pointed out that the transactions in question are recorded on the Ethereum blockchain, with a higher concentration of validating nodes in the U.S., suggesting a domestic nature. Nevertheless, Judge Lane noted that while such arguments were considered valid in other cases, like Williams v. Binance, they might not always suffice to determine the domesticity of a transaction solely based on server locations.
Judge Lane acknowledged the complexities of the case, particularly regarding personal jurisdiction and extraterritoriality. He emphasized the need for caution in establishing legal precedents that could extend U.S. law to foreign entities operating in the increasingly global and decentralized cryptocurrency market. He remarked that the appropriate scope of American law should be delineated by the legislature rather than the courts.
In conclusion, Judge Lane’s report highlighted that the individual defendants—who are citizens of Israel, with LocalCoin being an Israeli corporation and BProtocol a Swiss entity—are not subject to U.S. legal authority under the current framework. He noted that while the issues at stake were challenging, the court lacked the jurisdiction to impose American laws on foreign defendants outside of a clearly defined legal context.
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