Recently, a federal judge in Texas, USA, dismissed a securities class action lawsuit against the Bancor protocol and its founders. The case stems from the "impermanent loss protection" feature that Bancor once launched, promising to provide protection for cryptocurrency investors to prevent temporary losses caused by market fluctuations. This feature attracted a large number of liquidity providers, and the platform funds once exceeded US$2.3 billion. However, in 2022, Bancor suspended the feature under market pressure, causing investors to suffer losses. Investors therefore filed a lawsuit, accusing Bancor of violating securities laws, fraud, and breach of contract.
Here Aiying reminds industry practitioners that although Bancor is a decentralized protocol, the defendant in the class action lawsuit is not the protocol itself, but the companies, founders and team members related to its development, operation and promotion. Decentralized protocols are usually developed by an initial team or company and play a key role in early operations. Therefore, they will become the target of legal proceedings, and decentralization does not mean complete exemption from liability, especially when the governance and control of the protocol are still partially concentrated in the development team.
However, later in the case, the court finally ruled that Bancor and its founders were foreign entities, mainly operating in Israel and Switzerland, and were not sufficiently connected to the United States. The U.S. court had no jurisdiction and could not apply U.S. securities laws. The court recommended that the plaintiffs file a lawsuit in Israel, and the case was therefore dismissed in the United States.
I. Key points of the court's ruling: issues of jurisdiction and applicable law
The court emphasized that although the plaintiffs were American investors, this fact alone was not enough to prove that the case was closely related to the U.S. judiciary. The principle of jurisdiction requires that the defendant have a substantial connection with the place of litigation, and most of Bancor's transactions and operations take place outside the United States, which does not meet this condition.
At the same time, this case also reflects the limitations of the "extraterritorial effect" of U.S. securities laws. The Securities Act of 1933 and the Exchange Act of 1934 are the core laws of the U.S. securities market, but their scope of application is mainly limited to securities issuance and trading activities within the United States. These laws generally do not apply to foreign companies or cross-border projects unless the transaction clearly occurs in the United States or has sufficient connection with the United States.
Aiying believes that the court's ruling highlights the limitations of the application of U.S. securities laws, especially in cross-border crypto projects. Despite the global liquidity of crypto assets, U.S. securities laws do not automatically apply to all projects related to U.S. investors unless it can be proved that the activities of these projects are substantially related to transactions within the U.S. jurisdiction. This also means that operators of cross-border crypto projects are not necessarily subject to U.S. law, but may need to comply with the laws of their country of residence or face legal proceedings in other countries.
2. How to avoid U.S. jurisdiction
To avoid U.S. jurisdiction like Bancor, the key is to take a series of measures to ensure that the project is decoupled from U.S. laws and regulations as much as possible. Bancor was able to successfully avoid the jurisdiction of U.S. courts mainly because its operating entities and founders are located in Israel and Switzerland, and its project activities mainly take place outside the United States. This enables Bancor to effectively avoid the impact of U.S. securities laws through legal and territorial strategies. To emulate Bancor's approach, the following measures can be taken:
1. Set up the company in a country other than the United States
Like Bancor, set up the company's registration and operations in other jurisdictions, such as Switzerland, Israel or other countries that are more friendly to crypto projects. This can effectively prevent the project from being directly subject to U.S. law.
2. Make sure the founders and team are not in the United States
3. Avoid providing services to US investors
Limit US investor participation: Bancor explicitly states that it does not provide services to US citizens or residents, and strictly restricts their participation in token sales. You can ensure that US investors cannot participate in token sales or use your platform through user agreements, KYC (know your customer) procedures, geo-blocking technology, etc.
Geo-blocking: Prevent US users from accessing the project website or participating in the token sale through IP address filtering and technical means. This technical means can reduce your project's exposure to the US market.
4. Do not promote in the US
Avoid any form of marketing or promotion in the US, like Bancor. Ensure that the project's promotional activities are not promoted through US social media, advertising platforms or news channels to avoid attracting the attention of US investors.
5. Use the "Regulation S" exemption
If you cannot completely avoid international market contact, you can use the Regulation S exemption in the US securities law like Bancor. Regulation S allows securities to be issued in markets outside the United States, but requires you to ensure that these securities do not flow back to the United States. This can reduce conflicts with US securities laws.
6. Token design avoids being considered a security
7. Choose non-U.S. applicable laws and dispute resolution mechanisms
III. Aiying's compliance recommendations for the industry
1. The importance of compliance review
For practitioners in the crypto industry, compliance is no longer a "remedy" after the success of a project, but should be one of the core tasks before the project goes online. Regardless of the size of the project, a strict compliance review is required before it is launched to ensure that its operating model, legal structure, and promotional materials meet legal requirements. This not only helps to avoid possible legal risks in the later stage, but also enhances the legitimacy and credibility of the project and wins the trust of investors.
Especially in crypto projects that operate across borders, the complexity of compliance will be greatly increased. Different countries have different regulatory requirements for cryptocurrencies and blockchain technology. For example, in some countries, crypto assets may be considered securities and require strict registration and disclosure; in other countries, cryptocurrencies are classified as commodities or property and are subject to different legal systems. This difference means that practitioners must have a deep understanding of the legal framework of each target market, especially those involving securities laws, taxes, anti-money laundering (AML) regulations, and consumer protection laws. Therefore, the compliance team must have cross-border legal experience and keep up with changes in regulatory policies in various countries in a timely manner.
2. Choice of legal dispute resolution mechanism
Cross-border projects often face legal overlaps in multiple jurisdictions, so Aiying suggested that it is crucial to clearly select the applicable legal system and dispute resolution mechanism during the project design phase. Project parties can set in advance which laws apply to project operations through contract terms and user agreements, as well as which country's laws and courts should be used to resolve disputes in the future. This kind of advance planning can not only avoid jurisdictional disputes, but also improve the efficiency of dispute resolution. In the Bancor case, the US court ruled that it had no jurisdiction and recommended that the plaintiff file a lawsuit in Israel. If the project party clearly stipulates the applicable law and jurisdiction at the beginning, it may reduce investors' misunderstanding of jurisdiction issues and avoid legal disputes. Therefore, practitioners can strengthen the design of dispute resolution mechanisms in the following ways: Choosing arbitration instead of litigation: In cross-border situations, arbitration is often more flexible and efficient than litigation. Many projects choose international arbitration as the main mechanism for resolving disputes because it can avoid conflicts in jurisdictions of multiple countries and provide a relatively neutral arbitration platform.
Set clear applicable law clauses: Practitioners can clearly specify in the user agreement or white paper which country's legal system should be applied to the project. This will not only help the project party better control legal risks, but also help users and investors understand their rights and obligations.
Specify the jurisdiction of the court or arbitration institution: Practitioners can specify in the contract which country's court or arbitration institution will be responsible for handling legal disputes in the event of a legal dispute. This can avoid investors from filing multiple lawsuits in courts in different countries in the future, resulting in complicated legal procedures.
When designing these mechanisms, it is also necessary to ensure that they comply with the legal requirements of the country in which they are located and can be truly enforced. For example, some countries may not recognize certain types of arbitration awards, so the project party needs to ensure that its dispute resolution clauses are effective globally.
Fourth, the compliance challenges of cross-border Web3 projects
For cross-border crypto projects, compliance is not a simple task. Different countries have different regulatory laws, especially in the operation of trading platforms or protocols for crypto assets, the issue of territoriality is particularly prominent. Each country's laws have their own standards and requirements, such as which assets are securities and what investor protection measures are required. This means that cross-border crypto projects cannot only consider the regulations of one country, but must ensure that they comply with legal requirements in multiple jurisdictions.
The compliance challenge of cross-border crypto projects also lies in the fact that operators need to understand and comply with the legal requirements of different countries, including securities laws, anti-money laundering regulations, and investor protection regulations. The legal standards of various countries vary greatly. Some countries have relatively loose regulations, while some countries have extremely strict supervision of crypto assets. If these differences are not clear, crypto projects may easily fall into legal disputes or even face the risk of closure.
In addition, cooperation and conflicts between different jurisdictions also make things more complicated. For example, a crypto project may have investors from multiple countries at the same time, which means it needs to deal with the legal requirements of multiple countries at the same time. Some countries may jointly investigate or supervise, while others may conflict with the laws of other countries. In this case, how to balance these legal requirements and reduce legal risks has become a difficult problem that crypto project operators need to pay special attention to.
Judgment: https://ecf.txwd.uscourts.gov/cgi-bin/show_temp.pl?file=30919790-0--83798.pdf&type=application/pdf
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