SUIT OVER BLOCKCHAIN PROPERTY RIGHTS SURVIVES DISMISSAL BID

Law360 (August 10, 2021, 9:12 PM EDT) — A cryptocurrency enthusiast who took advantage of a bug in a blockchain organization’s code to mint millions of tokens can pursue claims that he is entitled to the tokens, a California federal judge found, saying the case raises novel questions about digital property.

Mark Shin has adequately alleged that ICON Foundation was wrong to get his crypto-asset accounts frozen after he took advantage of its flawed code, U.S. District Judge William H. Orrick said Monday. The case addresses property rights concerning blockchains and decentralized technology, a relatively fresh legal frontier.

Shin “appears to raise issues of first impression: both parties attempt to apply common law principles to the unique rules of the ICON Network to accuse the other of, among other things, interference with property rights,” the order said. “This area of law, and the rights of the parties, will benefit from a more complete factual record before decisions on the merits are made.”

For now, Shin’s allegations are enough to allow the case to go forward, Judge Orrick said in denying the bulk of ICON Foundation’s motion to dismiss the claims.

According to court filings, Shin discovered a bug in the ICON Network’s code after a software update. ICON bills itself as a blockchain protocol for decentralized applications and also has a native digital asset known as ICX, its website says.

The bug allowed Shin to create 14 million new ICX tokens, many of which he then transferred to the cryptocurrency exchanges Kraken and Binance, according to court documents.

“Shin acknowledges that ‘the authors and developers of the [software update] may not have intended for the network proposal to behave as it did,'” the order noted, citing Shin’s complaint.

But the code changes had been properly agreed to and adopted, so Shin has argued that he is the new tokens’ lawful owner.

ICON disagreed, and the organization asked Binance and Kraken to have Shin’s accounts frozen, saying he had attacked the network, Shin alleges. ICON later proposed an update, dubbed the Revision 10 Proposal, to correct the bug that Shin had exploited.

Shin alleges that these actions fly in the face of ICON’s claim of “decentralized” governance. ICON’s actions also wrongly interfered with his alleged ownership rights over the tokens, Shin argued.

He claims conversion and trespass to chattel for the tokens frozen in his ICON wallet and frozen in his accounts with the outside cryptocurrency exchanges. His allegations are good enough to move forward, Judge Orrick said.

“It is clear that the parties strongly dispute whether Shin’s actions in acquiring the ICX tokens were proper and whether common law principles should apply in this unique context,” Judge Orrick said. “The inquiry at this stage, however, is whether Shin has plausibly alleged possessory interest in the ICX tokens. I find that he has.”

“Whether Shin’s alleged ownership right is in fact legitimate cannot, and need not, be resolved on a motion to dismiss,” the judge added.

The state of Colorado seems to think Shin’s ownership claim is not legitimate; the District Attorney’s office sued Shin at the end of June alleging cybercrime, theft and money laundering in connection with the minting of the tokens. The state-level case is proceeding in lieu of an earlier-filed federal case against Shin by the U.S. Department of Justice, court filings show. 

Colorado has alleged that Shin “unlawfully, feloniously and knowingly” committed theft by exercising control over the tokens. The case is currently ongoing. 

Kyle Roche of Roche Freedman LLP, who is representing Shin, said the civil case in California presents key questions about blockchain and property rights.

“It’s a seminal case for establishing property rights on the blockchain,” Roche told Law360 on Tuesday. “Essentially, if the blockchain says you have certain tokens, and you didn’t take those tokens from another individual, the rules of blockchains are that that property belongs to you,” unless there are additional user agreements for the network, he said.

Ted Normand, also of Roche Freedman, said the case also foregrounds questions about decentralized governance.

“If you’re a DeFi company issuing assets … you can’t have a decentralized ecosystem only when it’s convenient,” he told Law360.

Counsel for ICON called the ruling disappointing but noted the early stage of the litigation. 

“We’re disappointed, but at this early stage the judge was required to accept Shin’s allegations as true despite their falsity,” Christopher Wanger, a partner at Manatt Phelps & Phillips LLP told Law360 on Wednesday. 

Wanger added that the ICON network is indeed decentralized and is governed by 22 different public representatives who aren’t controlled by the ICON Foundation. And ultimately, the debate over decentralization doesn’t excuse Shin’s actions, Wanger said. 

“Shin’s claims relating to the decentralized nature of the ICON network ultimately are immaterial to his property claims,” he said. “The case is interesting because it involves the application of old rules to new technology — blockchain and cryptocurrency. But ultimately the old rules prevail — you don’t keep things that don’t belong to you.”

ICON Foundation is represented by Christopher L. Wanger and Misa K. Eiritz of Manatt Phelps & Phillips LLP and by Jason Gottlieb and Michael Mix of Morrison Cohen LLP.

Shin is represented by Kyle W. Roche, Edward Normand, Ivy T. Ngo, Daniel M. Stone and Katherine Eskovitz of Roche Freedman LLP.

The case is Mark Shin v. ICON Foundation, case number 3:20-cv-07363 in the U.S. District Court for the Northern District of California. The Colorado state case is People of the State of Colorado v. Mark Shin, case number D32021CR1445 in the District Court for the County Of Arapahoe, Colorado.

–Editing by Peter Rozovsky.

 
https://www.law360.com/articles/1411490
Update: This story has been updated with comment from ICON Foundation’s counsel and information about the Colorado case.

 

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