by John Bender and Jack Lovejoy

Litigation involving cryptocurrency is increasing in Washington and around the country—both between private parties and in regulatory enforcement actions brought by the U.S. Securities and Exchange Commission (“SEC”), the Washington Department of Financial Institutions (“DFI”), and similar agencies. This trend will only continue to increase as entrepreneurs and investors flock to the new technology and its potentially game-changing applications.

Here in Washington, DFI has been active in enforcing state securities laws against companies and their principals who have sought to raise capital through initial coin offerings (“ICOs”) and related activity. Like the SEC, DFI has concluded that “the offer and sale of digital assets in ICOs or other token sales is frequently subject to regulation under state and federal securities law.”[1] The answer to this question in practice depends on the circumstances, including the purpose of the transaction.

Although the crypto industry is still in its infancy, DFI has already developed quite a track record in bringing enforcement or investigatory actions against parties for engaging in unregistered crypto offerings. The following are a few notable examples:

• In re Dragonchain, Inc., Order No. S-18-2433-21-CO01: DFI entered into a Consent Order with a Bellevue, Washington-based blockchain platform for allegedly failing to register a 2017 ICO that raised $12.7 million from 5,000 investors.
• In re Unikrn, Order No. S-18-2441-20-CO01: DFI entered into a Consent Order with Unikrn, Inc., for allegedly failing to register a $47 million offering of tokens that were designed for use on the company’s e-sports betting platform.
• In re RChain Cooperative, Order No. S-18-2463-20-CO01: DFI entered into a Consent Order with a Seattle-based cooperative association operating a blockchain network with over 1,700 members. DFI alleged that the company raised $30 million through multiple unregistered offerings of tokens backed by the Ethereum blockchain.
• In re Duber Technologies, Statement of Charges, No. S-18-2475-19-SC01: DFI charged a Washington company planning to operate a digital platform for the cannabis industry with engaging in unregistered securities transactions by offering the sale of digital tokens designed to function as a medium of exchange on its platform. The offering was advertised nationally but was later discontinued.

These cases illustrate that DFI has interpreted the definition of a “security” broadly under state law. They further illustrate that risks faced by businesses and entrepreneurs in the crypto space as a result of that broad interpretation.

There is no indication that the law in Washington will change to make crypto offerings any easier. And, as we explained in a previous post, the recent trend in the Washington State Supreme Court has been to make it easier for private parties to bring claims under the Securities Act of Washington. We encourage any person or business entering the crypto space, facing legal challenges in this new arena, or wondering whether they have a securities law claim to contact us.

[1] Washington Department of Financial Institutions, Digital Assets and Securities Laws, April 3, 2019, at https://dfi.wa.gov/sites/default/files/digital-assets-securities-laws.pdf.