In re Bibox Grp. Holdings Ltd. Sec. Litig.

• Decision Date: 16 April 2021
• Docket Number: 20cv2807 (DLC)
• Citation: 534 F.Supp.3d 326
• Parties: IN RE BIBOX GROUP HOLDINGS LIMITED SECURITIES LITIGATION
• Court: U.S. District Court — Southern District of New York

534 F.Supp.3d 326

IN RE BIBOX GROUP HOLDINGS LIMITED SECURITIES LITIGATION

20cv2807 (DLC)

United States District Court, S.D. New York.

Signed April 16, 2021

For lead plaintiff Alexander Clifford: Kyle William Roche, Edward John Normand, Velvel (Devin) Freedman, Alex Potter, Roche Cyrulnik Freedman LLP, 99 Park Avenue, Suite 1910, New York, NY 10016, Phillipe Selendy, Jordan Goldstein, Spencer Gottlieb, Michelle Foxman, Selendy & Gay PLLC, 1290 Sixth Avenue, 17th Floor, New York, NY 10104.

For defendants: Sigmund S. Wissner-Gross, Ashley L. Baynham, Brown Rudnick LLP, Seven Times Square, New York, NY 10036.

OPINION AND ORDER

DENISE COTE, District Judge:

Alexander Clifford brings this putative class action against defendants Bibox Group Holdings Limited, Bibox Technology Ltd., Bibox Technology Ou, Wanlin "Aries" Wang, Ji "Kevin" Ma, and Jeffrey Lei (collectively, "Bibox"), alleging that Bibox violated a number of provisions of federal securities law and state Blue Sky laws in its issuance of crypto-assets and its operation of an exchange for trading in crypto-assets. Because the plaintiff lacks standing to pursue most of his claims and his remaining claims are barred by the statute of limitations, Bibox's motion to dismiss is granted.

Background

The following facts are taken from plaintiff's amended complaint. They are assumed to be true.

I. The Nature and Function of Crypto-Assets

Crypto-assets, which are also called "cryptocurrency" or "tokens", are decentralized digital commodities that rely on a technology called the "blockchain." A blockchain is a decentralized electronic ledger that allows for secure and reliable tracking of the ownership and transfer of each individual unit of the crypto-asset. This tracking and validation process requires computer resources. In order to secure the requisite computer resources, blockchains are often designed such that people who volunteer their computer resources to complete the required validation are rewarded with new units of the crypto-asset. This process is known as "mining." But creation through mining is not an inherent property of crypto-assets, and crypto-assets can also be created centrally by a single entity.

The blockchain mechanism allows for the use of crypto-assets as secure stores of value and media of exchange that do not rely on centralized government or private control. Bitcoin, the first and most popular crypto-asset, is an example of a crypto-asset that serves primarily as a medium of exchange.¹ Another popular crypto-asset is Ethereum, which is built on a different blockchain from Bitcoin and has some additional features but otherwise functions similarly.

Although crypto-assets originated as a medium of exchange, the continued development of blockchain technology has allowed for several other uses for crypto-assets. One such use for blockchain technology is the so-called "smart contract," which essentially functions as an automated, secure digital escrow account. A smart contract allows the parties to define the terms of their contract and submit the crypto-assets contemplated in the contract to a secure destination. The smart contract then automatically distributes the crypto-assets to the appropriate party upon the satisfaction of the relevant conditions precedent defined in the smart contract. Crypto-assets based on the Ethereum blockchain, among others, are capable of smart contract functionality. Crypto-assets may also be used as "utility tokens," which allow the holder to use or access a certain product or service. Finally, another use for crypto-assets is as speculative "security tokens." Security tokens, like conventional securities, are issued by an entity seeking to raise funds to support a given project and are purchased by investors in the hope that their value will increase as their issuer develops its project. But unlike conventional securities, they do not give the holder an ownership stake in, or a share of the revenue of, an underlying corporate entity.

II. The ERC-20 Platform and BiBox

In 2015, the ERC-20 platform was launched. ERC-20 is not itself a crypto-asset but rather a platform for the creation of new tokens. ERC-20 allows for the creation of customizable tokens that operate on the Ethereum blockchain. Various properties of ERC-20 tokens are customizable. Since ERC-20 tokens rely on an existing blockchain and underlying technical architecture, new tokens can be created quickly by users with minimal technical expertise. But because all ERC-20 tokens operate on the Ethereum blockchain and must comply with the ERC-20 standard, all ERC-20 tokens have certain similarities.

Responding to the increased demand for crypto-assets and the new ease of creating tokens on the ERC-20 platform, hundreds of new tokens were issued between 2016 and 2018. These new tokens were frequently listed on crypto-asset exchanges, where they could be exchanged for other crypto-assets or for traditional currency.

Some issuers of crypto-assets also operated crypto-asset exchanges, while others did not.

Bibox was among the entrants into the crypto-asset market. In October 2017, Bibox launched a crypto-asset exchange. In order to fund the development of the exchange, Bibox also issued a token of its own, which it called the "Bibox Token" or "BIX." BIX, an ERC-20 token, could be traded for other crypto-assets on the Bibox exchange. Transactions involving BIX would be offered discounted transaction fees on the Bibox exchange. Bibox also promised to use a portion of its profits to buy back BIX tokens, thereby raising the price and creating a return for early investors. While BIX was built on blockchain technology and operates on the Ethereum blockchain, BIX's implementation of blockchain technology was different from the blockchain technology used in other crypto-assets such as Bitcoin and Ethereum. The BIX tokens that Bibox offered to the public were created centrally, as opposed to via the decentralized mining process used for Bitcoin and Ethereum.

The BIX token was launched in October 2017, and Bibox raised approximately $19 million from its initial offering of BIX. BIX was made available for trading on its exchange on November 24, 2017. Bibox promoted BIX via its social media accounts and at various conferences in the United States.

In 2018, the plaintiff traded in BIX on the Bibox exchange. In two separate transactions on June 10 and October 27, 2018, the plaintiff purchased BIX using bitcoin. On December 12, 2018, the plaintiff sold BIX in exchange for bitcoin.

III. Other Tokens Offered on Bibox

In addition to claims related to BIX, the complaint alleges various claims related to five other tokens that were based on the ERC-20 platform, operate on the Ethereum blockchain, and offered for trading on the Bibox exchange. These five tokens -- known as EOS, TRX, OMG, LEND, and ELF -- are described below.

A. EOS

The EOS token is a crypto-asset that was created by the issuer Block.one and initially offered for sale in June 2017. EOS has been listed for trading on the Bibox exchange since December 3, 2017. Block.one described EOS as a technologically superior competitor to Bitcoin and Ethereum. Like BIX, EOS was created via a centralized process, rather than through the decentralized mining process used to create Bitcoin and Ethereum.

In 2019, the Securities and Exchange Commission ("SEC") concluded that EOS was a security under the 1933 Securities Act. The SEC further found that Block.one had violated the 1933 Securities Act by selling EOS as an unregistered security. Block.one paid a $24 million settlement to the SEC for its securities law violations related to its sale of EOS. Block.one is not a defendant in this litigation.

B. TRX

The TRX token is a crypto-asset created and issued by the TRON Foundation. TRX was first offered for sale on August 31, 2017 and was listed on the Bibox exchange beginning on February 11, 2018. Bibox promoted TRX via its website. TRX was advertised as a secure, decentralized, and inexpensive blockchain-based mechanism for the distribution of digital content over the internet, and the TRX token was issued as a means of funding the development of the TRX system. Like BIX, the TRX tokens were generated through a centralized process rather than the decentralized mining process. The TRON Foundation is not a defendant in this litigation.

C. OMG

The OMG token, also known as OmiseGO, is a crypto-asset developed and issued by Omise, a provider of e-commerce services operating primarily in Asia. OMG was advertised as a crypto-asset designed to interface with Omise's existing e-commerce services and facilitate online transactions by customers without bank accounts. Investors in OMG stood to profit from a successful launch of OMG and improvements to the Omise system that increased the market price of OMG. OMG was first sold to the public on September 9, 2017 but was not listed on the Bibox exchange until July 10, 2019. Like BIX, OMG was issued through a centralized process, rather than a decentralized mining process. Omise is not a defendant in this litigation.

D. LEND

The LEND token, developed and issued by a company called ETHLend, is a crypto-asset designed to facilitate secure online loan transactions. LEND was initially issued in November 2017 and was listed on the Bibox exchange on December 10, 2017. LEND was issued through a centralized process. ETHLend is not a defendant in this litigation.

E. ELF

The ELF token was developed and issued by an entity called aelf and initially offered for sale in December 2017. According to a white paper published by aelf, ELF was "envisioned as ... a highly efficient and customizable [operating system]." Bibox listed ELF on December 21, 2017, soon after it was offered to the public. ELF was issued through a centralized process. aelf is not a defendant in this litigation.

IV. The Status of Crypto-Assets as Securities and the SEC's 2019 Guidance

A complex patchwork of federal and state laws regulates the issuance and sale of...