It is a routine scenario in breach of contract cases that the plaintiff alleges she made her performance but the defendant refused to pay. Nothing uncommon about that. In the corporate haven of Delaware, it is also not uncommon for such cases to present a “failure-to-deliver-securities” issue. That is, the payment under the contract was not to be in cash, but rather in securities such as stock. This presents a valuation question when fashioning a monetary award for plaintiff, as the price of securities fluctuates over time. The law of Delaware selects the highest market price of the securities occurring within a “reasonable time” after plaintiff’s discovery of the breach. This price is then multiplied by the number of shares the plaintiff was to be paid, and the court awards plaintiff this cash amount.

This standard procedure was thrown for a loop last month in a Delaware case presenting a novel issue: How to apply the valuation concept when the payment was to be made not in stock, but cryptocurrency.

Under the contract in question, the defendant’s payment was to be made in a cryptocurrency after it conducted an ICO and other token distribution events. This raised the issue of whether the typical approach in securities cases should be used, given the lack of guidance on whether digital assets are to be considered “securities” like stocks and bonds. As the court remarked:

Incidentally, the lack of regulatory policing of cryptocurrency is not without its problems and is on full display in the instant litigation. Before the Court can fashion a proper damages award, it must first determine how to classify cryptocurrency, i.e., is it a security/investment contract, a commodity, property, or currency?

The court ultimately ruled that the crypto in question was a security under the law. It relied on the fact that other courts have classed cryptocurrencies as securities under the traditional Howey test (discussed here); that the contract in question involved an ICO (a means of raising capital and thus indicative of the presence of a security); and that the contract itself applied Rule 144 of the Securities Act of 1933. And so the same approach in the failure-to-deliver-securities cases would apply.

At this point, the only remaining question was where to look to establish the market price of the cryptocurrency in question? With stocks, for example, resort is easily made to the national exchanges for an indisputable market price. With crypto, again, this presented a novel question. The court settled on using CoinMarketCap to determine the market price, given other courts’ use of it for valuation and its frequent use by major news publications to report on the prices of virtual currencies.

The case is significant given the current debate over whether or not crypto should be regulated as a security. In situations like this, where a novel question is first addressed by the courts, the earliest decisions can have long-lasting effects, given the law’s heavy reliance upon precedent.