Coinbase, Mt. Gox, and Gemini are well-known virtual currency exchanges. It is through these exchanges that cryptocurrency users may execute transactions (e.g., a Bitcoin transfer—whereby a transaction announcement occurs on the blockchain). As noted in a previous blog post, cryptocurrency transactions are pseudonymous, not anonymous. Further, cryptocurrency users do not have Fourth Amendment privacy interests in their virtual currency transaction records. See Bare Bitcoins – No Fourth Amendment Privacy in Virtual Currency Records. However, in the civil context, are litigants privy to blockchain information to identify users? Last Friday, a federal district court dealt with whether a civil litigant could apply for leave to serve a third-party subpoena on certain cryptocurrency exchange platforms.

Strobel v. Lesnick, et al.

A. Background

In Strobel, the plaintiff, Neal Strobel, a resident of Washington state, invested approximately $58,000 in cryptocurrency through the website worldofcryptomining.com (WOCM). The cryptocurrency was transferred to a WOCM wallet. Mr. Strobel invested after being recruited by Glen Lesnick who promised certain big returns. Unfortunately, after Mr. Strobel’s investment, the cryptocurrency investment was moved from the WOCM wallet to two primary wallets: one to a Gemini wallet and the second to a Coinbase wallet.[1]

Following certain suspect events, Mr. Strobel filed a civil lawsuit in the Northern District of California against Mr. Lesnick, Teresa Lesnick, Joseph Carr (who allegedly sold Mr. Strobel a Forex trading software), as well as Doe defendants. Subsequently, Mr. Strobel filed an application to subpoena Coinbase and Gemini to determine the owners of the wallets.[2]

B. Analysis

A court may authorize early discovery before the Rule 26(f) conference for the parties’ and witnesses’ convenience and in the interests of justice. Additionally, certain courts—such as those in the Ninth Circuit—generally consider whether a plaintiff has shown “good cause” for early discovery. Good cause may be established by evaluating certain factors:[3]

In evaluating whether a plaintiff establishes good cause to learn the identity of a Doe defendant through early discovery, courts examine whether the plaintiff: (1) identifies the Doe defendant with sufficient specificity that the court can determine that the defendant is a real person who can be sued in federal court, (2) recounts the steps taken to locate and identify the defendant, (3) demonstrates that the action can withstand a motion to dismiss, and (4) shows that the discovery is reasonably likely to lead to identifying information that will permit service of process.[4]

According to the court, the relevant factor to the discovery motion was demonstrating that the complaint could withstand a motion to dismiss. However, the court found an issue with personal jurisdiction. Based on a review of the parties and events involved, the plaintiff lives in Washington, the defendants live in Colorado and southern California, and the fraud likely occurred in Washington. As a result, the district court denied the application without prejudice, as the plaintiff was not able to establish that the Northern District of California was the right district for the lawsuit.[5]

Conclusion

Third-party subpoenas are nothing new in the world of civil litigation; however, they are relatively new with respect to cryptocurrency issues. The Strobel case highlights a basic principle in federal civil lawsuits—personal jurisdiction. Based on the facts of the case, the court questioned whether it had personal jurisdiction over the parties and whether it was the appropriate venue. Although the court ultimately denied the discovery request, this decision is not problematic for cryptocurrency litigants for a few reasons. First, plaintiffs who bring a lawsuit in a more appropriate venue will not face as much difficulty in seeking third-party discovery (here, the court notes that this may be cured by a transfer in venue). Second, this case dealt with early discovery (i.e., discovery before the Rule 26(f) conference), not all discovery. Finally, cryptocurrency issues are becoming more prevalent, and therefore, courts are becoming better acquainted with the nuances of where civil discovery and virtual currency collide.

 

For more cryptocurrency resources, check out our Cryptocurrency Resource page.

 

[1] Strobel v. Lesnick, et al., No. 21-CV-01010-LB, 2021 WL 3604681, at *1 (N.D. Cal. Aug. 13, 2021).

[2] Id.

[3] Id. at *2.

[4] Id. at *3.

[5] Id. at *3.

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