Introduction
A recent judgment by the Dubai Appeals Court following a series
of civil suits and criminal complaints has shed light on pitfalls
and best practices when faced with disputes arising from
cryptocurrency mining investments and when litigated before the UAE
courts.
This case involved a complicated series of litigation including
multiple civil disputes before the Dubai Courts at various levels,
criminal complaints, and various investments.
This article explores the principal claims and remedies, with a
focus on the complexities surrounding cryptocurrency mining and the
legal ramifications when volatility is attached to such
investments.
Case
Claims of misrepresentation and inflated fees in a
cryptocurrency mining investment
The plaintiff claimed that they had invested USD 300,000 in a
cryptocurrency mining device through a partnership, which was held
for over four months before the device was purchased.
And that the defendants had admitted that the initial price of
the device was USD 1,200,000 with the partnership share of the
plaintiff at 25%.
The plaintiff also alleged that it was later discovered that the
actual price of the device was USD 1,100,000 and the defendants had
charged a commission of USD 220,000. As a result, the final price
of the device was USD 880,000 and the actual partnership share of
the plaintiff in the partnership owning the cryptocurrency mining
device should have been 34%.
Inequitable distribution of Bitcoin
earnings
The court sided with the plaintiff that the losses suffered were
further exacerbated by the distribution of Bitcoin earnings based
on the original partnership share of 25%, rather than the corrected
share of 34% which led to the plaintiff receiving a lower value of
USD 175,000.
Fluctuating Bitcoin value and delayed
transactions
The plaintiff also argued another issue that contributed to
their losses was the decline in the value of Bitcoin from USD
19,000 to USD 6,000 over the seven-month period during which the
second defendant refused to transfer the cryptocurrency to the
account of the plaintiff. Consequently, the plaintiff argued that
the total amount they should have received was estimated at about
USD 1,900,000 in relation to the Bitcoin mining device
investment.
Lack of legal ownership and regulatory
compliance
The court also noted that the plaintiff was not registered as
the owner of a 34% share of the mining device, with the entirety of
the ownership retained by the second defendant. Additionally, the
plaintiff argued that the defendants were operating without a
license from the Securities and Commodities Authority to engage in
investment management activities.
Lack of Information on the mining device
production
It was evidenced to the court that 66.21021 Bitcoins were
transferred to the wallet of the plaintiff during the period from
27 September 2017 to 31 October 2018.
However, experts appointed by the court were not provided with
data on the production capacity of the cryptocurrency mining and
the number of Bitcoins produced during that period to verify the
correctness of the Bitcoins transferred to the plaintiff, nor were
the experts provided with information on Bitcoin distributions that
had occurred after 31 October 2018.
Dispute over investment and rising mining
costs
The investment was reportedly halted due to disputes between the
parties and rising mining costs. This led the plaintiff and the
defendants to suspend operations until the end of 2021 to decide
whether to resume operations, sell the assets, or liquidate the
project. The fate of the cryptocurrency mining device was not
disclosed, and no evidence was provided to indicate that the device
ceased operations on 31 October 2018.
Bitcoin wallet and losses
The plaintiff sold their Bitcoin wallet on the same date it was
received. The total value of the Bitcoins sold amounted to USD
499,961.89.
The first defendant held the Bitcoin profits of the plaintiff
for the period from October 2017 to February 2018, totaling five
months.
The court found that the Bitcoin transfers to the plaintiff
resumed on 17 March 2018, with the delayed payments resulting in a
decrease in Bitcoin value and losses of USD 92,676.01 for the
plaintiff.
Takeaways
Drawing upon the details of this case, we outline strategies and
tactics to increase the efficacy of cryptocurrency mining claims
and what pitfalls to avoid when litigating cryptocurrency mining
investments before the courts in the UAE:
- Ensure transparency in crypto-mining investment agreements
including accurate device prices, commission fees, and ownership
percentages. - Establish a fair and well-documented distribution of
cryptocurrency earnings based on accurate ownership percentages and
agreed-upon terms. - Cryptocurrency value fluctuations can significantly impact
investments. To minimize potential disputes arising from these
fluctuations, parties should agree on strategies to mitigate their
effects, such as setting predefined conditions for the transfer of
assets or establishing a mechanism to address delays in
transactions. - Ensure that the ownership of mining devices and other assets is
properly registered and compliant with local regulations and that
parties engaging have the necessary licenses from relevant
authorities. - Justify hashrate and mining power guarantees. Disputes can
arise if the mining company guarantees a certain hashrate or mining
power but fails to deliver, especially if the reasons for
underperformance are not clear or considered acceptable. - When pursuing a cryptocurrency mining claim, it is crucial to
have complete and accurate data on the production of the mining
device and the amounts produced during the relevant period. This
helps in verifying the correctness of the cryptocurrency
distributions made to the involved parties. If the mining company
has control over which mining pool to join, disputes can arise if
investors believe the chosen pool is not providing optimal
returns. - In the event of rising mining costs, it is important to have a
predefined plan in place to address such issues. The plan could
involve suspending operations, selling assets, or liquidating the
project, but should be transparent and agreed upon by all parties.
Establishing a clear course of action in advance can help prevent
additional losses and further disputes.
Cryptocurrency disputes can be highly complex and require
specialized knowledge. It is essential to engage dispute counsel
who have expertise in blockchain and digital asset disputes.
Including various experiences, our team has advised on NFT disputes
in the UAE and abroad, in litigation and arbitration, digital asset
multi-jurisdictional fraud, and assisted in drafting new technology
sovereign conventions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.