On Tuesday, September 10, MtGox & Tibbane, represented by the law firms of Baker & McKenzie and Hillis Clark Martin & Peterson, filed both their answer to Coinlab’s complaint, as well as twelve counterclaims against Coinlab in Coinlab v. MtGox KK, 2:13-cv-00777. The main thrust of MtGox’s argument is that the contract was voided by Coinlab’s failure to comply with its terms, viz., Coinlab failed to register with the federal government and all 47 states as a Money Transmitter by March 22, 2013. [MtGox Answer (“Ans.”)]. For more detail, read on.
Pages 1–18 of the Answer constitute the actual responsive pleading; in it, MtGox admits, denies, or claims insufficient information to accusations Coinlab levied in their complaint. [Coinlab Complaint]. Summarizing the highlights, MtGox concedes that they didn’t perform because Coinlab breached the contract. Ans. ¶ 2. The breaches MtGox alleged revolve around two provisions of the Exclusive License Agreement (“Agreement”) which required Coinlab to be compliant with all laws and regulations applicable to bitcoin exchange. See CounterClaim (“Countercl.”) ¶ 28. Specifically:
“CoinLab shall operate the Services in the Territory in compliance with all applicable laws after completion of the Transition Period . . . .”
Section 2(D). Next,
“The Parties, have to date and will continue throughout the Term to comply with all statutes, codes, ordinances, laws, regulations, rules, orders and decrees of all governmental authorities (including without limitation federal, state and local governments, governmental agencies and quasi-governmental agencies) having jurisdiction over a Party. The Parties specifically agree to fully cooperate and to obey any instructions or requests made by any competent authority with regard to money laundering or other criminal activities.”
Section 6(A)(iv). The transition period was 120 days from November 10, 2012, the duration of which terminated on March 22, 2013. On March 18, 2013, the U.S. Financial Crimes Enforcement Network, or FinCen (the agency charged with “safeguard[ing] the financial system from illicit use and combat[ing] money laundering”), issued guidance stating that exchangers are entities that “engage as a business in the exchange of virtual currency for real currency, funds, or other virtual currency,” and are money transmitters under FinCEN’s regulations if they either “(1) accept and transmit a convertible virtual currency or (2) buy or sell convertible virtual currency for any reason.”
The issue is that 31 U.S.C. § 5330 requires entities engaged in money transmission, or money transmitting businesses (“MTB”), as defined by FinCen, to register with the U.S. Department of Treasury. Failure to so register violates 18 U.S.C. § 1960, which criminally prohibits the operation of an unlicensed MTBs. MtGox became concerned when Coinlab claimed it “was registered as a ‘prepaid access’ provider and such was sufficient.” Countercl. ¶ 21. According to MtGox, “[b]y the expiration of the Transition Period on March 22, 2013 CoinLab was not FinCEN registered as a money transmitter and was not licensed by any state to be a money transmitter.” Countercl. ¶ 33. Ergo, Coinlab breached the contract, and MtGox was no longer required to perform its obligations. From the Answer:
Between approximately March 19, 2013 and April 20, 2013 MtGox personnel and CoinLab personnel had several oral and email communications in which MtGox sought to determine if CoinLab was properly registered with FinCEN as a money transmitter and properly licensed as a money transmitter in those states in which MtGox customers were located. In such communications CoinLab personnel admitted that CoinLab was not registered with FinCEN as a MTB and that CoinLab had not been licensed as a MTB by any state. By the expiration of the Transition Period on March 22, 2013 CoinLab was not FinCEN registered as a money transmitter and was not licensed by any state to be a money transmitter.
Countercl. ¶ 33. The end of the Answer section contains fifteen affirmative defenses that MtGox argues excused their performance under the contract. They’re mostly variations of the same theme, viz., the contract was void from its inception and is unenforceable or was valid but rescinded, but in the terms of different legal theories.
The remainder of the document, pages 19–49, contains MtGox’s counterclaims, which are its claims against Coinlab. In other words, MtGox argues not only that CoinLab’s complaint is without merit, but also that Coinlab has injured MtGox by its (non-)performance of the contract. Specifically, Section 4(A) of the Agreement provided for revenue sharing between MtGox and Coinlab (Coinlab entitled to 40% of revenue generated by current Coinlab customers). While MtGox interpreted the provision to begin after the 120-day Transition period, Coinlab asserted it was operative during that period. “as a result, MtGox made a net transfer to CoinLab of USD $62,258.70, CAD $ 40.00 and 1428.81263537 Bitcoins.” Countercl. ¶ 27. So MtGox’s argument goes, because Coinlab breached the contract by failing to register as an MTB, Coinlab needs to return the monies & bitcoins it received under the contract.
MtGox also requests the court erect a constructive trust in the amount of $5 million, presumably to cover the balance of Coinlab customer deposits. While MtGox credited Coinlab customer deposits to the tune of almost $12.8 million on its site, Coinlab never transferred the actual funds to MtGox. After the presumptive end of the Transition period, MtGox Demanded and Coinlab transferred a portion of those amounts: around $7.5 million. That leaves a Coinlab with an outstanding balance of $5.3 million due to MtGox. [Good catch Sturles!]
The rest of the counterclaim goes on to say as much according to different legal theories.
It doesn’t look good for Coinlab. As MtGox noted in its counterclaim, “in April 2013 CoinLab applied for an MTB license in the State of Washington. CoinLab still has not obtained a MTB license in any other state.” Countercl. ¶ 35. It’s also noteworthy that Coinlab wanted payments during the Transition period, but lacked “a schedule, a deadline or a plan to finance the application process” to become compliant. Countercl. ¶ 33. If we follow Occam’s Razor, one simple explanation is that Coinlab ran out of its venture capital, persuaded MtGox to (unknowingly) float its operating expenses, and then failed to understand or ignored Anti-Money Laundering regulatory compliance. A joint status report is due on September 20 to the federal court hearing the case, and some of the unanswered questions should be resolved.
UPDATE: the parties requested additional time, which the court granted, for Coinlab’s responsive pleading and both Coinlab’s and MtGox’s joint status report. [Link]