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CoinLab Files Response in Mt. Gox Lawsuit

CoinLab responded last week to the ongoing lawsuit with Mt. Gox. Among other points, the filing asserts that Mt. Gox was in breach of contract by failing to provide necessary customer information, making it impossible for CoinLab to comply with regulations. We were first made aware of the latest filing here.

Case Background

In May of this year, CoinLab filed a $75M lawsuit against Mt. Gox for failure to turn over all North American bitcoin exchange operations as obligated per an agreement dated November 2012. In the same suit, CoinLab asserted that Mt. Gox was also in breach of the agreement by not providing funds, records and technology necessary for CoinLab to take over operations.

Last month, Mt. Gox responded to the lawsuit stating that CoinLab had breached the original contract by not being compliant with regulations relevant for the legal operation of a bitcoin exchange. Mt. Gox also filed counterclaims totaling $5.5M for CoinLab’s alleged failure to properly settle balances owed between the two firms. For a fully detailed background on the case up to this point, please see our previous piece on the topic.

CoinLab’s Answer to the Counterclaim

CoinLab’s first point in their latest filing counters the assertion that they were in breach of any regulations. The company points out that they were registered with FinCEN as provider of prepaid access prior to the rulings and updated their filing with FinCEN to become a money transmitter shortly after the guidance was issued in March.

They also point out that not only has CoinLab never been found in violation of any law or regulation, but Mt. Gox itself has never filed for any state or federal licenses. While the relationship between CoinLab and Mt. Gox was presumably established to offload the heavy burden of U.S. regulatory compliance in the first place, seemingly making the point moot, particular clauses in the original agreement may be relevant. Namely, section 6(A)(iv)

“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… Nothing in this Agreement shall be construed as a representation or warranty from MtGox or Tibanne that any transaction contemplated in this Agreement or any transaction contemplated under the Services shall be legally permitted or shall not require an authorization, license or permit under any applicable law.”

While Mt. Gox does not have the necessary licenses to claim that they have to date complied with all regulations as required by the clause, the same paragraph also appears to exonerate them from any responsibility for doing so.

Canadian Exchanges

CoinLab also points out that the contract was to cover exchange clients in the United States and Canada, but Mt. Gox ignores the regulatory situation in the latter. FinTRAC, Canada’s equivalent to the U.S. FinCEN, has explicitly told a number of bitcoin exchanges that are not currently considered Money Service Businesses or required to register as such.

Alternative Business Models

CoinLab addresses the uncertainty in the regulatory landscape for exchanges, particularly at the state level. The filing cites the August inquiry by New York’s Department of of Financial Services which states, “virtual currency exchangers may be engaging in money transmission,” implying a lack of clarity around whether or not they would qualify as a money transmitter according to NY State regulations. The filing also cites the Bitcoin Foundation’s as-of-yet unanswered response to an inquiry from the California Department of Financial Institutions which lays out an argument for why buying and selling bitcoin with customers does not trigger money transmission compliance.

CoinLab builds on the point of presumed legality of buying and selling bitcoins with customers by stating that they could modify their regulatory exposure by changing the actual services they provide. The filing alleges CoinLab could offer the sale/purchase of bitcoin, virtual wallets or bitcoin transfer services. The validity of this point seems questionable, given that Section 1.A of the original agreement defines the Services to be offered as “the digital currency exchange service operated by MtGox on MtGox.com on the Effective Date,” and offering similar services is explicitly barred for a period of two years per section F.2.

Mt. Gox Hindered CoinLab’s Compliance

Perhaps the most important argument made in CoinLab’s answer is the assertion that any alleged lack of compliance by CoinLab – the cornerstone of Mt. Gox’s defense – was the result of Mt. Gox’s refusal to turn over necessary customer information. Without that information, CoinLab would be unable to make a case to regulators that they were adhering to appropriate Anti-Money Laundering and Know Your Customer requirements.

Section 2(D) of the original agreement states, “MtGox shall further provide CoinLab with any information or documents necessary for CoinLab to be compliant with all applicable laws and regulations of the Territory,” making a clear case for the legal obligation of Mt. Gox to provide such materials if they were needed for licensing

On April 13, CoinLab made an appeal to Mt. Gox explaining why the missing customer information would prevent them from becoming compliant. The date of that letter may turn out to be important in assigning responsibility for breach of contract. In the clause of the original agreement that allows for Termination for Cause states,

“Either Party may terminate this Agreement if the other Party materially breaches any provision of this Agreement and fails to cure or demonstrate that no such breach has occurred within 30 days of receipt of written notice thereof.”

If it is deemed that a lack of money transmission licensing would be a breach of contract after the explicit guidance from FinCEN on March 18, CoinLab may have taken the appropriate steps to remain within the window of curing any such breach. If Mt. Gox failed to furnish the required information thereafter, or any time previously with 30 days notice from CoinLab, ultimate blame for the contract’s failure may be placed on them.

Still missing from the filings and related exhibits are what both party agree are “several communications” between them related to regulatory compliance, which may shed further light on how each party managed their contractual responsibilities.

Mt. Gox’s $5.3M Counterclaim Unsubstantiated

In Mt. Gox’s response to the original complaint from CoinLab, Mt. Gox alleges they are owed $5.3M for money deposited into CoinLab bank accounts and credited on Mt. Gox. CoinLab explains in the latest filing that without access to the customer data, which was never provided by Mt. Gox, there is no way for CoinLab to know the customer’s exchange activity and fees. CoinLab also points out that Mt. Gox’s calculation of that $5.3 figure makes no account for customer withdrawals, as we noted in our previous coverage of this suit.

A number of questions still remain in this case, namely around the communications that occurred between the parties towards the end of their relationship. However the case turns out, every new filing sheds light on the dealings of two of bitcoin’s historically important entities.

The filing can be viewed in full here: CoinLab Answer to Counterclaim

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