When Jurisdiction Rules Meet Blockchain: Can the Old Bottle Contain the New Wine?

Abstract

The distributed nature of blockchain poses challenges to the existing legal system, notably the jurisdiction rules addressing court jurisdiction and governing laws. The In re Tezos case, a securities law dispute brought in the District Court of Northern District of California of the United States, faced this particular challenge. In this paper, I conduct a case study of the In re Tezos case to illustrate how the distributed nature of blockchain impacts the determination of court jurisdiction and governing law in the securities regulation context. I argue that while the internet has already complicated those effect-based jurisdiction rules, blockchain further complicates those conduct-based jurisdiction rules. With this understanding, I offer several principles for addressing jurisdiction issues in cases involving blockchain-based securities. Specifically, I propose an effect-based jurisdiction rule limited by a de minimis exception to mitigate blockchain’s impact, enhance legal certainty, and promote international coordination.

I. Introduction

Blockchain, or a broader concept known as distributed ledger technology ("DLT"), has recently received wide attention as a promising ledger technology for the next generation. Essentially, blockchain creates a distributed ledger system distinct from the current centralized ledger system. Through blockchain, the administrator of a ledger system needs not be a centralized entity trusted by the transaction parties. Instead, blockchain can viably connect a distributed group of persons known as “nodes” to maintain the ledger collectively. Such a “trustless trust” system bears the feature of decentralization, immutability, and pseudonymity, whose impact on the world is often believed to be equivalent to that of the internet.1

However, the distributed nature of blockchain poses severe challenges to the existing legal system.2 This paper will focus on jurisdiction rules, including judicial and legislative jurisdiction. The In re Tezos case in 20183 was arguably the first case dealing with this particular challenge.4 This case involved a worldwide initial coin offering (“ICO”) project. The District Court of Northern District of California of the United States had to decide whether a U.S. investor residing in Illinois was entitled to bring a private securities litigation in the United States against a worldwide ICO project initiated by the Tezos Foundation headquartered in Switzerland and whether the Securities Exchange Act of 1934 of the United States applied extraterritorially to this worldwide ICO project. Through this dispute, we may further observe that while the internet has complicated the jurisdiction rules for private securities litigation, the distributed nature of blockchain makes it even more complicated.

In this paper, I conduct a case study of the In re Tezos case to illustrate the jurisdiction issues associated with blockchain and discuss whether the current jurisdiction rules can contain blockchain. Due to the In re Tezos case background, my study focuses on securities regulation, particularly how to determine a court's jurisdiction and the governing securities laws in a dispute involving blockchain-related securities. The structure of this paper is as follows. In Part II, I brief the factual background of the In re Tezos case and the Court’s analyses and findings in the case. In Part III, I analyze how the distributed nature of blockchain impacts the determination of judicial and legislative jurisdiction, particularly those conduct-based rules. In Part IV, I provide several principles for handling the jurisdiction issues in cases involving blockchain-based securities, focusing on how to introduce an effect-based jurisdiction rule limited by a de minimis exception. Finally, I conclude this paper in Part V. It is anticipated that this paper may clarify the jurisdiction issues associated with blockchain-based securities and lay down a direction forward.

I. In Re Tezos as a Touchstone

In the In Re Tezos case, the plaintiff investor residing in Illinois claimed that the defendants conducted unauthorized securities offerings in the form of an ICO project in the United States and thus sought to rescind the contract and claim assorted damages.5 This section will brief the Court’s findings on determining judicial and legislative jurisdiction in this dispute.

A. The Background of the In Re Tezos Case

In 2014, Arthur Breitman and Kathleen Breitman (“the Breitmans”), based in Northern California, started to plan the Tezos project to create the token “Tezos” as a solution to the shortcomings of crypto-asset such as Bitcoin and Ethereum. In 2015, the Breitmans formed a company Dynamic Ledger Solutions (“DLS”), whose headquarters was the home of the Breitmans.6 In 2017, the Breitmans and DLS established in Switzerland the Tezos Foundation, a non-profit organization that oversaw the coming ICO project.7

The Breitmans and the Tezos Foundation launched the ICO project on July 1, 2017, under which Investors could invest in bitcoin or ether in exchange for Tezos tokens. In two weeks until July 14, 2017, the Tezos Foundation raised bitcoin and ether with a value equivalent to US$232 million.8 According to the forum-selection clause in the Contribution Terms, the legal situs of all ICO-related participation and litigation was Alderney.9

Lead plaintiff Arman Anvari was an Illinois resident who contributed 250 ether to the Tezos ICO. He brought the case in Northern California, claiming that the Tezos project was a sale of unregistered securities and seeking to rescind the sales and claim assorted damages.10 Defendants in this case, including the Breitmans, DLS, Tezos Foundation, etc., moved to dismiss the case. Among the grounds for dismissal, I will focus on the following two, namely (i) Anvari failed to establish personal jurisdiction against Tezos Foundation; and (ii) the impropriety of the extraterritorial application of the Securities Exchange Act of 1934.11

B. The Court’s Analyses and Findings

1. The Court’s Judicial Jurisdiction over Tezos Foundation

The District Court of Northern District of California firstly addressed whether Plaintiff established personal jurisdiction against Tezos Foundation. In the United States, there are two ways to establish personal jurisdiction against a defendant who does not reside in the forum state, i.e. (i) general jurisdiction, that is, if the defendant has a continuous and systemic presence in the state; and (ii) specific jurisdiction, that is, if a defendant has minimum contacts with the state such that the exercise of jurisdiction does not offend traditional notions of fair play and substantial justice.12 In the case of the Tezos Foundation, the Court mainly looked at specific jurisdiction.13

To establish specific jurisdiction, three elements must be met. The plaintiff shall establish two prongs, that is, (i) the defendant purposefully directs his activities or consummates some transaction with the forum or resident thereof; or performs some act by which he purposefully avails himself of the privilege of conducting activities in the forum, and (ii) the claim must arise out of or relates to the defendant’s forum-related activities. If the plaintiff successfully established these two elements, the defendant shall, in turn, present a compelling case to rebut that the exercise of jurisdiction comports with fair play and substantial justice, i.e., is reasonable.14

In this case, the Court firstly referred to past case laws related to the internet.15 It confirmed that it would not establish specific jurisdiction against Tezos Foundation simply because the website of Tezos Foundation was hosted on an Arizona server, freely accessible by U.S. citizens, and highly interactive.16 The Court, however, found that the contact between Tezos Foundation and the United States was more than the above.

a. The First Prong of Purposeful Direction

The Court relied on the following four pieces of facts in establishing the first prong of “purposeful direction” of the personal jurisdiction test, including:17

• Tezos Foundation kept at least one employee or agent in the United States.

• The California-based Breitmans were the de facto U.S. marketing arm of the Tezos Foundation;

• The Tezos Foundation engaged in little to no marketing of the ICO anywhere other than in the United States;

• A significant portion of some 30,000 contributors to the ICO were U.S. citizens.

The Court specifically highlighted that “[a] different conclusion might be warranted if Anvari were one of a small number of well-informed Americans who managed to learn about and participate in an ICO exclusively marketed in some foreign country.”18 This was, however, not the case there. Instead, based on the above facts, the Court found that "the Foundation encouraged U.S. citizens to participate in the ICO, it made it easy for them to do so, and the results reflected those efforts."19

b. The Second Prong of Relationship between Claims and Forum-related Activities

In examining whether the plaintiff’s claims arose out of or related to the defendant’s forum-related activities, the Court relied mainly on the following two pieces of facts, that is,

• The decision of Tezos Foundation to build an English-language, U.S.-hosted website; and

• The decision of Tezos Foundation to structure an ICO accommodating U.S.-based participation.20

In the Court’s view, these facts were the “but for” causes of Anvari’s alleged unregistered securities purchase and, thus, established a close relationship between the plaintiff’s claim and the defendant’s forum-related activities.21 Therefore, the Court found the second prong satisfied. Accordingly, based on the above two-prong examinations, the Court found a prima facie case for establishing specific jurisdiction against Tezos Foundation.

2. The Extraterritorial Application of the Securities Exchange Act of 1934

In the United States, whether the Securities Exchange Act of 1934 applies to a private cause of action is governed by the Morrison transactional test. Specifically, it applies only when (i) the purchase or sale involves a security listed on an American stock exchange or (ii) the purchase or sale of any other security takes place in the United States.22 In this case, the Court relied on the Morrison transactional test in determining whether the Securities Exchange Act of 1934 applied to the worldwide ICO project of the Tezos Foundation. Moreover, since the Tezos tokens were not listed on any American stock exchange, the Court’s focus centered on whether the purchase or sale of Tezos tokens took place in the United States.

The Court firstly refused to rely on the legal situs of the ICO as stated in the Contribution Terms. It highlighted that under the Morrison transactional test, the place of a security transaction refers to the actual situs of the transaction instead of the contractual situs.23 It further noted that the critical question was, “where does an unregistered security [transaction], purchased on the internet and recorded ‘on the blockchain,’ actually take place?”24 The Court, in the end, found that the ICO transaction took place in the United States based on the following factors:

• The plaintiff participated in the transaction from this country;

• The plaintiff used an interactive website that was hosted on a server in Arizona;

• The interactive website was run primarily by Arthur Breitman in California;

• The plaintiff responded to marketing that almost exclusively targeted United States residents.

• The plaintiff’s contribution of ether to the ICO became irrevocable only after it was validated by a network of global “nodes” clustered more densely in the United States than in any other country.25

Nevertheless, the Court also cautioned that “no single one of these factors is dispositive to the analysis.”26 That said, “together they support an inference that Anvari’s alleged securities purchase occurred inside the United States.”27 Noting that the place of transaction under the Morrison transactional test includes both the seller’s location and the buyer’s location in the case of an internet sale,28 the Court found that Tezos’ ICO project took place in the United States and the Securities Exchange Act of 1934 applies to the project.

C. Summary: Issues Unresolved

In this dispute, the Court essentially faced two jurisdiction issues. The first one involved judicial jurisdiction, that is, whether a court has jurisdiction over a dispute. The Court applied the jurisdiction rule in the internet era, specifically the purposeful direction test, in determining the case. Notably, the Court was conscious of the features of the internet. It thus did not establish its judicial jurisdiction simply because internet activities were freely accessible in the United States. It, therefore, examined more factors that supported additional contacts of Tezos Foundation with the United States, including the location of Tezos’ employees, the location of Tezos’ marketing arm, the location of Tezos’ major marketing efforts, and the location of the majority of contributors.

The second one involved legislative jurisdiction, that is, the governing law of the dispute. Specifically, the Court decided whether the Securities Exchange Act of 1934 of the United States applied to that private cause of action. The Court applied the famous Morrison transactional test and focused on the place of transaction of an ICO project. In determining the place of transaction, the Court considered the elements related to internet sales and those related to blockchain validation. Possibly for the first time, the place of the validation nodes of a blockchain came into the spotlight in determining the legislative jurisdiction.

In re Tezos, however, is a relatively straightforward case. As the facts found by the Court suggest, the Tezos project is less distributed and decentralized than envisaged by some in the blockchain space. The issuer, marketing team, and even verification nodes of Tezos’ ICO project were primarily concentrated in the United States. The marketing efforts and the resulting contributors were mostly concentrated in the United States. All of these factors rendered the United States a reasonable place for possessing judicial and legislative jurisdiction over this ICO project. Nevertheless, determining the judicial and legislative jurisdiction could prove more challenging in other blockchain projects.

II. When Securities Litigation Meets Blockchain

This section will illustrate how blockchain challenges the current jurisdiction rules in securities litigation. I will specifically focus on whether or not the existing rules built in the internet era may contain blockchain challenges.

A. A Brief Overview of Blockchain and ICOs

1. The Operation of Blockchain

Blockchain creates a distributed ledger system that sharply contrasts with the current centralized ledger system. Under a centralized ledger system, to conduct remote transactions, the transaction parties entrust a central entity, such as a bank or a clearinghouse, to maintain the transaction ledgers on behalf of both parties and update the ledger records per the instruction by the parties. However, a centralized ledger system incurs costs and time for retaining a central ledger administrator, creates a single point of failure, and invites this administrator to withhold the transaction data of parties. Blockchain creates a distributed ledger system that operates without a central ledger administrator in response to these concerns.

A blockchain system contains at least three key actors: the developers, protocol administrators, and verification nodes. Developers are the persons who develop the blockchain protocol and determine the genesis components of the protocol and rules for modifying the protocol.29 In other words, they are the founders of a blockchain system. Protocol administrators are the persons who, according to the protocol, are entitled to update or modify the rules coded into the blockchain protocol.30 In a sense, they act as the management of the blockchain system and maintain the operational rules of that system. Verification nodes, in turn, are persons entitled to update or modify the records in the ledger of a blockchain system. In other words, they are the persons who collectively maintain the blockchain ledger and thus facilitate the transaction services provided by a blockchain system. Most importantly, these actors can collectively provide ledger services without knowing or trusting each other through blockchain technology. In other words, blockchain technology can assist in organizing a group of people without a central organization.

In general, blockchain possesses several core features, notably decentralization and immutability.31 The level, however, varies among different blockchain systems. There are permissioned blockchains whose protocol stipulates that only a designated group of people may participate in the operation and become the protocol administrator or verification nodes of its blockchain system. This includes so-called private blockchains and consortium blockchains. Since permissioned blockchain presupposes a specific group of people to operate its system, it is less decentralized and thus less immutable, and the likelihood for this specific group of people to collide in manipulating the ledger is heightened.32 Permissionless blockchains, in contrast, are open to the public and permit anyone to participate in the operation of its blockchain system. As a result, it is generally perceived as more decentralized and immutable, although the actual level of decentralization and immutability varies depending on the circumstances.

2. The Operation of ICOs

ICOs, also known as token sales or coin sales, typically involve the creation of digital tokens using distributed ledger technology and their sale to investors by auction or subscription in return for a crypto-currency or an official fiat currency,33 a blockchain application originally made possible via Ethereum. Ethereum differs from the Bitcoin blockchain in that its blockchain system is open-source. Programmers thus may adopt it as the underlying blockchain to create their tokens. Furthermore, they may write smart contract codes on top of the underlying blockchain and thus design tokens with various functions. For example, some tokens bear investment purposes and sometimes even promise to share profits with the token holders, the so-called “investment tokens.”34 Other tokens bear utility purposes and represent the right of taken holders to exchange for specific goods or services in the future, the so-called “utility tokens.”35 Other tokens bear payment purposes, the so-called “payment tokens.”36 Programmers may issue these tokens to the public for fund-raising via the internet.

To be sure, ICOs are not so novel. The token issuer, for instance, often operates in a centralized manner wherein raised funds are accumulated into a pool and administered from this pool. Moreover, the issuance of tokens usually takes place on a website via the internet, which is not significantly different from the online securities offerings we have seen. In a sense, the sales of tokens are not particularly distributed. It is thus unsurprising that the Securities Exchange Commission of the United States (the “SEC”) deemed many ICO projects to be issuing unregistered securities in recent years.37

That said, ICOs bear some distributed nature to the extent that they apply blockchain to administer the token ledgers. Specifically, the transfer of tokens is recorded in the ledger of the underlying blockchain system, subject to the administration and verification of a distributed group of verification nodes if the blockchain is so designed. Moreover, the consideration for the tokens is often another crypto-asset, such as bitcoin or ether, whose transfer is handled by a distributed blockchain system. Accordingly, portraying ICOs as a product of the internet plus blockchain and smart contracts is fair.

B. The Internet Old Wine and the Blockchain New Wine

Blockchain undoubtedly operates on the internet, but it is something more. In particular, a blockchain-based activity is qualitatively more distributed than a purely internet-based activity.

The internet bears some distributed nature as well. It makes remote and cross-border communication less costly and more instant and accessible. Recipients of internet-based communication thus can be distributed around the world. This complicates the jurisdiction rules based on the territorial principle, particularly the effect-based rule. Thanks to the internet's distributed nature, the effect place of an internet-based activity can be anywhere connected to the internet. Therefore, any sovereign that adopts the effect test to determine jurisdiction is entitled to claim that it is the effect place and thus has jurisdiction over an internet-based activity.

Foreseeably, such an understanding paralyzes the original intent of jurisdiction rules to allocate power among sovereigns. It compels the defendant to defend their case in courts worldwide, which imposes undue burdens on the defendant. Furthermore, it has the potential to cause abusive lawsuits. Thus, jurisdictional rules have to adjust the standard for adopting the effect test correspondingly. The purposeful direction test adopted in the U.S. case law, for instance, attempts to limit the application scope of the effect test, a common way for world courts to respond to the challenges posed by the internet.

Blockchain escalates the distributed nature of the internet to a different level. The primary feature of blockchain is decentralization,38 meaning that an activity can be provided by a distributed group of people who are not consolidated into a centralized institution. In other words, deinstitutionalization. Both permissionless blockchains and consortium blockchains bear this feature. Without a centralized institution representing this group of people in committing the activity, determining the conduct place of such activity could be challenging. Under traditional jurisdiction rules, in cases involving multiple participating individuals, the place of any individual who participated the activity can serve as the conduct place. However, in the case of blockchain, the participating individuals are distributed worldwide. Therefore, any sovereign that adopts the conduct test can claim jurisdiction over a blockchain-based activity and paralyze the original intent of jurisdictional rules. In short, while the internet compromises the effect test, blockchain compromises the conduct test.

The challenge posed by blockchain can be more profound. Blockchain participants often participate in the blockchain system (e.g., verify the records to be updated into the ledger) in their residences. If a plaintiff requests for the defendant to be liable for such conduct,39 the conduct place is very likely to be the residence place of the defendant. To that extent, blockchain compromises the conduct test and the principle of actor sequitur forum rei, the core principle of jurisdictional rules. It might be less problematic if the plaintiff, once in a while, faces a group of defendants residing in different places and cherry-picks one of the places among them to establish jurisdiction. As blockchain becomes more prevalent, however, such cherry-picking might become routine. In that case, we might need to rethink.

C. When the Blockchain-based ICO Meets Jurisdiction Issues

Below I use the court’s analyses in In re Tezos to illustrate how blockchain affects the analyses when determining jurisdiction, including judicial and legislative jurisdiction.

1. When Blockchain Meets the Determination of Judicial Jurisdiction

In In re Tezos, the Northern District of California borrowed from the case law related to the internet. It invoked the purposeful direction test to decide on personal jurisdiction against Tezos Foundation, a defendant headquartered in Switzerland. The Court established its jurisdiction by finding that the United States was the principal marketing place of the ICO project. The marketing force, the marketing focus, and the final contributors in this project all rested in the United States. Even the language of the ICO website supported this finding.40 In sum, plentiful evidence indicated that Tezos Foundation had more than minimum contact with the United States.

However, the Tezos case is an easy one considering that the U.S. element, in that case, is relatively prominent. Establishing jurisdiction could be more controversial for a truly worldwide ICO project. The Northern District of California was aware of this and emphasized that it might find otherwise if the ICO were marketed exclusively in countries other than the United States.41 This is possibly true. After all, under this hypothetical scenario, Tezos Foundation made no marketing efforts in the United States, rendering it less persuasive to establish that the ICO was purposefully directed at the United States. However, what if the case was not that extreme? What if Tezos Foundation made equivalent marketing efforts in many countries, which is more likely the case for a truly worldwide ICO project?

Notably, the Northern District of California did not examine blockchain-related factors in establishing its judicial jurisdiction over this dispute. For instance, it did not consider the place of verification nodes in Tezos’ ICO project as it did in determining the legislative jurisdiction. Perhaps this was because the evidence before the Court was clear enough to establish the Court’s jurisdiction. In any event, whether the place of verification nodes or other blockchain-related factors would affect the analysis in a truly worldwide ICO project remains debatable.

2. When Blockchain Meets the Determination of Legislative Jurisdiction

In determining whether the Securities Exchange Act of 1934 of the United States served as the governing law in In re Tezos case, the Northern District of California invoked the Morrison transactional test. Therefore, the Court needed to decide the “place of transaction” of Tezos’ ICO project. Accordingly, the Court examined factors including (i) the place of the investor, (ii) the place of the server of the ICO website, (iii) the place of the person running the website; (iv) the target place of the ICO marketing, and (v) the place of verification nodes for the transaction.42 The Court also cautioned that none of these factors is decisive.43

The Court considered the above factors for sound reasons, at least in theory. Conceptually, the seller’s place and the buyer’s place are both relevant to determine the place of transaction. The place where the sale is concluded also matters. In the case of ICOs, the transaction refers to the sale of tokens by the issuer to the investor. Therefore, the investor’s place can serve as the buyer’s place—this explains why the Court considered the investor's place. The seller, in contrast, was the token issuer, i.e., Tezos Foundation based in Switzerland. The Court evaluated other factors to break the split, which is typical in a cross-border transaction. Turning to the major marketing place as it did when determining the judicial jurisdiction was a sound choice—this explains why the Court considered the target place of the ICO marketing.

a. The Place of Transaction and Internet

The Northern District of California also attempted to determine where the sale was concluded by considering several internet-related factors. For instance, the Court considered the place of the ICO website’s server and the person running the website. Conceptually, this makes sense if one determines the place of transaction of an online transaction at its face value and considers an online transaction taking place on the hosted website. In that case, one needs to determine the place of the hosted website. The place of the website's server and the person running the website then surface as reasonable options. After all, websites are virtual; the server represents the tangible thing closest to the website in the physical world, while the person running the website represents the person closest to the website in the physical world.

The above conceptual understanding, however, risks rigidity and arbitrariness. The place of the server is highly random and changeable. In reality, an internet-based transaction can occur without obstacles wherever the server is. The place of the person running the website is similarly the case. In other words, although these places can be conceptually understood as the place of an internet-based transaction, it has little relationship with the transaction in the real world. If courts place too much weight on these factors, token issuers in the case of ICO can easily game the jurisdiction rules by manipulating these places.

b. The Place of Transaction and Blockchain

The blockchain-related factor noticed by the Northern District of California was the place of verification nodes. As the Court observed, investors paid ether as the consideration for the Tezos token, which made the payment of ether part of the ICO transaction.44 Besides, this transaction became irrevocable only after the assignment of ether was validated by a network of global nodes.45 Therefore, the place of verification nodes represented the place where the transaction was concluded and became irrevocable. Notably, the Court did not simply rely on the place of a single verification node but looked at the place where verification nodes were densely clustered.46 The fact that the verification nodes in the Tezos’ case “clustered more densely in the United States than in any other country” thus reinforced that the place of transaction of Tezos’ ICO was in the United States.

However, using the clustering place of verification nodes to determine the place of transaction of a blockchain-based also risks rigidity. While the clustering place of verification nodes is less likely to be manipulated, it again has little relationship with the transaction in the real world. For instance, most tokens are built on the Ethereum framework and have their transactions validated by Ethereum nodes. By far, the United States accounted for the most Ethereum nodes, followed by Germany, Singapore, and the United Kingdom.47 One, however, would certainly disagree that all token transactions take place in any of the United States, Germany, Singapore, or the United Kingdom simply because of that. In light of that, courts should also refrain from placing too much weight on this factor.

D. Summary

In combination with the internet, Blockchain poses an unneglectable challenge to the current jurisdiction rules, including judicial and legislative jurisdiction. Specifically, it becomes more challenging to determine where blockchain-based conduct or transactions occur because blockchain deinstitutionalizes the ledger administrator and distributes the verification nodes worldwide. Courts can undoubtedly consider all relevant factors and make a comprehensive assessment on a case-by-case basis. The Northern District of California adopted this method and found that most factors pointed at a specific jurisdiction. That conclusion, however, did not answer the fundamental question.

Moreover, the case-by-case method causes legal uncertainty. A token issuer would prefer to refrain from being governed by multiple jurisdictions to the extent possible because the cost of global litigation and global filings is prohibitive. However, suppose the case-by-case method is adopted. In that case, token issuers may find it challenging to identify in advance which and how many sovereigns may exercise judicial or legislative jurisdiction over their proposed ICO project. This legal uncertainty would hamper the orderly development of global fund-raising through ICOs.48

III. Back to the Origin: Proposing an Effect Test with Quantitative Limitation

In light of the challenges posed by the distributed nature of blockchain, I propose the following three general principles for handling jurisdiction issues in disputes involving blockchain-based securities. While I propose these principles mainly in the context of securities regulation, they might be of reference value on other occasions.

A. Shifting the Focus Away From the Conduct Test to the Effect Test

In light of the distributed nature of blockchain, I propose that courts, when faced with disputes involving blockchain-related securities, should refrain from determining the jurisdiction on a conduct basis. As emphasized before, the “conduct” related to blockchain-based securities is committed by a distributed group of people scattered worldwide. Attempting to determine the place of such conduct is thus impracticable. It is also in vain because the places of these verification nodes are generally disconnected from the actual conduct or transaction.

Returning to the effect test for determining the jurisdiction issues involving blockchain-based securities is a more proper direction. Blockchain blurs the conduct aspect of a security transaction and renders the conduct test less suitable for blockchain-related securities. Blockchain, however, does not greatly obscure the effect aspect of a security transaction. After all, in its nature, blockchain is an alternative means for issuing securities to public investors. While the means change, the end of issuing securities to public investors does not change much. The impact of blockchain on the effect test is thus limited.

Returning to the effect test also fits well with the objective of securities regulations. Securities regulations are designed to protect investors in the capital market. In the eyes of a securities regulator, its primary concern should be the investors and capital market order in its domestic territory. Adopting the effect test means that a domestic court has jurisdiction over, and a country’s securities regulations apply to, a blockchain-based securities transaction involving investors in its territory. This result is in line with the primary focus of securities regulations.49

Following this line, one may consider whether courts should continue applying the Morrison transactional test in the blockchain era. Before blockchain’s emergence, the test incurred significant controversies.50 U.S. Congress, for instance, adopted the “conduct test” and the “foreseeable substantial effect” test in the Dodd-Frank Act to replace the Morrison transactional test for actions brought by the SEC or the United States.51 However, it remains applicable in private causes of action.52 The emergence of blockchain may provide the United States with an additional factor for rethinking the Morrison transactional test.

B. Introducing De Minimis Exceptions as a Quantitative Limitation to the Effect Test

The effect test, however, is not without questions. As elaborated above, when applying the effect test to internet-related activities, the distributed nature of the internet could frustrate the purpose of jurisdiction rules. The U.S. case law thus has developed the purposeful direction test as a response to limit the effect test. The Dodd-Frank Act, as mentioned above, also adopts a "foreseeable substantial effect" test instead of a pure effect test.

The flexible nature of the purposeful direction test or the foreseeable substantial effect test could be desirable or undesirable. While these tests can encompass a variety of situations on a case-by-case basis, they cause legal uncertainty to token issuers. For example, token issuers face the risk of global litigation and global filings if multiple courts claim jurisdiction over and if the securities regulations of multiple countries apply extraterritorially to their token offerings.53 These tests may be too flexible for issues to pre-plan their offering to avoid the costs of global litigation and global filings. That said, these tests are in the correct direction. It is laudable that they attempt to limit the effect test qualitatively.

If the qualitative way is in the right direction, we may envisage a quantitative way to substantiate it. Consider a de minimis exception for the effect test, under which a court does not possess jurisdiction over, and a set of securities regulations does not apply extraterritorially to, a securities offering if that offering involves less than a specific ceiling amount of domestic investment or investors. Such de minimis exception, in effect, substantiates the purposeful direction test or the foreseeable substantial test by introducing clear numerical standards. This may significantly raise the legal certainty for issuers to pre-plan their worldwide token offerings.

Domestic securities regulators may also reference the cost-benefit principle in setting this numerical ceiling.54 Each domestic regulator should consider the enforcement cost and investor protection concerns in its respective territory. After all, pursuing a worldwide token offering that only affects a minimal amount of domestic investment may appear cost-inefficient. This mentality is possibly the unspoken practice among world securities regulators, but legislating it helps raise legal certainty for worldwide token offerings.

C. International Coordination Fills the Void

The possible shortcoming of the proposed de minimis exception is that issuers might game this exception. After all, if most jurisdictions adopt this proposal, an issuer may keep its offering below the ceiling amount in each jurisdiction yet raise a significant amount of funds in aggregate. While gaming the de minimis exceptions in multiple jurisdictions requires sophisticated calculation, it is technically possible, especially because the internet and blockchain render less costly a global fund-raising project like an ICO.

In light of this gaming possibility, some form of international coordination might be needed. International standard-setting bodies such as the International Organization of Securities Commission (“IOSCO”) may facilitate the coordination among world securities regulators. For instance, such a body may recommend that a worldwide securities offering must be subject to at least some securities regulation if it raises funds above a specific floor amount. It may further recommend the principles for determining which national court has jurisdiction and which national securities regulations apply in such cases. Such international coordination may help fill the void if the de minimis exception is universally adopted.

Conclusion

In In re Tezos, we witness how a court handles the judicial and legislative jurisdiction issues in a blockchain-based securities offering. However, in re Tezos is a relatively straightforward case and leaves many aspects of blockchain unexplored. In this paper, I illustrate how the distributed nature of blockchain compromises the jurisdiction rules based on the conduct test, such as the Morrison transactional test. I advocate that jurisdiction rules based on the effect test, complemented with the design of de minimis exception, better fit the need for securities regulation and enhance legal certainty for worldwide securities offerings. I also propose the direction for international coordination to fill the regulatory void potentially caused by the de minimis exception. As the internet and blockchain make worldwide securities offerings technologically possible, enhancing the clarity of jurisdiction rules is needed to render worldwide securities offerings legally possible.