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Collective actions – new judicial option that will have to be observed by ICO projects?

In April, the Collective Actions Act (ZKolT) will start to apply, which is aimed at facilitating access to justice, stopping and preventing illegal activities and enabling to obtain damages in cases of mass harm due to violations of rights in certain fields. At the time of an increased raising of start-up capital with initial coin offerings (ICOs) that are not subject to any special regulation that would protect the payers, the enforcement of such act seems most appropriate in terms of timing and content. However, will ZKolT indeed achieve its purpose also with violations when the injured parties are the payers of ICO projects and the owners of cryptocurrencies?

Why ICO projects should be interested in collective actions

The trend of raising funds by means of ICOs has spread widely last year, and on a global level, it has exceeded USD 5.6 billion of raised funds (according to the data of the website Business Insider). Of this, only Slovenian teams have raised more than USD 110 million (according to the data of the website Finance.si). In 2017, first collective actions due to violations with regard to such fund raising were filed abroad. The most resounding was the case of several so-called class actions in the US against the Swiss foundation Tezos, which performed ICO in July 2017 and raised USD 232 million. Besides, there were several collective actions filed also against the company Dynamic Ledger Solutions as the owner of intellectual rights of Tezos foundation and against the main members of the team Arthur and Kathleen Brightman. In these proceedings, the injured parties base their claims on the violations of regulations on the issuance and sale of financial instruments, while also accusing the defendants of unfair business practices and insufficient and misleading provision of information on the project. It is interesting that in their actions the injured parties challenge even the agreement on the choice of applicable law and competent court, as in their opinion, despite different provisions in the general terms, US law should apply to the adjudication on the dispute, and not Swiss law, while US court should allegedly have jurisdiction, and not the court in Switzerland. All Slovenian teams offering their products internationally are being faced with similar risks as well. Therefore, they definitely have to be interested in the consequences which the new ZKolT could have for them.

Scope of applicability of ZKolT in the field of cryptocurrencies

ZKolT limits the possibility of filing a collective action only to predefined fields. This means that in the case of mass violation of rights it first needs to be assessed whether this is even the field in which collective protection is possible under Slovenian law. Among others, the claims of consumers due to violations of their rights and the claims (of natural and legal persons) referring to the violations of the rules on trading on organised markets and to prohibited practices of market abuse in accordance with the Financial Instruments Market Act (ZTFI) may be enforced with collective action under ZKolT. It seems that in practice, collective actions under ZKolT could take place particularly in these two fields.

In relation to the first basis, ZKolT stipulates that consumers may enforce claims both due to violation of their rights from contractual relations with companies and due to violation of other (non-contractual) rights under consumer protection regulations. It should be stressed that under Slovenian law consumers are only natural persons obtaining and using goods and services for purposes outside their trade or profession. Therefore, only the injured parties meeting the conditions for consumers will be able to enforce the violation of their rights with collective actions on this basis, while also other conditions stipulated by consumer regulations will have to be fulfilled in order for the actions to be successful.

Furthermore, collective actions under ZKolT will be possible also to enforce claims in relation to violations of the rules on trading on organised markets and prohibited practices of market abuse in accordance with ZTFI. As opposed to consumer protection, which under ZKolT will be available only to certain natural persons (legal persons are namely never considered consumers), both legal and natural persons will be able to enjoy collective protection on this basis. In relation to cryptocurrencies, the question arises whether they even meet the conditions for financial instruments as stipulated by ZTFI. At least for now, in Slovenia it is considered that due to the requirements on form, cryptocurrencies cannot meet the conditions for financial instruments, and thus ZTFI does not apply to them. Since in ZTFI organised market is defined only as a market of financial instruments (and not also as a market of any other kind), it seems that in accordance with such viewpoint, collective actions in relation to violations of cryptocurrencies issued on organised markets will not be possible. However, the question is whether the provisions of ZKolT could still apply if cryptocurrencies, in relation to which violations of rules on trading on organised markets or prohibited practices of market abuse were committed, were considered financial instruments in substance, while their issuance and form would not follow the regulations in this field. It should be further stressed that a change in the viewpoint of Slovenian authorities could occur, which could eventually see certain forms of cryptocurrencies as financial instruments. In this case, the provisions of ZKolT could apply to violations on organised market of such cryptocurrencies, which would open the possibility of collective actions also to legal persons injured by these violations.

A regulation that does not provide any final answers

ZKolT offers new possibilities of legal protection to some injured owners of cryptocurrencies (particularly to consumers). Other injured persons, who will not be covered by collective protection, will only have the possibility of traditional individual civil action. Since the practical applicability of ZKolT in the field of cryptocurrencies (particularly for legal persons) will depend precisely on the development of the legal regulation of this field, it will be essential to monitor closely the trends and changes. Nevertheless, it is important already now for ICO projects that they are aware of possible consequences, which they might have to face after the application of ZKolT.