Cryptocurrency Surge Sent Lawsuit Stake Soaring to $16 Billion

(Bloomberg) -- When two blockchain developers sued one another over an options deal in September, the stakes were high at $1.1 billion. Four months later, they were fighting over a contract valued at $16.6 billion.

It’s a side effect of the recent surge in the value of virtual currencies, in particular Ripple Lab Inc.’s XRP. While all cryptocurrencies were on a tear last year, XRP led the pack. It climbed from 22 cents in September to $3.32 on Jan. 4. Since then it’s plunged by about two-thirds, underscoring the volatility of contracts tied to them.

The price spike meant Ripple suddenly faced a huge loss in a contract with its ex-partner, R3 Holdco. R3, a developer working on behalf of a consortium of banks, says it had a deal to buy 5 billion XRP for less than a penny each and Ripple canceled the options. R3 sued to force Ripple to honor the promise, and Ripple countersued to say R3 failed to meet partnership commitments and misled the company about its interests.

The case is a harbinger of legal battles to come as companies take stock of cryptocurrency-related agreements struck before prices swelled, and look for an escape hatch that would let them hold on to rapidly appreciating assets, including the most popular one, Bitcoin.

"In 2018, there are going to be a lot of fights between people over trying to enforce contracts that were negotiated when there was a much different valuation," said lawyer David Silver, who focuses on litigation involving cryptocurrency. "Contracts didn’t necessarily incorporate or contemplate the incredible explosion in value."

They also don’t contemplate the volatility, as the digital currencies plummeted since the beginning of the year. As of Tuesday, Bitcoin had fallen more than 36 percent since Jan. 5, while Ethereum declined 31 percent since Jan. 13.

Although few disputes have yet to make it to court, Silver said battles are brewing over a variety of agreements, including startups funded with Bitcoin where financing providers are looking for ways to unwind those deals because the virtual currency is sometimes worth more than the business itself.

"Now that the Bitcoin far exceeds the value of the company, the lender will simply want its Bitcoin back," Silver said. "The business will never equal the value of the Bitcoin."

Ripple, based in San Francisco, said in its counterclaim that it canceled the option agreement because R3 abused the partnership, not because XRP surged in value. It said New York-based R3 offered to promote Ripple’s technology for settling cross-border payments to its members but instead developed a competing product.

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"Had R3 been truthful with Ripple and XRP II about these matters, Ripple and XRP II never would have entered into the agreements," Ripple said.

Yet the options agreement could’ve left Ripple stuck handing a huge windfall to its former partner. Although contracts usually contain "material event" provisions or other language that allows parties to back out if circumstances change dramatically, that doesn’t appear to be the case for Ripple’s options agreement with R3.

Ripple’s claim that R3 acted deceptively "suggests to me that that’s the best horse they have to go on," said David Hoffman, an expert in contracts law at the University of Pennsylvania. "I just imagine that the contract doesn’t give them anything other than this."

Given the amount of money at issue, a party would have "plenty of reason to explore every legal argument to try to get out of the obligation," added Gregory Klass, a professor at Georgetown Law.

Representatives for Ripple and R3 declined to comment. The contract is now valued at less than $5 billion.

R3 is developing Corda, a blockchain-related technology for financial institutions. The organization is studying how trading of securities, derivatives and loans can be overhauled by using distributed ledger technology.

Ripple’s virtual currency technology can make it easier to send payments around the world, allowing transfers within minutes rather than days. Shares of MoneyGram International jumped 10 percent on Jan. 11 when it announced it would work with Ripple on a pilot project to use XRP to move money internationally.

After their partnership soured last year, R3 sued Ripple in Delaware and Manhattan state courts over the options agreement. Ripple filed its claim against Ripple in state court in San Francisco. The Delaware and California cases were thrown out by judges, while the dispute moves forward on R3’s home turf in Manhattan.

--With assistance from Matthew Leising

To contact the reporter on this story: Christie Smythe in Brooklyn at csmythe1@bloomberg.net.

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Joe Schneider

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