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Digitalira.com, LLC v. Kingdom Trust Co.

United States District Court, D. South Dakota, Southern Division

November 12, 2019

DIGITALIRA.COM, LLC and ALTERNATIVE IRA SERVICES, LLC, Plaintiffs,
v.
THE KINGDOM TRUST COMPANY, Defendant.

          ORDER GRANTING PRELIMINARY INJUNCTION

          KAREN E. SCHREIER UNITED STATES DISTRICT JUDGE

         Plaintiffs, DigitalIRA.com, LLC (Digital IRA) and Alternative IRA Services, LLC (Bitcoin IRA), move for a temporary restraining order and preliminary injunction against defendant, The Kingdom Trust Company. Docket 3. Kingdom Trust opposes this motion. Docket 37. For the following reasons, the preliminary injunction is granted.

         BACKGROUND

         In recent years, some retirement investors have begun holding their retirement assets in cryptocurrency. See Docket 4 at 4-5. Such investors store these assets through a trust custodian, who, for a fee, employs secure methods to keep the assets safe from nefarious third-parties. Id. at 4. Many investors also use an account service provider who facilitates the purchase, sale, and delivery of cryptocurrency funds. See Id. at 4-5. Such account service providers recommend a variety of third-party services to their customers. Id. These services include trust custodianship and online trading platforms, which allow customers to self-direct trading through an online portal. Id.

         Kingdom Trust is a trust custodian. Id. at 5. It charges customers a monthly fee in exchange for holding their assets in secured storage. Id. It has been approved by the South Dakota Division of Banking as a public South Dakota Trust Company. Id. Bitcoin IRA is a technology platform that allows account holders who keep assets in cryptocurrency to make trades and monitor their account balances online. FTR: Evidentiary Hearing on Motion for Temporary Restraining Order and Preliminary Injunction at 9:18 a.m., DigitalIRA.com LLC et al. v. The Kingdom Trust Company, No. 19-CV-4137-KES. It uses several fictitious business names in conducting its services: Bitcoin IRA, Digital IRA, and Digital Gold. Id.

         DigitalIRA.com is a separate, new entity. Id. at 9:19 a.m. It was created to be the third-party administrator for BitGo Trust, a trust custodian unrelated to Kingdom Trust. Id. DigitalIRA.com and Bitcoin IRA, while separate entities, are related. Id. Chris Kline serves as Chief Operating Officer of both companies, and the former refers customers to use the latter as an online trading platform. Id.; Docket 4 at 5. DigitalIRA.com has no alleged relationship with Kingdom Trust.

         On September 5, 2018, Bitcoin IRA[1] and Kingdom Trust entered into a referral agreement. Docket 1-1 at 2. The agreement stated that Bitcoin IRA would refer its clients to use Kingdom Trust as a trust custodian. Id. ¶ 1. In exchange, Kingdom Trust agreed to pay Bitcoin IRA a referral fee for account holders who became Kingdom Trust customers. Id. ¶¶ 2-3. The agreement was for a term of one year from its execution and it renewed annually automatically, unless terminated by one of the parties. Id. ¶¶ 5, 7. It allowed for termination by either party, provided that the terminating party gave 180 days of written notice to the other party. Id. ¶ 6. Kingdom Trust agreed to notify Bitcoin IRA of any changes made to accounts that used Bitcoin IRA as a trading platform. Id. ¶ 13.

         Kingdom Trust customers who wished to use Bitcoin IRA as their online trading platform named Bitcoin IRA as their account designated representative (ADR). Docket 4 at 2. An ADR is granted access to customer accounts for use in advising and facilitating trades. Docket 1-3 ¶ 10.3; FTR: Evidentiary Hearing at 12:54-12:55 p.m. This designation gave Bitcoin IRA permission to access account data in Kingdom Trust. Docket 4 at 2. Kingdom Trust facilitated this access via application programming interfaces (APIs). FTR: Evidentiary Hearing at 9:23 a.m. The APIs map data, like customer name and address, from Kingdom Trust accounts into Bitcoin IRA, and vice versa. Id. Bitcoin IRA also received a daily “data feed” from Kingdom Trust that contained updated information about customers' holdings. Id. at 9:33 a.m. The data feed also included data about trades and transactions so that Bitcoin IRA's account pages could reflect the same information as Kingdom Trust's database. Id. at 12:56-12:57 p.m. Bitcoin IRA used this information to ensure its platform reflected accurate information about customers' holdings. Id. at 9:33 am.

         Over 1, 000 of Kingdom Trust's customers used Bitcoin IRA as their ADR and used the Bitcoin IRA platform to effectuate online trades. See Id. at 11:15-11:16 a.m. The Kingdom Trust-Bitcoin IRA relationship began to sour after Bitcoin IRA became the third-party administrator for BitGo Trust. Id. at 10:03 a.m. According to Kline, Bitcoin IRA partnered with BitGo Trust to give Bitcoin IRA customers “optionality.” Id. Bitcoin IRA users could, but were not required to, choose to use BitGo Trust instead of Kingdom Trust as their trust custodian. Id.

         On July 5, 2019, Bitcoin IRA sent a letter to its account holders. Defendant's Exhibit 21. The letter stated that by “upgrading” accounts for free, customers could receive new features. Id. at 1. But the “upgrade” that Bitcoin IRA touted as an improvement to its existing features was a switch from Kingdom Trust to BitGo Trust. FTR: Evidentiary Hearing at 10:53 a.m. The letter included a link to a form that directed a transfer of customers' assets from Kingdom Trust to BitGo Trust. Id. at 10:53-10:54 a.m; Defendant's Exhibit 21 at 1. An “upgrade my account” link, which also took customers to the form, was added to the Bitcoin IRA customer login portal. FTR: Evidentiary Hearing at 12:58 p.m.

         Following the letter and additional solicitations from Bitcoin IRA, 1, 177 customers submitted requests to transfer their assets from Kingdom Trust to BitGo Trust. Id. at 11:15-11:16 a.m. Before moving any assets to BitGo Trust, Kingdom Trust validated each customer's intent to transfer. Id. at 11:58 a.m., 1:00-1:01 p.m. Kingdom Trust asserts that many customers who filled out the “upgrade” form did not know they were requesting to transfer assets to BitGo Trust. Id. at 1:01 p.m. Kingdom Trust felt the transfer requests exposed its clients to “heightened risk.” Id. at 1:02 p.m. It alleges that for customers who validated their desire to transfer and submitted the proper paperwork, transfers were effectuated within a few weeks. Id. at 1:14-1:15 p.m.

         On August 23, 2019, Kingdom Trust removed Bitcoin IRA's API access and stopped sending daily updated account information, as was the previous custom. Id. at 9:34-9:35 a.m. Thus, Bitcoin IRA's online trading platform no longer reflected accurate, up-to-date information about assets held in Kingdom Trust's customers' accounts. Id. Kingdom Trust did not provide notice to Bitcoin IRA prior to removing access to account data. Id. at 9:58 a.m.

         Bitcoin IRA created a “mirror” database that reflects account information as it was on August 23, 2019, so that customers' accounts still reflect some estimate of actual assets. Id. at 9:34 a.m. But without updated data, customers risk trading on outdated information that reflects inaccurate balances and holdings. Id. at 9:35 a.m. This might cause further problems with liquidity providers once trades are executed. Id. Kingdom Trust has not reinstated Bitcoin IRA's access to account data. Id. at 11:39-11:40 a.m.

         Kingdom Trust asserts that its customers would be harmed if Bitcoin IRA is able to access account data. Id. at 1:04 p.m. It claims Bitcoin IRA's misleading behavior in urging clients to “upgrade” shows that Bitcoin IRA shared confidential information about Kingdom Trust accounts with BitGo Trust and DigitalIRA.com. Id. at 1:04 p.m., 1:43 p.m. Kingdom Trust alleges that by withholding access to client account information, it is acting in its clients' best interest and is performing due diligence to ensure their data will not be misused. Id. at 1:03-1:04 p.m. Around 400 customers who initially requested a transfer have not been transferred to BitGo Trust. Id. at 11:57 a.m. Kingdom Trust asserts that it is still “walking through the process” of transferring these customers. Id.

         To date, customers are still not receiving up-to-date data about their Kingdom Trust accounts through the Bitcoin IRA platform. Id. at 11:39-11:40 a.m. Kingdom Trust does not send account data to Bitcoin IRA for any accounts. Id. at 11:40 a.m. Because of volatility in cryptocurrency markets, trading on reliable data is crucial. Id. at 11:39 a.m. Kingdom Trust notes that customers can still trade on updated data by first calling Kingdom Trust or logging onto their website to check their account data, and then logging on to Bitcoin IRA to make the trade. Id. at 12:57-12:58 p.m. Around 80 trades have been made in this manner since August 23, 2019, when Bitcoin IRA's access to Kingdom Trust data was shut off. Id. at 12:58 p.m.

         Bitcoin IRA alleges that “down time” and continuity statistics are crucially important to its reputation as a technology platform. Id. at 10:31- 10:32 a.m. It states that because it is not receiving data from Kingdom Trust, its reputation suffers among its existing and potential customers. Id. at 10:31 a.m. Account holders who are unable to access their data via Bitcoin IRA, despite having designated Bitcoin IRA as their ADR, may lose confidence and trust in the service. Id. at 10:32 a.m. And Bitcoin IRA alleges that it could suffer ...


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