Written by Chris Walton, JDYour client got paid in tokens instead of cash. The other side didn’t deliver. The tokens have a price on CoinMarketCap, but it’s been swinging 40% month to month. What are the damages?
That’s the question the Delaware Superior Court answered in Diamond Fortress Techs. v. Everid, Inc., 274 A.3d 287 (Del. Super. Ct. 2022)), a 2022 decision that produced a $25 million damages award for breach of two contracts payable in cryptocurrency tokens. The opinion, by Judge Wallace, is useful not because it breaks new theoretical ground — the legal framework it applies is well-established Delaware securities law — but because it shows exactly how a court will classify crypto tokens and calculate damages when someone fails to deliver them. If you’re litigating a dispute involving token-denominated obligations, this is the playbook.
Diamond Fortress, a biometric software company, licensed its fingerprint-recognition technology to EverID, a blockchain company building a cryptocurrency trading platform. Diamond Fortress’s software would verify user identities on EverID’s platform. CEO Charles Hatcher also signed on as an advisor for the integration. The contracts specified payment in EverID’s cryptocurrency — “ID Tokens” — rather than cash: 10 million tokens to Diamond Fortress under the licensing agreement, 2.5 million to Hatcher under the advisory agreement. Twenty-five percent vested at the initial coin offering; the rest vested over time.
The ICO occurred on February 8, 2021. EverID never delivered the tokens. Diamond Fortress tried to reach EverID for about a month, got no response, and filed suit. EverID never responded to the complaint. The court entered a default judgment.
A note on that last point: because EverID defaulted, the court’s analysis was uncontested. There was no opposing expert, no dueling methodologies, no challenge to the plaintiffs’ framework. That limits the precedential weight of the decision on contested issues. But the analytical framework the court laid out — how to classify tokens and how to measure damages — is the part that transfers to contested cases, because it’s built on existing Delaware law, not on the specific facts of this dispute.
Before the court could calculate damages, it had to classify the tokens. This matters because the damages formula depends on what kind of asset you’re dealing with. Delaware has well-established precedent for “failure to deliver securities” cases. It has different rules for commodities, different rules for property.
Judge Wallace applied the Howey test — the Supreme Court’s three-factor framework for identifying an investment contract as a security: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits derived from the efforts of others. The court found all three satisfied.
The critical factor was the third prong. Diamond Fortress and Hatcher didn’t agree to receive ID Tokens because they believed the tokens had standalone intrinsic value. They agreed to receive them because they expected the tokens’ value to increase as EverID’s platform gained adoption — adoption that depended on EverID’s efforts, not theirs. The agreements were executed before the ICO, so the “investment” was necessarily speculative and tied to future platform performance. That’s the textbook profile of a security under Howey.
The court flagged an important nuance: tokens that function as securities at the time of an ICO might shift to commodity classification later, as the platform matures and the tokens gain independent utility. The classification isn’t permanent. It depends on the economic reality at the time of the transaction. For litigation counsel, this means the classification question is fact-specific and date-specific — what the token was at the time the contract was formed and breached is what matters, not what it became later. One caveat: Diamond Fortress is a state court default judgment, and the real battleground for Howey analysis is in federal court, where decisions like the Ripple ruling have drawn distinctions (such as between institutional token sales and secondary market transactions) that this case never addressed. Cite Diamond Fortress for its damages methodology; look to federal securities precedent for the classification fight.
Once the court classified the tokens as securities, the damages calculation followed Delaware’s established “failure to deliver securities” framework. As Judge Wallace noted, “but for the novelty of the subject instrument being units of cryptocurrency, this suit mirrors any other failure to deliver securities case — a run-of-the-mill action for Delaware courts.”
Delaware follows the New York Rule for failure-to-deliver damages: the measure is the highest market price of the security within a reasonable time after the plaintiff discovers the breach. “Reasonable time” is how long it would have taken the plaintiff to replace the securities on the open market. Delaware courts have accepted two to three months as reasonable.
The court used CoinMarketCap to find the highest price for ID Tokens in the three months following EverID’s failure to deliver. That price was $2.01 per token. Applied to the 10 million tokens owed to Diamond Fortress and the 2.5 million owed to Hatcher, the math produced $20.1 million and $5.025 million, respectively — roughly $25 million in total.
Two things practitioners should note. First, the New York Rule uses the highest price in the reasonable period, not the average or the closing price on the date of breach. For a volatile token, the difference between the average price and the peak price in a three-month window can be enormous. Second, the court endorsed CoinMarketCap as “a reliable cryptocurrency valuation tool” for determining that market price. In an uncontested proceeding, that endorsement was easy. In a contested case, expect the opposing side to challenge the data source, argue for a different measurement window, or dispute what constitutes “a reasonable time” to replace the tokens.
The Diamond Fortress framework works cleanly when the token traded on an exchange with observable prices during the relevant period. A lot of real-world token disputes involve harder facts:
Tokens that never reached an exchange. If the ICO never happened or the token was never listed, there’s no CoinMarketCap data to reference. You’re in DCF or comparable-transaction territory, with all the difficulties that entails for an asset with no cash flows and no reliable comparables.
Tokens with negligible liquidity. A token can have a listed price on CoinMarketCap and still be effectively illiquid — thin order books, wide bid-ask spreads, and a market cap that couldn’t absorb a sale of the volume at issue without moving the price. The New York Rule assumes you could have replaced the securities on the open market. If selling 10 million tokens would have cratered the price, the “highest market price” may not reflect realizable value.
Tokens that are clearly not securities. Bitcoin and Ether, at their current stage of adoption, are increasingly treated as commodities by regulators. If the token at issue doesn’t satisfy Howey, the failure-to-deliver-securities framework doesn’t apply, and you need a different damages theory. The court in Diamond Fortress acknowledged this by noting that a token’s classification can evolve over time.
These are the contested questions that Diamond Fortress leaves open, and they’re the ones most likely to drive token valuation disputes in the next few years.
If the facts of your case look like Diamond Fortress — a token that was listed on exchanges, traded with reasonable volume, and has observable price history on CoinMarketCap or a comparable data source — you may not need a formal valuation engagement. The damages formula is mechanical: identify the measurement window, pull the highest price, multiply by the quantity owed. A competent paralegal with a CoinMarketCap subscription can produce the number.
You need a valuation expert when the token didn’t trade publicly, traded with negligible liquidity, or when the classification (security vs. commodity vs. property) is contested. You also need one when the opposing side challenges the data source or the measurement period, or when the volume at issue is large enough that market-impact analysis becomes relevant. The line is whether there’s a reliable market price. If there is, the legal framework does the work. If there isn’t, someone has to build a value from fundamentals, and that’s where valuation methodology — and the expert’s ability to defend it on cross — becomes the case.
Diamond Fortress is a straightforward case with a useful framework. The court classified early-stage crypto tokens as securities under Howey, applied Delaware’s failure-to-deliver-securities damages formula, and endorsed CoinMarketCap as a reliable data source for token pricing. The $25 million award followed mechanically from those steps. For litigation counsel, the value of the case is the roadmap: classify the token first, then apply the corresponding damages framework. For valuation practitioners, the value is knowing when you’re needed and when you’re not — and preparing for the harder cases where there’s no observable market price and the classification itself is in dispute.
If you’re working on a dispute involving token-denominated obligations and the token didn’t trade on a public exchange — or traded with volume too thin to support a market-price argument — happy to talk through the valuation approach. Sometimes a scoping call is enough to tell you whether a formal engagement is warranted.
