The legal treatment of cryptocurrency in Canada: recent developments

Over the course of the final decade, cryptocurrencies have grown from the curiosity of some on-line fans to a globally acknowledged medium of alternate valued within the trillions of {dollars}. However whereas Bitcoin, Ethereum, and Dogecoin have turn into family names, the authorized guidelines that apply to cryptocurrency stay unclear and unsettled. On this article, we define among the current developments in Canadian jurisprudence associated to the authorized remedy of cryptocurrencies.

Background

Basically phrases, cryptocurrencies are a sort of digital asset or ‘token’ that capabilities on the blockchain. Blockchain is a distributed ledger expertise, which means that each time a transaction happens on a blockchain system, every element of that system independently checks the validity of each different element. Blockchain and cryptocurrency have been pitched as revolutionary partially as a result of this enables for decentralized, ‘trustless’ transactions, with out the necessity for central intermediaries.

One of many key authorized questions that arises round cryptocurrency is the best way to categorize it legally – what precisely is cryptocurrency? Is it a type of forex? Safety? A commodity? Or a brand new and novel kind of asset with traits totally its personal? These distinctions are removed from tutorial; how cryptocurrency is categorized can have far-reaching penalties when it comes to how it’s handled by legislators, courts and regulators.

Canadian courts have struggled with the query of the best way to deal with cryptocurrency when contemplating whether or not to grant authorized treatments and aid, as illustrated by plenty of current circumstances.

Cryptocurrency as funds

In Li v. Barber, 2022 ONSC 1176 (Barber), the Ontario Superior Courtroom of Justice granted a Mareva injunction to freeze funds that ‘Freedom Convoy’ organizers had raised. A Mareva injunction is a unprecedented treatment that can solely be granted when the plaintiffs have a powerful obvious case in opposition to the defendant, the place the defendants have property inside the jurisdiction of the courtroom, and the place there’s a severe danger that the defendants will take away or dissipate property earlier than the courtroom may give judgment.

The property sought to be frozen by the plaintiffs in Barber included cryptocurrency held in digital wallets. The query arose as as to if the cryptocurrency saved in digital wallets was the truth is held by the defendants, and whether or not digital property current on a blockchain could possibly be thought-about inside the jurisdiction of the courtroom.

The courtroom discovered that the funds, “whether or not they have been within the type of forex or cryptocurrency are actually legally within the possession, energy and management of the defendants.” It additionally discovered that the organizers and lots of the digital establishments holding their cryptocurrency have been inside the jurisdiction of the courtroom. It identified that even an strange fiat forex like Canadian {dollars}, when deposited with a financial institution, “exist[s] not as bundle of cash in a vault or a field, however as a ledger entry which information a debt by the monetary establishment to the shopper… In that sense, we already dwell in an age of digital forex.” As such, “digital funds usually are not immune from execution and seizure to fulfill a debt any greater than a checking account supplied the person or establishment which may entry the funds are inside the attain of a courtroom order.”

Cryptocurrency as a digital asset

In Shair.com Global Digital Services Ltd v Arnold, 2018 BCSC 1512, the Supreme Courtroom of British Columbia thought-about an software for a Mareva injunction and preservation order with respect to cryptocurrency. On this case, the defendant, a former worker of the plaintiff, bought cryptocurrency with funds obtained from the plaintiff, however didn’t return a laptop computer with the relevant pockets info after the defendant’s employment was terminated.

The Courtroom held that the digital forex (i.e. cryptocurrency) and associated pockets info at problem have been “digital property” and made an order that they be preserved pending trial.

Cryptocurrency as a specie of property

In Cicada 137 LLC v. Medjedovic, 2022 ONSC 369, and Cicada 137 LLC v. Medjedovic, 2021 ONSC 8581, Medjedovic, a math prodigy, was alleged to have stolen $15 million value of cryptocurrency utilizing subtle hacking strategies. He prevented showing for trial and resisted cooperating with authorities. The plaintiff requested an Anton Piller order, a kind of injunctive aid that permits for search and seizure in civil circumstances. As a part of that order, property can be seized, after which managed by a 3rd celebration till the end result of the case. On this case, cryptocurrency can be transferred from the defendant’s digital pockets to the pockets of an unbiased custodian.

The Ontario courtroom was cautious to not come to any closing conclusions in regards to the precise nature of cryptocurrency as property. As an alternative, it acknowledged that it was sufficient for now “to seek out that individuals invested worth to acquire management of the tokens” that the defendant allegedly took. Additional, the courtroom acknowledged that “the regulation will decide in the end whether or not the digital tokens are a specie of property…”

The courtroom emphasised the significance of extending the potential for injunctive aid into the sphere of cryptocurrency: “This can be a very severe matter for which an Anton Piller order is justified… As this new type of investing and commerce grows, it’s basically essential to the soundness of the financial system and the net market place that that the integrity of those property be maintained. The investing and transacting public want assurance that the regulation applies to guard their rights. Regardless of what some would possibly suppose, the regulation applies to the web because it does to all relations amongst individuals, governments, and others.”

Cryptocurrency as household property

In M.W. v N.L.M.W., 2021 BCSC 1273, the Supreme Courtroom of British Columbia handled cryptocurrency within the context of dividing household property after the breakdown of a wedding. Beneath the Family Law Act, SBC 2011, c 25, “family property” is defined in s. 84(1)(a) as all actual and private property owned or beneficially owned by both partner on the date of separation, until it’s excluded property. The Supreme Courtroom of British Columbia didn’t carry out an evaluation as as to if cryptocurrency match inside the definition of “household property” – the Courtroom merely included the respondent’s cryptocurrency when making allocations of the events’ property and liabilities and attributed a worth to the respondent’s cryptocurrency holdings, primarily acknowledging that cryptocurrency met the definition of household property.

Different circumstances throughout the nation have equally included cryptocurrency as household property to be included in household property division (for instance, Kostrinsky v Nasri, 2022 ONSC 2926). In M.M.D. v J.A.H., 2019 ONSC 2208, when contemplating whether or not to order redacted disclosure of cryptocurrency accounts in a household regulation matter, the Ontario Superior Courtroom of Justice acknowledged that cryptocurrency “is clearly a risky, rising, intangible supply of wealth which the courts should grapple with extra often in future.”

Cryptocurrency as one thing to be selected one other day

In Nelson v Gokturk, 2021 BCSC 813, the plaintiff introduced claims in breach of contract and conversion concerning the sale and supply of fifty Bitcoin to the defendant. The plaintiff delivered the 50 Bitcoin to the defendant, however the defendant by no means paid the agreed upon sum. The Supreme Courtroom of British Columbia held that the defendant breached the contract and ordered that the defendant pay to the plaintiff the quantity agreed upon within the contract.

With respect to the declare in conversion, the Courtroom assumed, with out deciding, that the plaintiff might set up the tort of conversion concerning the Bitcoin. Though the Courtroom acknowledged that cryptocurrency was a “digital asset”, nothing within the resolution turned on this level. In its evaluation, the Courtroom decided that the damages have been the identical whether or not awarded in contract (breach of contract) or tort (conversion), and, as such, acknowledged that there was no must additional contemplate the benefit of the conversion declare. Consequently, no resolution was made with respect to the character of cryptocurrency in relation to a conversion declare.

In Kik Interactive v AIG, 2020 ONSC 8194, the applicant sought indemnification from its insurer for the authorized bills it incurred in defending an motion commenced by the Securities Alternate Fee in the USA which alleged that cryptocurrency provided by the applicant was a safety and that the sale to the general public was an unregistered public providing of securities. The applicant took the place that its cryptocurrency was not a safety however as an alternative an asset. The Ontario Superior Courtroom of Justice decided that the allegation of a public providing of securities was enough to set off the exclusion within the coverage. As such, the difficulty didn’t activate whether or not the cryptocurrency was really a safety, solely on whether or not it was alleged, and the Courtroom didn’t should make a discovering with respect to the character of the cryptocurrency.

Takeaways

Whereas main case selections coping with cryptocurrency have been comparatively uncommon in Canada, the rising prevalence of crypto property and their integration into the broader monetary system means that litigation involving these questions will turn into extra widespread. Making use of authorized ideas to cryptocurrency presents distinctive challenges, however Canadian courts are illustrating the attribute flexibility and flexibility of the widespread regulation. The circumstances mentioned on this article recommend that the courts haven’t but settled on a transparent doctrine in regards to the precise authorized nature of cryptocurrency. As an alternative, the courts have to date been inclined to put aside the duty of defining a substantive doctrine about cryptocurrency, and brought a practical strategy to offering aid in relation to digital property.