Regulating cryptocurrency exchanges: The courts struggle

Tuesday, March 24, 2020

Cryptocurrency remains, in many ways, a novel asset class. No surprise, then, that courts in many jurisdictions are still trying to figure out how their law applies to the phenomenon.

“The overarching theme is whether cryptocurrency is property or not, and the answer depends on the cryptocurrency’s architecture,” said John Kim, a partner in Norton Rose Fulbright Canada LLP’s Vancouver office. “The difficulty is that there are several thousand types of cryptocurrency in circulation and the architecture varies throughout.”

What courts are trying to do, Kim said, is analyze the nature of a particular currency in terms of the parties’ intention.

“If the currency has been properly implemented, the court will try their best to determine whether the expectation of the parties was or was not that property be created.”

Esoteric as cryptocurrency may still be, the question of whether it is property goes far beyond the academic, the arcane, or the technical. Indeed, whether cryptocurrency is property or not circumscribes the remedies available to parties, such as whether the currency can be subject to tracing, freezing and recovery orders.

The most in-depth decision to date is AA v Persons unknown who demanded Bitcoin on 10th and 11th October 2019 and others [2019] EWHC 3556 (Comm), decided by the English High Court in December 2019.

The case involved an unnamed Canadian insurer, whose website was compromised by a hacker demanding ransomware in bitcoin. As it turns out, the Canadian company was itself insured against cyberattacks by an English entity, the claimant in the case.

After some negotiations, the ransom was paid, but a blockchain investigation firm hired by the English insurer managed to track the payment to a specific address at a cryptocurrency exchange known as Bifinex. The claimant sought a proprietary injunction, seeking to prohibit the defendants from dealing with the bitcoin in which the claimant asserted a proprietary interest.

Thus arose the issue as to whether bitcoin, as cryptocurrency, was property capable of being frozen.

What was clear was that bitcoin did not fit into either of the two kinds of property traditionally recognized by English law.

“[The Bitcoins] are not choses in possession because they are virtual, they are not tangible, they cannot be possessed,” the court stated. “They are not choses in action because they do not embody any right capable of being enforced by action.”

But the failure to fit into these traditional categories, the court concluded, did not necessarily mean that bitcoin could not be treated as property. Indeed, bitcoin met the four criteria set out in the classic definition of property enunciated in National Provincial Bank v. Ainsworth [1965] AC 1175 — they were “definable, identifiable by third parties, capable in their nature of assumption by third parties, and having some degree of permanence” — and as such could be treated as property.

Some seven months earlier, in March 2019, the Singapore International Commercial Court had reached the same conclusion in B2C2 Ltd v. Quoine Pte Ltd. [2019] SGHC(I) 03.

“Cryptocurrencies are not legal tender in the sense of being a regulated currency issued by a government but do have the fundamental characteristic of intangible property as being an identifiable thing of value,” the Singapore court stated in ruling that cryptocurrency could be the subject of a trust.

The issue has also been raised in New Zealand in the course of the ongoing liquidation of the Cryptopia crypto exchange.

“The New Zealand High Court is currently considering whether Cryptopia held cryptocurrency in its custody in trust for its customer of whether that cryptocurrency formed part of Cryptopia’s assets,” said Evan Thomas in Osler, Hoskin & Harcourt’s Toronto office. “To determine that issue, it’s likely the court will have to decide whether and to what extent cryptocurrency is property.”

Canada, unfortunately, has little jurisprudence on the subject.

“There are two earlier B.C. cases that have touched on the question of whether cryptocurrency is property but without the in-depth analysis of the English court,” Thomas said.

In its September 2018 decision in Copytrack Pte Ltd. v. Wall 2018 BCSC 1709, the Supreme Court of British Columbia granted a tracing and recovery order with regard to cryptocurrency, but explicitly declined to characterize its nature absent an adequate evidentiary record, stating:

“In my view, the proper characterization of cryptocurrency, including the Ether Tokens, is a central issue in this case, and one that informs the analysis of whether Copytrack’s claims in conversion and detinue can succeed. However, the evidentiary record is inadequate to permit a determination of that issue on this application, and, in any event, it is a complex and as of yet undecided question that is not suitable for determination by way of a summary judgment application.”

Finally, that same court’s earlier ex parte ruling in Shair.Com Global Digital Services Ltd. v. Arnold 2018 BCSC 1512, which granted a preservation order in regard to cryptocurrency, simply seems to assume that bitcoin is in fact property.

This is the second in a three-part series. Read part one: Regulating cryptocurrency exchanges: Unclear definitions.

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