Canada is often considered a haven for laundered money and wrongfully hidden assets, with judges acknowledging that the law has been slow to catch up to these crimes.
As Justice Pepall of the Ontario Court of Appeal recently stated in the context of a massive fraud against a Paraguayan pension fund, “Canada’s legal system has struggled to respond to dishonest dealings in society” (Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional v Garcia, 2020 ONCA 412).
Yet Canadian courts have shown consistency in their helpful approach to recovering cryptocurrency. As a relatively new investing option, the cryptocurrency space is largely unregulated and has quickly become a target for fraudsters. As a result, courts have been asked to opine on applying criminal and civil recovery remedies to this digital asset.
In response they have, in a variety of circumstances, treated cryptocurrency as an “asset” and “property” for the purposes of asset recovery. For example, courts are frequently granting interim preservation of property orders (IPOs) in respect of cryptocurrency and on the same terms as they would elsewhere, applying the well-known “substantial question to be decided” test and “interests of justice” factors (Neural Capital GP, LLC v 1156062 BC Ltd., 2019 BCSC 478; Shair.com Global Digital Services Inc. v Arnold, 2019 BCSC 870; Director of Civil Forfeiture v Hobbs, 2019 BCSC 1344).
In the cryptocurrency space, most IPOs have been sought and granted in British Columbia. An IPO is a form of statutory interlocutory relief similar to an injunction that can often be sought ex parte, or, without notice to the alleged wrongdoer. It is a critical tool to ensure the preservation of property pending the outcome of a case. IPOs are sought by plaintiffs moving under statute (e.g., rule 10-1 of British Columbia’s Supreme Court Civil Rules and rule 45 of Ontario’s Rules of Civil Procedure) or by provincial Attorneys General moving under civil forfeiture legislation (e.g., British Columbia’s Civil Forfeiture Act and Ontario’s Civil Remedies Act).
Unlike asset recovery injunctions, IPOs have a low threshold, as they are typically sought in disputes over ownership and title. The legal framework requires courts to grant an IPO if there is “a substantial question to be decided” as to the plaintiff’s entitlement to the property or a “serious question to be tried” as to whether the property constitutes the proceeds or instrument of “unlawful activity.” The exception is when granting an IPO would clearly not be in the “interests of justice.”
The “interests of justice” factors include: (1) proportionality; (2) fairness; (3) the degree of culpability, complicity, knowledge, acquiescence, or negligence; (4) how widespread in the community the sort of unlawful activity in question is; (5) the need to remove profit motive; (6) the need for disgorgement of wrongfully obtained profits; (7) the need for compensation; (8) prevention of future harm; and (9) general deterrence (Director of Civil Forfeiture v Hobbs, 2019 BCSC 1344; British Columbia (Director of Civil Forfeiture) v Crowley, 2013 BCCA 89).
This is a notably lower threshold than the “strong prima facie case” called for in a Mareva application (Neural Capital GP, LLC v 1156062 BC Ltd., 2019 BCSC 478). This higher standard is justified because a Mareva injunction, or “freezing order,” is an extraordinary, equitable remedy that freezes the assets of a party in circumstances where there is a genuine risk that the party would dissipate some or all of its assets before the conclusion of a trial or action.
Canada has yet to see a reported case concerning a Mareva application related to cryptocurrency. Still, the cases concerning IPO’s imply that the principles relevant to Mareva and the similar Norwich and Anton Piller applications would apply equally to crypto assets. For example, an interpleader case demonstrates that courts will treat frozen crypto assets in the same manner as other assets for purposes of judicial remedies.
An interpleader order is a rarely utilized statutory tool that an innocent party can employ to extricate itself from a proceeding in which competing claims have been made against property held by that party. In Canadian Imperial Bank of Commerce v Costodian Inc. et al, 2018 ONSC 6680, CIBC sought an interpleader order concerning $25.7 million that it had frozen related to intended cryptocurrency transactions by hundreds of individuals on an exchange platform operated by QuadrigaCX. CIBC sought to pay the funds into court so that competing claims of entitlement could be resolved. The court granted the order but refused to extinguish CIBC’s liability with respect to the funds, as it was unclear whether CIBC had wrongfully frozen the accounts.
Outside of the preservation of property scope, Canadian courts have also acknowledged that bitcoin companies are subject to the same principles as financial institutions in the criminal context of search and seizure and the return of seized goods (R v Jahanshahloo, 2018 CarswellPEI 122).
Still, there are important gaps to fill in the case law. For example, Canadian courts grapple with whether a crypto asset is considered a “good” for the purposes of the doctrines of conversion and wrongful detention (Copytrack Pte Ltd v Wall, 2018 BCSC 1709). Conversion is an intentional, strict liability tort consisting of the taking with intent of exercising over a chattel an ownership inconsistent with the real owner’s right of possession. Wrongful detention, or detinue, is an action to recover for the wrongful taking of personal property.
Similarly, it remains an open issue whether cryptocurrency can constitute a “security” in the context of “initial coin offerings,” termed “ICO’s,” for the purposes of securities regulation (Director of Civil Forfeiture v Hobbs, 2019 BCSC 1344).
Canadian courts have not yet gone so far as to emulate the UK’s commendable stance on asset recovery in the context of cryptocurrency. See, for example, the UK High Court of Justice’s recent decision concerning fraudulently induced bitcoin transfers dissipated through various cryptocurrency exchanges.
In Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited, the High Court ordered a proprietary injunction, worldwide freezing order, and ancillary disclosure order against the unknown fraudsters, as well as a disclosure order against several cryptocurrency exchanges outside of the UK to reveal the identity of the fraudsters. The court found that the “location” of a crypto asset is the place where the owner is domiciled, which provided the English court with jurisdiction over the fraud.
Nearly all cases in Canada relating to cryptocurrency have involved applications for IPOs, so it remains to be seen whether Canadian courts will follow the UK’s determined approach to international crypto asset recovery.
As demonstrated in Ion Science, establishing jurisdiction will be an important first step to be considered in international crypto asset recovery. While no Canadian cases have yet discussed the issue of jurisdiction over crypto assets “located” internationally, Canadian courts have assumed jurisdiction in typical fashion in disputes over the ownership of cash in a bitcoin ATM located in Canada and the Canadian location of bitcoin acquired by a terminated employee on behalf of a former employer in Canada, among other examples.
Regardless of how the courts apply the judicial tools and remedies to assist plaintiffs, the practical impediment worldwide to tracing crypto assets continues to the be decentralized nature of cryptocurrency, the nature of the storage of the “key” to access such assets, and the form of the “wallet” where such assets are placed. Courts will be asked to provide remedies granting access to the “key” to enable plaintiffs to recover the asset in the “wallet.”
Based on case law to date, it appears that Canadian courts will exercise their discretion to tailor traditional remedies to assist parties seeking relief related to crypto assets in Canada. Plaintiffs will be asking Courts to make creative orders in this emerging area to dissuade fraudsters from continuing to consider Canada a haven for laundering or hiding assets, crypto or otherwise.
Lincoln Caylor, pictured above left, is a litigator at Bennett Jones LLP in Toronto and focuses on cross-border financial crime disputes. He is co-founder of The International Academy of Financial Crime Litigators.
Nina Butz, above right, is a litigator at Bennett Jones LLP in Toronto and focuses on financial crime disputes.