The wild swings in cryptocurrencies have created ripple effects in the world’s economy. This new type of currency has grown in value and popularity, in part, by the increased adoption by retail and institutional investors alike.1 There is little doubt that litigation will follow.2 One recent case is Canadian Imperial Bank of Commerce v. Costodian Inc. et al. Justice Hainey’s decision is quite interesting, because it provides a concise summary of how the respondent cryptocurrency exchange functioned and how complicated the process really is.
Before delving into this case let’s quickly review some basics. Currencies like the Canadian dollar are called “fiat” currencies. It is a currency issued by a government which gives the country greater control over its economy because the government decides how much money is printed. It has no intrinsic value. It only has value because of the faith people have in that particular government and its economy.3 Cryptocurrency, like bitcoin, is a virtual currency not backed by any government. It is a digital asset with decentralized structures distributed across a network of computers. Theoretically, this makes the cryptocurrency immune to government interference or manipulation.4 For example, there is a set, specific amount of bitcoin that will ever be mined. No one can simply create more.
It is beyond the scope of this blog to provide a full explanation of bitcoin or other cryptocurrencies. Rather, the court decision that is the subject of this blog helps the reader to better understand the process of how cryptocurrency exchanges, one of the primary modes of exchange for investors, function. In the case under review the court reviews the parties and the roles they play in the context of the financial institution’s application for an interpleader order.
Interpleader is a mechanism for determining the respective interests of two or more claimants in the same property where the property is held by a third party that has no beneficial interest in it.5 There are generally two kinds of interpleader proceedings, but the first type is more common.6 Typically, an interpleader proceeding arises when two or more parties commence litigation where each is claiming that they are entitled to the same property. A third party (often a bank or an insurer) who is holding the property (including money) that is the subject of the litigation, but who is claiming no beneficial interest in the property, seeks to pay the disputed property into court so that they are not further involved in the litigation.
Atypically, in this case, it appears that CIBC commenced an application for an interpleader order after conducting its own investigation regarding financial activity in respect of certain bank accounts related to a cryptocurrency exchange. It elected to freeze these accounts (the “Disputed Accounts”) arising from the relationships between the various respondents. Here it appears that the CIBC wanted to pay money into court to give potential parties notice about these funds. No actual litigation had been commenced by any parties claiming an interest in the funds.
CIBC’s investigation was prompted by the individual respondent transferring $2 million from a Transaction Account to his personal chequing and savings account. The individual respondent, who was a principal of one of the companies involved in the cryptocurrency exchange, admitted that he did not have any personal interest in these funds.
The respondents did not cooperate with CIBC’s subsequent investigation.
Before evaluating CIBC’s request for an interpleader order, Justice Hainey identified the role of each actor involved and provided a concise summary of how the cryptocurrency exchange functioned.
At paragraph 7, Justice Hainey identified the role of the respondents:
- Quadriga – was the actual online cryptocurrency exchange;
- Billerfy – was a payment processor that facilitates payments to and from various online platforms; and
- Costodian – was a payment platform that was incorporated for the sole purpose of holding funds deposited by individual investors for buying and selling cryptocurrencies.
In the subsequent paragraph, His Honour summarized the mechanics of the exchange from the investor’s initial deposit through to the withdrawal:
- A cryptocurrency investor sends a wire transfer to a Costodian account at CIBC;
- Billerfy provides the identity of the investor and the amount of their deposit to Quadriga;
- Quadriga credits the investor’s online wallet with “Quadriga CX Bucks” which they can use to buy and sell cryptocurrencies;
- When the investor wants to cash out their Quadriga CX Bucks, they submit a withdrawal request to Quadriga, which forwards these requests to Billerfy;
- Billerfy aggregates these requests, rounds up to the nearest $500,000 or $1,000,000 and makes a draw on Costodian’s accounts at CIBC to an account held by Billerfy at another financial institution;
- Billerfy then transfers the withdrawn funds from that account to the individual investors who submitted the withdrawal requests.
Justice Hainey granted the interpleader motion and determined that CIBC met the onus of establishing that there was a real foundation for the expectation of competing claims with respect to the disputed funds.
His Honour’s determination was based on an adverse inference he drew from Quadriga’s refusal to answer whether investor deposits had ever been actually credited to their respective accounts in the form of Quadriga CX bucks. Based on this adverse inference, Justice Hainey held that there was a real foundation for the expectation that the investors would have a competing claim and granted the interpleader motion.
Perhaps more importantly, Justice Hainey’s endorsement highlights the dangers that can be associated with cryptocurrency exchanges and the importance of doing your due diligence on the exchange you intend to use, not just the cryptocurrency itself.
- See February 26, 2021 article Banking and investment institutions are turning to bitcoin. Could it be dangerous for the economy? ↵
- See Dalton McGrat’s blog Litigation Notes on Bitcoin and Other Cryptocurrencies. ↵
- See Investopedia’s article “Fiat vs. Representative Money: What’s the Difference?” ↵
- See Investopedia’s article called “Cryptocurrency” by Jake Frankenfield. ↵
- Watson & McGowan, Ontario Civil Practice 2021 at p. 1092 ↵
- See Rule 43 of Ontario’s Rules of Civil Procedure. The second type of interpleader motion is brought by a creditor or claimant who is involved in a dispute of ownership of property seized by a sheriff. ↵