Using cryptocurrency to pay for goods or services is becoming increasingly commonplace in Canada. It is therefore no surprise that the legal treatment of cryptocurrency has made its way to the Canadian judiciary.
In Copytrack Pte Ltd. v. Wall, the British Columbia Supreme Court considered the legal nature of cryptocurrency and what remedies were available to a plaintiff who mistakenly transferred approximately $495,000 worth of its digital funds to the defendant. Although the decision leaves it open for future courts to determine whether cryptocurrency is a “good” that can be subject to claims in conversion and wrongful detention, it confirms cryptocurrency is “property” that can be traced and recovered.
Copytrack PTE Ltd., a Singapore company in the business of digital content management and copyright enforcement, created its own cryptocurrency known as CPY tokens. As part of an initial coin offering campaign, Copytrack offered CPY tokens for sale to investors. The defendant, Brian Wall, subscribed for 530 CPY tokens, valued at about $780 CDN. When finalizing the sale, Copytrack mistakenly transferred to Wall’s cryptocurrency wallet 530 ether tokens, which are a different – and much more valuable – form of cryptocurrency. Copytrack immediately advised Wall of the mistake and requested the return of the ether tokens, which Wall failed to do.
Copytrack brought an application before the court seeking a number of orders relating to what Copytrack alleged was Wall’s “wrongful retention or conversion of the Ether Tokens.” Copytrack also sought summary judgment of these claims. In defence, Wall claimed his cryptocurrency wallet was hacked by an unknown third party and the ether tokens were transferred from his wallet to five different cryptocurrency wallets. He argued that, as a result, the tokens were no longer in his possession or control.
According to the court, the real issue to be determined in this case was whether the doctrines of conversion and wrongful detention applied to cryptocurrencies and whether that issue could be determined on a summary basis.
In its initial submissions, Copytrack set out the elements of detinue for the recovery of “goods” wrongfully converted or detained, arguing it had a better right to the goods than did Wall. As the court noted, however, Copytrack did not address the question of whether the cryptocurrencies were, in fact, “goods.”
Upon providing the court with additional submissions on this point, Copytrack argued that determining whether cryptocurrency is a good was unnecessary given that a broad range of things can ground claims in conversion and detinue. Copytrack submitted that the ether tokens could in fact be subject to these claims because the tokens (1) are capable of being possessed, stored, transferred, lost and stolen; (2) were, when the conversion and wrongful detention began, held in Wall’s wallet; (3) are specifically identifiable and have been traced to five wallets in which they are currently being held; and (4) can be used as a medium of exchange, a store of value, and a unit of account, like funds or currency. Wall’s position remained that this was a pure question of law that could not be decided summarily.
The court held that the proper characterization of cryptocurrency was a key issue in this case and central to determining whether the ether tokens could ground a claim in conversion or detinue. The court found that the issue was “a complex and as of yet undecided question” that could not be determined by summary judgment.
However, recognizing that it would be “both unreasonable and unjust” to deny Copytrack a remedy in the circumstances – particularly given Wall’s death during the proceedings – the court granted an order allowing the plaintiff to trace and recover the wrongfully transferred cryptocurrencies from “whatsoever hands the Ether Tokens may currently be held.” As the court expressed, regardless of the characterization of the ether tokens, it was undisputed that they were Copytrack’s property, they were sent to Wall in error, they were not returned when demand was made and Wall had no proprietary claim to them.
Copytrack has left it to future courts to determine whether cryptocurrency can ground claims for conversion and wrongful detention of goods. The decision has confirmed, however, that cryptocurrency is “property” that can be the subject of tracing orders when mistakenly transferred to third parties.
Copytrack’s ether tokens were identifiable and had been traced to the specific cryptocurrency wallets in which they were being held. This may not, however, be the case for all owners of mistakenly transferred cryptocurrencies. Transactions using cryptocurrency are often anonymous or pseudonymous, such that deciphering the identity of the other party to the transaction can be challenging, if not impossible.
The transfer of cryptocurrencies also generally defies jurisdictional boundaries. Given that cryptocurrencies are treated differently in different jurisdictions, an order issued by a Canadian court to trace the digital coins may not be enforceable in the country in which the coins end up. It is to be seen whether Copytrack runs into these kinds of difficulties.
Practically speaking, plaintiffs can consider applying for orders compelling the disclosure of any cryptocurrency passwords, wallets, or user credentials in an attempt to identify the correct recipient of the transfer and trace the correct property. Given these unique challenges, plaintiffs should consider engaging experts to assist in tracing their cryptocurrency.