Cryptocurrency Litigation: Traditional Remedies in Modern Circumstances

May 06, 2022

Written By Maureen Ward, Nathan Shaheen and Shaan Tolani

Previously under seal and only recently released to the public, the Ontario Superior Court’s decision in Cicada 137 LLC v Medjedovic, 2021 ONSC 8581 [Cicada] shows a necessarily functional approach for those seeking to identify, trace and freeze digital assets.

In the decision, Justice Myers granted an Anton Piller Order—a court remedy that allows the plaintiff, through a court-approved independent supervising lawyer, to enter a defendant’s property in order to seize relevant devices and records—in connection with the alleged theft of $15 million in cryptocurrency tokens. In doing so, the court further demonstrated that remedies ordinarily available to potential targets of economic crime remain available in novel cases involving digital assets. 

Background

The plaintiff, Cicada 137 LLC, is a DeFi platform operated as Index Finance, which holds digital assets on behalf of a group of investors. The plaintiff alleged that the defendant—a 19 year-old with a master’s degree in mathematics named Andean Medjedovic—hacked the platform to move $15 million in tokens to his own wallet.

To locate the password(s) to the cryptocurrency account or wallet in which Mr. Medjovic had allegedly moved the tokens, the plaintiff moved ex parte to obtain an Anton Piller Order from the Ontario Superior Court.

The Court’s Decision

Justice Myers granted the Anton Piller Order, holding that the plaintiff established a strong prima facie case that Mr. Medjovic misappropriated the tokens to his own wallet and that he is likely to hide the password(s) to the wallet. As a result, the court authorized a search for the password(s)—which Justice Myers said was likely stored in a computer or memory device – so the allegedly misappropriated tokens could be moved to the wallet of an independent court officer pending the outcome of the litigation.

In rendering his decision, Justice Myers commented on the importance of ensuring this type of interim relief, and the law more generally, applies to digital assets in order to protect the investing and transacting public:

As this new form of investing and commerce grows, it is fundamentally important to the stability of the economy and the online market place that that the integrity of these assets be maintained. The investing and transacting public need assurance that the law applies to protect their rights. Despite what some might think, the law applies to the internet as it does to all relations among people, governments, and others.

Although Justice Myers’ decision is helpful for the investing and transacting public, some open questions remain. In particular: (1) whether digital assets may be classified as property; and (2) whether a “Code is Law” defence—an assertion that there is nothing illegal or wrongful about doing something that the programming code of a platform allows–may apply in future cases.

On the first question, Justice Myers purposefully left open whether digital assets may be classified as property and instead took a more principled approach to his ruling. He commented that it was enough for purpose of the case “that people invested value to obtain control of the tokens that the defendant appears to have taken” and that “the law will determine in due course whether the digital tokens are a specie of property and/or whether the defendant has any right to keep them (or control over them) or the value that they represent from the plaintiff regardless of how the law classifies them.”

Notably, after Justice Myers rendered his decision under seal, in a different decision, Justice MacLeod commented that the government order made in connection with the Freedom Convoy Protest referred to virtual currency as property. In addition, court decisions in the United Kingdom have already suggested digital assets are classified as property under English Law, which has been fundamental for the courts there to grant proprietary injunctions (for example, in AA v Persons Unknown, [2019] EWHC 3556 (Comm.)). This suggests that Ontario courts will likely also classify digital assets as property, though it remains to be seen.

Takeaways

Cicada is an important decision that reveals an increasing trend of interim relief being sought and awarded in cases involving cryptocurrency. For example, in our previous insight, "Mareva Injunction over Cryptocurrencies in the Freedom Convoy Class Action," we reported on a Mareva Injunction involving the freezing of digital assets held in connection with the Freedom Convoy protest in Canada We expect this trend to continue as digital assets become even more prevalent.

Given the explosion of initial coin offerings and influx of funds into the digital asset space, it is important that courts, as Justice Myers does in Cicada, signal to the investing and transacting public that the law will continue to protect them whether their assets are traditional or more novel.

If you have any questions about the information in this blog post or need legal counsel regarding fraud litigation, financial crime or anti-money laundering related issues, please contact the authors or a member of the Bennett Jones Anti-Money Laundering group or Fraud Law group.

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