Cryptocurrency fraud remedies available but enforcement difficult in Ontario

As the investment hub of one of the most crypto-obsessed countries in the world, Ontario will need appropriate legal remedies to deal with the currency’s problems, evidenced most recently by the spectacular demise of cryptocurrency exchange and hedge fund FTX Trading Ltd.

Fortunately, potent remedies are available. The bugbear is enforcing them.

“Powerful civil relief is available through extraordinary remedies such as Anton Piller orders and Mareva injunctions,” says Lou Brzezinski, a commercial litigation partner at Blaney McMurtry LLP in Toronto. “But because crypto entities can set up anywhere, enforcing the remedy is at least 50 percent of the problem.”

A fresh report from CryptoManiaks, a cryptocurrency education platform, points to the extent of the problem domestically. The study calculated the Google searches for 10 of the most popular cryptocurrencies in the world’s 100 most populated countries as a percentage of each country’s population.

It ranked Canada fourth for cryptocurrency interest worldwide, with 1,671,800 searches monthly, equating to 4.3 percent of the population. The results put Canada behind the Netherlands, Turkey and Germany but ahead of the UK (12) and the US (15).

“Overall, we expect the number of reported cryptocurrency cases to increase significantly in the coming years,” writes Brzezinski’s colleague Summer Xia in a firm newsletter.

What’s heartening is that extraordinary remedies have already been granted at least twice in Ontario-based cryptocurrency cases.

Most famously, the plaintiffs in Li v Barber obtained a Mareva injunction from the Ontario Superior Court. The injunction, obtained without notice, prohibited the Ottawa “Freedom Convoy” defendant organizers from dissipating or removing crowdfunded crypto-assets pending a determination of liability.

And in Cicada 137 LLC v. Medjedovic, the OSC, without notice, granted an Anton Piller interim preservation order against a defendant who had allegedly stolen cryptocurrency from the plaintiff. The order not only froze the cryptocurrency but provided for the location and seizure or preservation of passwords or documents pending trial.

Enforcing extraordinary remedies in cryptocurrency cases can be more complicated than obtaining them.

In a recent case, crypto fraudsters deceived an elderly couple into investing their life savings, some $1.5 million, in a fraudulent investment platform. The organizers then converted the funds into Bitcoins that they delivered to a deposit address they controlled. They then lied to the couple, saying that a Bitcoin crash had wiped out their investment.

The couple retained a commercial litigation team led by Brzezinski. He hired CypherBlade, who had located the currency in the Freedom Convoy case. The Pittsburgh-based blockchain investigation agency revealed many indicia of fraud associated with the fraudsters’ platforms. While the deception made it difficult or impossible to locate the individuals involved, CypherBlade did trace the movement of funds from the plaintiffs’ Bitcoin wallets to various exchanges that could potentially freeze and preserve their assets.

Blaneys moved for and obtained an ex parte Mareva injunction. The pertinent question, the court stated in a brief endorsement, “was whether the funds the plaintiffs sought to enjoin were now owned or controlled by the defendants who were the target of the injunction and whether the defendants were attempting to dissipate funds to which a judgment might attach.” Here, “the circumstances of the fraud itself” led to an inference that this was the case.

Blaneys has been trying to enforce the order.

“We sent the orders to the head offices of the platforms where the scammers had deposited the Bitcoin, but so far, the responses we received indicate the wallets were emptied either the day before or the day that the platforms received the order,” Brzezinski says. “We suspect that the platforms are working with the fraudsters.”

The strategy now is to seek a contempt order, but that’s “difficult and expensive” because the orders need to be “domesticated” in the host of jurisdictions where the platforms reside, including Malaysia, Seychelles, British Virgin Islands, Japan, California and Alberta.

“We’re doing it slowly and will continue to do so as long as our clients’ funds last,” Brzezinski says.

One of the core problems in enforcing cryptocurrency-related orders is that the transactions are irreversible.

“Our court system is not really set up to deal with irreversible transactions that pose questions about where they have been created and who has created them,” says Natasha MacParland, a partner in the corporate practice and financial and restructuring insolvency practice at Davies, Ward Phillips & Vineberg LLP’s Toronto office.