What Law Applies to Cryptocurrency in Ontario?
Cryptocurrency is becoming more mainstream. However, the law has not kept pace with the technology, leaving a vacuum, akin to a “Wild West”. In the recent decision, Cicada 137 LLC v. Medjedovic, 2021 ONSC 369, Justice Myers touches upon the issue of litigating cryptocurrency, an area that is under regulated.
In Cicada, it is alleged that the defendant stole money ($15 million in cryptocurrency tokens). In handling the interlocutory matters, Justice Myers notes that there are different theories on when cryptocurrency can be considered stolen. At paras 5-6, Justice Myers writes that one theory is that if a person can trade within the parameters of the code, then whatever comes of it is fair.
There is a theory in some cryptocurrency academic thought, that because blockchain technology is based on publicly available or ‘open source’ programing code and is based on a laissez-faire contract theory, that ‘the code is law’. … if one is able to trade with a blockchain participant within the parameters of the programming code or the notional contract among the voluntary participants, the result is lawful whatever it may be… That means that if a clever person can devise a way to exploit a loophole or weakness in the code to induce the holder to enter into an unexpected and unfavourable transaction, more power to him or her. The code is public and the users are deemed to take the risk of placing their cryptocurrency assets in a repository with a program that functions as it does with whatever vulnerabilities it may have.
The other side relies on the principles found in Ontario common law.
In the article “Precedent, Principles, and Presumptions” by Terry Skolnik, Skolnik writes that precedent plays a central role in the enforcement of the law. Yet “abiding to old precedents may make little sense when applied to modern technologies”. One path around this problem is using legal principles and presumptions. Legal principles have several hallmarks. They are deeper and broader than rules. They are connected to philosophical values of dignity, liberty, equality, fairness, and justice. Legal principles complement rules and can help guide the court’s answers. Whereas presumptions require inferences to be drawn that can be rebutted (e.g. the presumption of innocence). Both presumptions and principles can help guide the court when precedent is not enough.
If the Cicada case gets to trial, then it will be a key decision on how cryptocurrency should be regulated. Is it a winner take all if you are a math whiz? Is the code law? Or, will case law, principles, and presumptions be determinative? And if so, what previous court decisions should apply to this new technology?
My guess is that legal principles will be applied to the case to prevent people from taking advantage of loopholes in the code.
I would hope that legal principles, particularly regarding fairness, would guide any justice decisions in these types of matters.
A strict application of “the code is law” philosophy is plainly flawed, if not ridiculous. Anyone who writes code will tell you its always flawed – somebody can always find a hack. There are reasons we have to update our antivirus programs daily and why companies issues software and firmware update on a regular basis. Code is inherently vulnerable since it is typically written to fulfill a particular practical/functional objective, and its near impossible for anyone to predict any or all of the compromises or vulnerabilities it leaves open.
The notion of strictly leaving crypto investors/savers at the whims of the laissez-faire notion of “you bought code, you suffer by the code” is nonsense. The principled issue is whether or not that investor was deceived or defrauded by another that resulted in an unjust gain by that other at the original owner’s expense/peril. As with any tort/crime, its the reasonable apprehension of wrong doing that is locus of legal intervention.
For analogy, if somebody breaks into a bank vault and steals everyone’s money and valuables from the safe-deposit boxes, should the owners and/or the bank be without recourse because somebody was clever enough to exploit a weakness in the bank’s security system or the building itself?
Its the act of unjust gain that roots the principle of fairness that law protects in the bank case – the same should apply to crypto. My thought is theft is theft – the technology, or lack of understanding or approval of the technology involved, should not be a bar to the law’s application in the service of justice.