Law Times

LAW TIMES 4 COVERING ONTARIO'S LEGAL SCENE | FEBRUARY 25, 2019 www.lawtimesnews.com BY AIDAN MACNAB For Law Times THE loss of about $190 million of investor money resulting from the death of the founder of cryp- to-currency exchange Quadriga CX demonstrates the regulatory gaps and necessity for better over- sight, say lawyers active in the area of blockchain technology. "I think Quadriga CX is go- ing to be the case that turns things in Canada and kick-starts regulation because this problem could very well happen again," says Chetan Phull, founder of Smartblock Law PC, a cyber- tech law firm in Toronto focused on blockchain, data privacy, IT contracts and litigation. "Quadriga CX, I think, will trigger Parliament to act and regulate crypto-exchanges more like banks," he says. On Feb. 5, the Supreme Court of Nova Scotia granted Quad- riga CX creditor protection for 30 days, under the Companies' Creditors Arrangement Act. The company is represented by Mau- rice Chiasson and Sara Scott of Stewart McKelvey and the court appointed Ernst & Young Inc. as monitor of the process, which will be represented by Elizabeth Pillon and Lee Nicholson of Stikeman Elliott LLP. In a statement made Feb. 5, the company said it filed for creditor protection because it has been unable to access its customers' crypto-currency and could not get the funds to settle customer withdrawal requests. Historically, the threat to cy- bersecurity in crypto-platforms has typically been a breach from an outside third party. What makes the case of Quadriga CX unique, says Phull, is that the exact opposite is the problem. The money is locked, as if in an indestructible safe with no way to open it. The security of blockchain technology became its peril, as the only way to access the wallets containing the digi- tal currency died with the owner of the exchange, Gerry Cotten, who left no password behind. "I'm hoping this case illus- trates the importance of not just data security from the stand- point of breaches but also data security from the standpoint of putting these impenetrable locks on data that can never be accessed again because of irre- sponsible conduct," says Phull, whose firm focuses on data pri- vacy and cybersecurity. Regulators around the world wrestle with crypto-currency's ambiguous status — certain types in certain contexts can take the form of a currency, commod- ity or security, all of which apply different regulatory frameworks. In Canada, crypto-currency does not meet the legal definition of money and most regulators are treating it as a commodity, but it can also be used as an investment contract, for example, to raise funds for a startup, in which case it is a security, says Phull. "There really isn't anything in our laws that would regulate a company like Quadriga CX," says Mike Stephens, a partner at Fasken Martineau DuMoulin LLP in Vancouver. Though Quadriga CX was run without the contingency measures that would have pro- tected its customers, Stephens says, there was not much regula- tors could have done, as the com- pany exists in the gap between the jurisdiction of securities regulators and the jurisdiction of the Financial Transactions and Reports Analysis Centre of Canada, which regulates money transmitters. Crypto-graphic instruments are not defined as securities, though some regulators in Can- ada "infill the definition of secu- rities" to include them by apply- ing the Pacific-Coin test, he says. To determine if an investment is a security and, therefore, needs to be registered with a provincial securities regulator, Canadian courts apply the 1970 Supreme Court case Pacific Coast Coin Exchange v. Ontario Securities Commission. The case produced a test: A financial arrangement is an investment contract if it in- cludes an investment of money in a common enterprise, with the expectation of profit from the ef- forts of others. Pacific Coast Coin follows closely the 1946 U.S. Supreme Court case Securi- ties and Exchange Commission v. W.J. Howey Co., which ap- plies a nearly identical test. Aaron Grinhaus of Grinhaus Law Firm PC in Toronto says he expects that recent amendments to the Proceeds of Crime (Mon- ey Laundering) and Terrorist Financing Act will be helpful but, until the Canada Revenue Agency, securities regulators and FINTRAC get on the same page, there will be ambiguities that will be exploited by practi- tioners but will be "remarkably detrimental" to regulators. "Quadriga CX, having been the first major exchange in Can- ada, was the first entry point for many Canadian early adopters, and so this entire situation came as a shock to many of us," said Aaron Grinhaus of Grinhaus Law Firm PC in Toronto. LT Chetan Phull says the case of Quadriga CX shows there are major gaps in the govern- ment's ability to regulate crypto-currency. Case could be one 'that turns things in Canada' Will Quadriga CX spur regulatory oversight for crypto exchanges? NEWS The Canadian Lawyer InHouse Innovatio Awards is the pre-eminent award program recognizing innovation by members of the in-house bar within the Canadian legal market. These awards celebrate in-house counsel, both individuals and teams, who show leadership by becoming more efficient, innovative and creative in meeting the needs of their organizations. The Innovatio awards program draws on a panel of in-house counsel judges to determine the winners, based on a range of criteria. NOMINATIONS NOW OPEN NOMINATE AN INDIVIDUAL OR TEAM IN THE FOLLOWING CATEGORIES: • Law department leadership • Law department management • Legal operations • Diversity • Best practices in compliance systems • In-house M&A/Dealmakers • Working with external counsel • Litigation management • Risk management • Tomorrow's leader in innovation Accepting nominations from large, small and public sector/non-profit legal departments. NOMINATIONS CLOSE MARCH 29, 2019 For more information or to nominate visit www.innovatio-awards.com Questions? Contact Jennifer Brown | jen.brown@tr.com SIGNATURE SPONSOR BRONZE SPONSOR BRONZE SPONSOR THE E B O L G AND MAIL MEDIA PARTNER GOLD SPONSOR PLATINUM SPONSOR COCKTAIL SPONSOR SILVER SPONSOR Untitled-3 1 2019-02-20 2:21 PM

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