I last wrote about Bitcoin and cryptocurrency in the context of a Mareva injunction obtained against the developers of cryptocurrency wallet in the context of “Freedom Convoy” litigation.
Since that time, the practice and theory of how digital assets are treated by the law has continued to develop.
Bitcoin Pitfalls
Ask 100 people for their opinions on Bitcoin and you will hear varied opinions on its utility, but in the popular conscience, there remains a clear belief that all cryptocurrency is risky, given the prevalence of scams, losses, and thefts. A notable example in the Canadian context is the sudden death of the founder of Quadriga, a Canadian cryptocurrency exchange, and the resulting loss of $215 million dollars of crypto assets.
With the perception and reality of cryptocurrency pitfalls, our courts have struggled to fit cryptocurrency assets into existing jurisprudence, and the remedies in the event of a loss and how to pursue such a loss are unclear.
One historic cause of action which could be adapted to remedy such losses is the historic tort of conversion.
The Tort of Conversion
Conversion refers to the wrongful interference with another's property. Conversion does not apply to real property (real estate, land), but applies to personal property: tangible goods, inventory, equipment, and supplies. The tort of conversion is the civil equivalent of theft. It involves the taking of tangible goods in violation of a plaintiff's exclusive right of possession of its goods.
The elements of conversion are:
- The defendant commits a wrongful act;
- the act involves the plaintiff's property;
- the plaintiff's property is handled or disposed of by the Defendant; and
- the object of the handling or disposition denies or negates the plaintiff's title or other possessory interest in the property.
The damages in a conversion claim are calculated based on the market value of the property at the time of conversion, with the law treating conversion as a forced sale of the plaintiff's property.
Historically, and in mainstream jurisprudence, conversion only applies to tangible goods. However, there is support for the development of the tort of conversion to apply to intangibles.
In reality, intangible concerns are already protected by the law of conversion. For example, certain tangible goods have intangible value. A cheque is in principle just ink on paper, but the Supreme Court of Canada has stated unequivocally that if a cheque is subject to conversion, the “defendant's liability extends to the face value of the converted instrument, and is not limited to the value of the instrument as paper and ink.”
Conversion applied to Intangibles
In the 2020 decision, Canivate Growing Systems Ltd. v. Brazier, the Supreme Court of British Columbia decided an application for summary judgment regarding a party to an agreement regarding use of a domain name, canivate.com. Canivate's claim was that the defendant interfered with its use and possession of the domain name “canivate” and related website and email addresses.
In deciding whether the tort of conversion could apply, the court stated:
In the electronic age in which we live, I find that it would be incongruous if conversion were limited to physical goods, or tangible chattels. In the case at bar, the defendant exerted exclusive control over Canivate's website as soon as he removed administrative control of canivate.com from the company. The defendant held the only key to the website which was critical to operations of the company, and prevented Canivate from using its website and email addresses. I find that a modern conception of conversion must include wrongful interference with intangible goods, such as electronic data, websites and email.
The Ontario Court of Appeal recently confirmed that it is not settled whether intangible property can be the subject of a conversion claim.
Ontario courts have not foreclosed conversion claims for intangible assets, it appears that they are simply waiting for the right case. Conversion claims for intangible assets have primarily failed because they were brought regarding the use of information.
For example, in Utilebill Credit Corporation v. Exit It Contract Consulting Inc., Justice Myers found that a conversion claim could not be advanced in an alleged conversion of confidential customer information. The barrier to the conversion claim was that the information alleged to have been stolen was not information over which the plaintiff could claim exclusive possession.
Justice Perrel has also found that the tort of conversion cannot apply to intangible property. In Del Giudice v. Thompson, Justice Perell found that conversion does not apply in the context of a data breach:
There are torts or legal remedies that do apply to provide remedies for the misappropriation and misuse of intellectual property that do not involve the notion of possession or tangible property; for example, there is breach of confidence. However, advancing a claim for conversion is a non sequitur in the circumstances of the immediate case. Information is not a type of property within the ambit of the tort of conversion, which is for tangible, not intangible, property. The misuse of private information might be amenable to a breach of confidence, but that is a misuse of information not a conversion of it.
The Ontario Court of Appeal reviewed that decision and upheld it. On the conversion issue, the Court of Appeal simply found that on the facts of the case, the misconduct alleged was “adequately addressed by existing causes of action”. The Court of Appeal did not take the opportunity to rule one way or another on whether conversion could apply to intangible property, leaving the matter to be argued another day:
This case does not implicate a gap in the common law that warrants a change to the tort of conversion.
Justice Perrel has also applied the same intangible/tangible logic explicitly to a case regarding Bitcoin, in Ramirez v. Ledn Inc.
While the conversion issue played a modest role in the outcome of the motion being decided, Justice Perrell stated the following with respect to the conversion claim advanced:
Conversion is a tort associated with the right of physical possession of tangible property. The tort of conversion does not apply to intangible property because such property does not entail a right of possession. Bitcoins are intangible property. It follows that the tort of conversion does not apply to Mr. Ramirez's property rights in bitcoins. This claim should be struck without leave to amend.
While there is no dispute that Bitcoin is intangible, Justice Perrel's comments on the nature of Bitcoin ownership are at odds with the mechanics of Bitcoin, and the comments of regulators and other courts.
If Bitcoin is anything, there is a growing consensus that best parallel is that Bitcoin (which is distinct form most other cryptocurrencies) is a commodity. The Canadian Securities Administrators, in the 2019 Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms, stated:
We note that it is widely accepted that at least some of the well established crypto assets that function as a form of payment or means of exchange on a decentralized network, such as bitcoin, are not currently in and of themselves, securities or derivatives. Instead, they have certain features that are analogous to existing commodities such as currencies and precious metals
If Bitcoin does not entail a right of possession, as suggested in Ramirez, it becomes more difficult to explain the mechanics and regulation of numerous Canadian public investment funds, under which the custodianship of the underlying tokens is tightly regulated.
A Right of Possession
Ultimately, ownership of bitcoin is visible on a publicly viewable, open, decentralized, immutable ledger, used and owned exclusion of others. The bitcoin associated with a given wallet is available for all to see, and can only be transacted by being signed for with the private key that corresponds with the wallet's public key. Bitcoin is more defensible to an end user than any other personal property, and while the defence of your tangible personal property might rest on the strength of your deadbolt, or the safety of your neighborhood, the possessory interest is protected by a string of 64 hexadecimal numbers and letters that only the holder knows and the power of crytpography.
Bitcoin is not immune to theft via social engineering, or poor security and custody practices. When the worst transpires, it remains to be seen whether tort of conversion will be brought into the electronic age.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.