The Risky Business of Cryptocurrency

Nova Scotia’s Supreme Court has granted one of Canada’s largest cryptocurrency exchanges creditor protection after the sudden death of its founder and CEO left the company unable to access roughly $250 million in Canadian assets. A story published by the CBC stated the court issued a 30-day stay of proceedings in order to prevent any lawsuits from proceeding against the company. The news highlights the risks involved in cryptocurrency even as the industry attempts to find a legitimate place in the Canadian and international markets.

What is cryptocurrency?

Cryptocurrency is a digital currency existing outside of regulated marketplaces, such as banks, and serves as an alternative to cash, credit cards, cheques, and other forms of traditional payment. People can convert traditional currency into cryptocurrency, or (more unlikely for the common consumer) use computer power to generate cryptocurrency from scratch by performing extremely complicated computations. The most famous form of cryptocurrency is Bitcoin, though there are a large number of alternatives available.

One of the most important features of cryptocurrency is the security it offers. In order to hold or transfer cryptocurrency from one person to another, a wallet is required. In order to access a wallet, a password (or key) is needed. Without a password it’s unlikely that cryptocurrency can be accessed by anyone, even its legitimate owner. In 2017, it was reported that a man from the United Kingdom had accidently thrown away a hard drive containing the key to access 7,500 Bitcoins, which at the time were worth over $127 million.

QuadrigaCX

QuadrigaCX is a Canadian cryptocurrency exchange, which holds and facilitates the transfer of cryptocurrency from one person to another. Its founder, Gerald Cotten, died suddenly on December 9, 2018 while on a trip to India. After his death, his widow stated in court documents that Cotten was the only person with access to his encrypted laptop which is thought to be the only computer with the key needed to open the wallets holding the currency. Her affidavit stated, “The laptop computer from which Gerry carried out the Companies’ business is encrypted and I do not know the password or recovery key. Despite repeated and diligent searches, I have not been able to find them written down anywhere.”

This has left the company’s customers unable to access their funds. Nikhilesh De, a reporter from CoinDesk, a publication covering cryptocurrency told the CBC the money could be gone forever if Cotten’s computer in inaccessible.

The company had begun to face legal trouble about a year before Cotten died when CIBC froze $26 million of its assets due to irregularities it discovered in payment processing. A 2018 Ontario Superior Court of Justice document states that $67 million worth of transactions had been improperly transferred to the personal account of the payment processor the company used.

One of the company’s customers told the CBC he tried to withdraw $15,000 from his account in October but was unable to. He said “[t]his is a tough lesson learned. I would probably avoid [cryptocurrency] in the future,” adding “[t]hey’ve left us completely in the dark. I’m kind of preparing for the worst.”

The news highlights the risks of cryptocurrency. The Financial and Consumer Affairs Authority of Saskatchewan told Global News in October 2018 that there are specific risks associated with cryptocurrency, including:

1. Volatile cryptocurrency prices rise and fall dramatically often driven by media hype and public interest.

2. Unprotected cryptocurrencies are not backed by a bank or authority like Canadian currency is. Additionally, cryptocurrency may not be subject to securities regulation, which means you may have little recourse in a dispute and may be vulnerable to your investment’s value being manipulated. Cryptocurrency trading platforms and exchanges are susceptible to cybersecurity threats and hacking.

3. Complex cryptocurrencies are by their nature, complex and difficult to understand. It can be confusing and time-consuming to trade or withdraw cryptocurrency, often requiring several intermediaries. It is also hard to make informed decisions without financial statements and traditional assessment criteria to rely on.

4. Expensive certain fees are associated with trading cryptocurrency. Make sure you understand what it will cost you to trade. These costs have the potential to erode profits.

If you have legal questions regarding cryptocurrency and how it may affect your business, taxes or other associated matters, contact the experienced corporate lawyers at Duncan, Linton LLP for clear, forward-thinking, strategic legal advice. We work with our clients to minimize risks while protecting their business ventures through all stages of growth. We can be reached at (519) 886-3340 as well as online.