Calling on the code: Civil consequences for cryptocurrency
Would-be blockchain bandits that still believe cryptocurrency is beyond the reach of the law should think again. In Cicada 137 LLC v Medjedovic, the Ontario Superior Court of Justice had no qualms with taking a practical approach to providing relief in respect of digital assets.
Civil relief for cryptocurrency conduct
The Plaintiff in the proceeding, Cicada 137 LLC, a cryptocurrency holding platform, alleged that Andean Medjedovic, a 19 year-old with a master’s degree in mathematics, hacked into its platform and removed over $15 million worth of cryptocurrency tokens.
The Plaintiff determined that the tokens had been transferred to Mr. Medjedovic’s cryptocurrency wallet (he later admitted that he had taken the tokens). Justice Myers granted an ex parte preservation and Anton Piller (civil search and seizure) order, among other relief, to allow for the search of passwords and other evidence that could further efforts to both locate the tokens and prevent any dissipation.
Justice Myers’ decision makes it expressly clear that merely because assets may be of a digital nature does not mean that they exist lawlessly:
This is a very serious matter for which an Anton Piller order is justified. A very substantial amount of value has been taken. Moreover, the plaintiff’s expert provides evidence about the magnitude of hacking of digital assets to date. As this new form of investing and commerce grows, it is fundamentally important to the stability of the economy and the online market place that that the integrity of these assets be maintained. The investing and transacting public need assurance that the law applies to protect their rights. Despite what some might think, the law applies to the internet as it does to all relations among people, governments, and others.1
Code is law
Mr. Medjedovic used his “formidable mathematical powers” to create a digital attack that forced the release of the tokens to him and others. The Plaintiff alleges that it was hacked and those using its platform were defrauded. Mr. Medjedovic’s response at the preliminary stages of the proceeding indicate that he may later rely on “code is law” as part of his defence.
“Code is law” is a phrase which was originally developed by Lawrence Lessig in his 1999 book on the structure and nature of regulation on the internet, “Code and Other Laws of Cyberspace,” to argue that the internet should incorporate organizing principles and rules. The contemporary use of the phase has become popular in the blockchain context to describe how the technical nature of the system inherently determines what can and cannot be done. As Justice Myers noted:
The theory postulates that voluntary participants accept and are bound by the results of the use of the technology. 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.2
It remains to be seen whether and to what extent “code is law” will operate as a defence at trial. If successful, it would allow for conduct that the code permits to be exploited with no consequences at law.
Practical cryptocurrency considerations
As a decentralized system that has long been celebrated for its anonymity, cryptocurrency by its nature can be an obstacle in legal proceedings. Despite the relief granted in the Cicada matter to date, and while Mr. Medjedovic attended for an initial court appearance, he has since disappeared. Mr. Medjedovic has been found in contempt for his failure to attend court appearances and further efforts by the Plaintiff to locate him have been “stymied” by his parents.3
The use of cryptocurrency is becoming more mainstream, and with its popularity, the problems that can arise are becoming more prevalent. Courts in Canada have shown a willingness to develop the common law in a way that addresses the practical implications of its use. While the law in this area is still developing, we anticipate that litigation involving digital assets will become increasingly commonplace. For now, although it can be tempting to treat cryptocurrency in a manner akin to regular currency, it should be kept in mind that obtaining legal relief in relation to cryptocurrency is likely to remain complicated for some time. Any potential cryptocurrency considerations in a current or potential proceeding should be addressed early on to avoid later complications and potential disappointment.
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