The Significance and Implications For Persons Engaging With Cryptocurrencies and Digital Assets
A series of protests and blockades in Canada against COVID-19 mandates and restrictions, called the "Freedom Convoy" by organizers, began earlier this year. It occupied downtown Ottawa in January and February, capturing international attention. In response to the protests and blockades in Ottawa's downtown core, the Government of Canada invoked the Emergencies Act and declared a Public Order Emergency. A number of executive orders were then passed pursuant to the legislation and the declaration, which not only prohibited certain public assembly and restricted the use of property to support the protests and blockades, but also made it illegal for any person to provide any property, including currency or digital currency, to or for the benefit of participants in the protests and blockades. Meanwhile, a number of persons affected by the Convoy launched a putative class action against certain protest organizers, supporters, and participants on behalf of a proposed class of affected residents, businesses and employees, seeking up to $20 million in damages and other relief for alleged private and public nuisance.
In the context of that putative class action, the plaintiffs brought a motion on an ex parte basis (without notice) before the Ontario Superior Court of Justice on February 17, 2022 seeking a civil freeze order, known as a Mareva injunction, to restrain the defendants from dissipating their assets in a way that may deprive the plaintiffs of an effective remedy, leaving them with an unenforceable civil judgment.
A Mareva injunction is an extraordinary remedy. The test for obtaining a Mareva injunction is stringent and well-established. A plaintiff must establish not only the typical factors required for injunctive relief, but also that: (i) they have an apparently strong case against the defendant, (ii) the defendant has assets in the jurisdiction, and (iii) there is a serious risk the defendant will dissipate those assets or remove them from the jurisdiction if the order is not granted.
The Court granted the Mareva injunction on an interim basis (for a period not to exceed 10 days) and released detailed reasons for its decision, reported here as Li et al. v. Barber et. al., 2022 ONSC 1176. Notably, the Order granted by the Court applies expressly to cryptocurrencies and includes a schedule setting out a detailed list of specific crypto wallets to be frozen, comprising over 100 wallet addresses. The Order restrains any person with notice of the Order (including any crypto exchanges served with the Order) from selling, removing, dissipating, alienating, transferring, assigning, encumbering, or similarly dealing with any of the assets subject to the Order. Any person who knows of the Order and does anything which helps or permits the defendants to breach the terms of the Order may be held to be in contempt of the Order and could potentially be fined or imprisoned.
In its reasons, the Court held that there was an apparently strong case for establishing tort liability. The Court also found that the plaintiffs presented clear evidence (including in the form of a report from an expert investigator that had been monitoring activity in the relevant digital wallets) that the defendants are the owners of the digital wallets that have amassed bitcoin or other digital assets, and these digital assets, hosted by digital institutions, are within the jurisdiction of the Ontario courts. The Court was also satisfied that there was a risk of the defendants dissipating the assets as soon as possible. Given these findings and others, the Ontario court granted the Mareva injunction freezing the defendants' crypto assets on an interim basis.
The Court's decision appears to have been guided, in part, by the finding that the defendants moved to crypto-based funding specifically to: (i) avoid Government seizure and (ii) shield the funds from platforms such as GoFundMe, which had recently frozen and returned to donors certain funds after it found the protest-related activities the fundraising campaign was supporting to be in violation of its terms of service. Here, the Court found that the funds were purposely placed outside of the control of any conventional fundraising platform such as GoFundMe and that the defendants were promoting the use of cryptocurrencies as an alternative measure under the mistaken belief that crypto is untraceable and could not be seized by legal authorities. The Court also found that there was considerable evidence, including text messages and social media posts, about the plans to distribute the cryptocurrencies as soon as possible, in part to benefit the individual protestors but also to avoid any enforcement activity.
The granting of the Mareva injunction in this case is significant for a number of reasons, including because it appears to be one of the first reported decisions (if not the first reported decision) in Canada of a Mareva injunction that explicitly freezes cryptocurrencies. While a Mareva injunction is by no means a novel remedy in Canada, and Mareva orders will generally apply to all of a defendant's assets, which naturally would include the defendant's crypto assets, this appears to be one of the first times (if not the first time) that a Canadian reported decision in respect of Mareva injunction has expressly dealt with the freezing of digital cryptocurrency wallets specifically. In its decision, the Court noted that digital funds are not immune from execution and seizure to satisfy a debt any more than funds in a bank account. This is consistent with the practice currently taking shape in other jurisdictions, such as the U.K., where Courts have recently granted similar civil freeze orders over cryptocurrencies.
Another noteworthy aspect of the Court's decision is that the Court exercised its discretion to dispense with the need for the plaintiff to provide an undertaking as to damages, which is a typical condition for obtaining injunctive relief. Under Rule 40.03 of the Ontario Rules of Civil Procedure, unless the Court orders otherwise, a party seeking an injunction is required to give an undertaking to pay damages to the defendant if the injunction is ultimately shown to be unjustified and proven to have caused the defendant to suffer harm. It is rare for courts to dispense with this requirement, although courts may do so in certain circumstances, including where the case has broad public interest significance or the case involves human rights. Here, the Court was satisfied that it was appropriate to dispense with this requirement given the nature of the action and the evidence presented to it on the motion.
As cryptocurrencies and other digital assets are stored on blockchain-based public ledgers that can be viewed by anyone, and the sophistication of litigants and the investigative and tracking techniques they can employ have improved, cryptocurrencies and other digital assets are no longer evading detection to the same extent they used to, and, indeed, are becoming increasingly subject to not just regulatory enforcement and seizure, but also civil enforcement and seizure by private litigants.
The Court's decision granting the Mareva injunction presents several key takeaways for industry participants:
- Private litigants should expect increasingly more enforcement options to be available, which innovative counsel can seek to leverage to get access to assets thought to be largely beyond reach.
- Digital asset service providers, such as exchanges and digital wallet providers, need to be cognizant of their legal obligations when served with court orders such as Mareva injunctions, and have robust compliance regimes in place that will allow them to respond quickly to legal demands. Even if service providers are not directly holding assets or performing a custodial function, they are not immune from regulatory and civil legal process. For instance, even if a digital asset service provider cannot freeze digital assets pursuant to a Mareva order due to technical impossibility given that the exclusive control of and access to the assets is held by private key holders, they may still be subject to Norwich Pharmacal orders or other third-party disclosure orders compelling them to turn over user information. It is critical for service providers to recognize that as cryptocurrencies and other digital assets such as non-fungible tokens gain more mainstream prominence, service providers will be increasingly faced with complex legal challenges and demands that require swift and diligent action.
Although relatively nascent, the cryptocurrency space has already provided fertile ground for civil litigation, including class action litigation directly against crypto lending and exchange platforms and other operators in the crypto space for, among other things, breach of securities laws, breach of consumer protection legislation, civil fraud, breach of contract, misrepresentation and unjust enrichment. While it remains to be seen whether the Mareva injunction that was granted in this case will expire or be lifted, or otherwise be varied if it is extended, the initial granting of the Mareva injunction may represent a watershed moment in the Canadian cryptocurrency industry as it reflects the beginning of an increasing trend in digital asset enforcement activity by private civil litigants and the courts. We expect this to only become more prevalent as more mainstream acceptance and adoption of blockchain technology, cryptocurrencies and other digital assets takes hold.
 There must be a genuine issue to be tried, the moving party must establish that they may suffer irreparable harm if the order is not granted and the balance of convenience must favour the granting of the order.
 Bennett Jones LLP has acted on at least one case where a preservation order over cryptocurrencies was obtained from the Ontario Superior Court of Justice, on consent, with no reported decision (Hyatt v Burns, CV-18-00595740-00CL). Similar orders may have been granted by Canadian courts in other cases without reported decisions.
 E.g. Ion Science Ltd v Persons Unknown (unreported decision of the U.K. Commercial Court, 21 December 2020)